Basic Financials-Mariane Kiraly - test Unit 3.1 Reviewing the - - PowerPoint PPT Presentation

Basic Financials-Mariane Kiraly

test

Unit 3.1

Reviewing the Financial Position

• f Your Business

Using Farm Records to Develop Financial Statements

How do you measure your financial health?

Financial Statements

Cash Flow

• Liquidity
• Solvency
• Profitability
• Repayment
• Liquidity

Financial Statements

Cash flow statement

• Cash income
• Cash expenses

Income statement

• Cash income
• Cash expenses
• Changes in assets
• Changes in liabilities
• Net farm income, accrual

adjusted (profit) Balance sheet

• Assets
• Liabilities
• Net worth (owner

equity)

Source: Damona Doye, Oklahoma State University

Financial Ratios

• Help to assess
• profitability
• debt capacity
• financial risk
• Ratios developed for each

financial measure

Picture source: http://bit.ly/1QOZ37o

What is Needed?

• Asset and liability values
• Scheduled principal and interest

payments

• Gross farm revenue
• Net farm income
• Interest expense
• Depreciation expense
• Nonfarm income, family living

expenses, and income tax payments

• Unpaid labor
• Value of Labor and Management

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Assessing Farm Viability

• Viability is the ability of the receipts of the farm to pay expenses,

make debt payments and provide for family living

• Financial statements are the first tools to use after the farm

records are in order

• Records will include all income, all expenses, capital purchases,

depreciation statement, cash balances, interest and debt payments, and inventories of crops and livestock

• Most banks require financial statements but if you have no debt, you owe

it to yourself to prepare financial statements for your own satisfaction and information

The Balance Sheet

• A balance sheet is a snapshot of your business at any given

point in time and should be done at least once/year

• It is required by financial institutions if there is a loan in

place, to obtain a new loan, or to refinance an old loan

• A balance sheet indicates at what % equity is owned by the

farmer

• Do not be afraid of a balance sheet-it is a crucial

component of your financial statements

Look at the Balance Sheet Information

• Tom Smith did a balance sheet as of 1/1/2015
• Let’s review some details
• Assets – Liabilities = Owner’s equity
• ($422,300- $71,100) = $351,200
• Debt to Equity is 20%($71,100/$351,200)
• Tom is in good shape financially

Liquidity and Solvency

• Liquidity-ability of the farm to meet financial obligations as

they come due. Tom Smith is solvent as the farm was able to cash flow the current expenses with current assets (Part 1)

• Solvency-the ability of the farm business to pay all its debts

if it were sold tomorrow. As you look over the balance sheet, you can see that Tom has more than enough capital to sell everything and pay off the debts.

Income Statement

• Also called a Profit and Loss Statement
• Takes into consideration inventory, accounts payable,

accounts receivable and is based on accrual accounting and required by banks

• Can be revealing to business owners who might think that

the checkbook balance is an indicator of profit

• Illustrates the “opportunity cost” of operating the farm as

compared with another kind of occupation

Income/Expense Worksheet

• Note that Tom has projected or actual income of $25,100 and

expenses of $17,650. He made $7450 on the farm venture after all expenses were paid. He also cash-flowed, even if he had some low times, overall for the year he was in a positive cash flow position. He also “ate” some of the profits in the form

• f beef…he should put a value on that somewhere…
• The rate of return depends in part on how much time Tom spent
• n the business. If his “opportunity” cost is $40,000 for full-time

work and he spent 25% of his time working the farm, a $10,000 unpaid labor would be assigned. Since Tom is retired, he has no “opportunity cost”. It is an important concept to grasp and keep in mind for any business venture.

Cash Flow Statement

• Also known as “Where did the money go?
• Shows in gross terms the income, expenses, new

loans, capital purchases, principal payments and money coming in from other sources

• Is very illustrative of where the money went over

the course of a year

• Helps farmers see the “big picture”

Cash Flow Statement

• Cash flow from operating
• Farm receipts
• Less farm expense
• Net cash farm income
• Less personal withdrawals
• Less net cash withdrawals
• Net provided by operating activities
• Sale of assets such as those held long-term like machinery or breeding

livestock are generally considered capital gain

• Money borrowed is added into the cash flow statement and principal

payments are deducted from cash flow

• Beginning and ending cash are reconciled and anything coming in from

reserves or going into reserves is noted

What about multiple enterprises?

• It is important to recognize that a beef and

vegetable operation may co-exist but they should be analyzed separately due to the differences between them

• As best as possible, allocate expenses both

enterprises have in common and overhead expenses accordingly

• Sometimes, one enterprise can support another but

it is good to know which is making money

Long Term Benefits

• Those who track progress of the farm business have better

records, make more money, and end up dropping enterprises that are not profitable

• Those who understand the various ways to measure

profitability can do so easily once they get started

• Do not be intimidated by financial lingo-farmers need to be

businesslike now more than ever

• Ask for help to get started from CCE
• Have confidence in your record keeping, keep on top of it,

and learn as you go

Key Financial Ratios

• When you have the records, you can make simple calculations to

give you some financial ratios (and sound really smart to your lender)

• From the Balance Sheet, you can quickly calculate:
• Assets – Liabilities = Owner’s Equity

From the Cash Flow Statement you can calculate: Debt/Asset ratio Rate of Return on assets Operating Profit Net Farm Income

How to Know if You are Making Money

• Keep good records to get a basis for balance sheet, profit and loss

statement and cash flow analysis

• Look critically at the reports and do some simple calculations to see

what the numbers are telling you

• Keep in mind that you could be doing something else and that

alternatives have an opportunity cost

• Compare balance sheets from year to year
• Remember that it is more important to enjoy what you are doing

than making lots of money, but it’s nice to do both!

What tool is available to measure a change in the farm business?

• It’s called a partial budget!
• It measure just the change that you want to make
• It’s quick and easy
• It’s used a lot in farming business management

Partial budget to add a sweet corn enterprise

Assumptions behind the budget