Title: Financial Management
1Financial Management
- Returning To The Farm
- University of Nebraska-
Lincoln
2Assets
- Things Of Value Owned By The Business
- Tangible (Real Estate, Inventory)
- Intangible (Intellectual Property)
- Current Assets Are Assets That Can Be Converted
To Cash Within A Year - Cash
- Accounts Receivable (A/R)
- Inventory
3Current Assets
4Assets
- Fixed Assets Provide Benefit To Business For More
Than 1 Year - Buildings
- Equipment
- Land
- Liquidity Speed Ease An Asset Can Be
Converted To Cash. (Intermediate or Long Term) - Ease Of Conversion vs. Loss Of Value
- Tractor vs. Custom Hog Finishing Unit vs. Land
5Intermediate Term Assets
6Long Term Assets
7Non-Farm Assets
8Liabilities
- Obligation To Pay A Debt
- Current Liabilities Generally Must Be Paid Within
1 Year - Accounts Payable
- Current Years Principle Payment On Loan
- Taxes Payable
9Current Liabilities
10Liabilities
Term Liabilities Are Obligations That Are Due
After 1 Year Intermediate -Term Bank Notes 2 to
10 Year Long-Term Bank Notes 10 or
more Contracts
11Term Liabilities Intermediate
12Term Liabilities Long
13Non-farm Liabilities
14Owners Equity (Net Worth)
- Estimate Of The Business Value That Would Be
Transferred To Owners If All Assets Were
Liquidated All Liabilities Paid - Increased By Invested By Owners Or Made In The
Business And Decreased By What Owners Withdraw
From The Company Or The Business Lost
15The Balance Sheet
- Summary Of Businesss Assets, Liabilities, Net
Worth - Assets Are Arranged From Most Liquid To Least
Liquid - Statement Of The Financial Condition Of A
Business On A Specific Date - Should Be Prepared At Least Once A Year, Usually
At The End Of The Fiscal (Calendar) Year
16The Balance Sheet
Owners Equity (Net Worth)
17Assets Liabilities Owners Equity
- Two Groups Can Make Claims Against The Business
- Creditors
- Owners
- Creditors, Legally, Are Entitled To The First
Claim - The Balance Is The Owners Equity
- If Liabilities Exceed Assets
- Owners Equity Is Negative
- Firm Is Insolvent
- Could File For Bankruptcy
18Balance Sheet
- For Trend Analysis
- Complete At Same Time Each Year
- Value Assets Same Way Each Year
- Asset Valuation
- Cost
- Cost Less Depreciation
- Market Value
19Balance Sheet Trend Analysis Multi-year look
at the Direction of progress In financial
performance
Measure progress in Net Worth
20The Income Statement
- Summarizes Farms Revenues Expenses Over A
Given Period Of Time - Provides Measurement Of Profit
- Should Be Prepared At Least Once A Year, Although
May Prepare More Frequently
21The Income Statement
- Revenue Amount Received (Or To Be Received)
From Selling Grain or Livestock, Government
Program Benefits, or Services Provided - Expenses Amount Paid (Or To Be Paid) For Inputs
Used In Production, Labor Management Costs,
Noncash Items (e.g., Depreciation)
22The Income Statement
- Net Income What Is Actually Made By The Farm
Business After All Expenses Are Paid - Net Income Revenue - Expenses
23Comparative Statements Analysis
- Compare Documents From One Period To The Next, Or
To Budgeted Amounts - Are There Major Changes?
- What Caused The Changes?
- Calculate Difference In Absolute Percentage
Terms
24Income and Expense Trend Analysis
Net Farm Profit /-
25Working Capital
- Money Used To Meet Daily Emergency Expenses
- Measure Of Liquidity
- WC Current Assets Current Liab.
- Guidelines
- Green WC or gt than Current Liabilities
- Yellow WC lt Current Liabilities but gt 0
- Red WC lt 0
26Rationale for Ratio Analysis
- Financial Statements Are Only Numbers On Paper
- Measure Health Of The Business
- Compare Over Time, One Farm To Another, Or
Against Benchmarks - Means To Control The Firm
- Easily Understood
- Communicate To Interested Parties Outside
Management (e.g., Lenders)
27Ratio Analysis
- Easy To Calculate, Compare, Understand
- Four Categories Of Financial Ratios
- Liquidity
- Solvency
- Efficiency
- Profitability
28Liquidity Ratios
- Measures The Ability To Pay Bills Or Short Run
Obligations - Working Capital
- Current Ratio
29Current Ratio
- Formula Current Assets
- Current Liabilities
- Function Measure Of Short-Term Liquidity
- Guideline
- Green gt 1.5
- Yellow 1.0 -1.5
- Red lt 1.0
- Improve By Current Assets Or Current
Liabilities
30Solvency Ratios
- The Ability To Pay Debt Or Long Run Obligations
- Debt To Asset Ratio
- Equity To Asset Ratio
- Debt To Equity Ratio (Leverage)
31Debt To Asset Ratio
- Formula Total Liabilities
- Total Assets
- Function Measures How Much Of The Assets Lenders
Are Capitalizing How much your lenders own of
your business - Guideline
- Green lt 0.3
- Yellow 0.3-0.7
- Red gt 0.7
- Improve By Liabilities Or Total Assets
32Equity To Asset Ratio
- Formula Total Equity
- Total Assets
- Function Measures How Much Of The Assets Are
Funded By Owner Capital - How much you own of your business.
- Guideline
- Green gt 0.7
- Yellow 0.7-0.4
- Red lt 0.4
- Improve By Equity Or Total Assets
33Debt to Equity (Leverage) Ratio
- Formula Total Liabilities
- Net Worth (OE)
- Function Determine Size Of Debt, Measures
Leverage - Guideline
- Green lt0.43
- Yellow 0.43-1.5
- Red gt 1.5
- Improve By Liabilities And Net Worth
34Efficiency Ratios
- Relative Activity Of The Farm With Respect To Its
Assets, Inventory Levels, Customer Credit
Payments, Its Own Bill Paying - Asset Turnover
35Asset Turnover Ratio
- Formula Gross Revenues
Total Assets - Function Measure Intensity Of Asset Use
- Guideline
- The Higher The Better
- Varies Across Industries Even Farm Enterprises
36Asset Turnover Ratio Benchmarks
Enterprise Green Yellow Red
Cow-Calf gt0.20 0.07-0.20 lt0.07
Swine gt1.10 0.60-1.10 lt0.60
Cash Grain gt0.35 0.20-0.35 lt0.20
Feedlot gt1.50 0.90-1.50 lt0.90
Dairy gt1.10 0.85-1.10 lt0.85
37Profitability Ratios
- Indicator Of Businesss Profitability
Performance - Return On Equity
- Return On Assets
- Operating Profit Margin Ratio
38Operational Ratios
Except depreciation interest
- Operating Expense Operating Exp
- Gross
Revenues - Depreciation Expense Depreciation Exp
- Gross
Revenues - Interest Expense Interest Exp
- Gross
Revenues - Net Income Ratio Net Income
- Gross
Revenues - These Should Add Up to 1.0
39Return on Equity (ROE)
- Formula Net Profit
- Total Equity
- Function Measures How Owners Fared During The
Year In Exchange For Letting The Farm Use Their
Money - If The Return On Equity Is 10, Then .10 Of
Profits Are Created For Each 1 That Was
Invested. - Guideline Will Vary Can Range From To
40Return on Assets (ROA)
- Formula (Net Profit Interest)
- Total Assets
- Function Measures How Owners Lenders Fared
During The Year In Exchange For Letting The Farm
Use Their Money - Add Back Interest Because It Is Lenders Payment
- Guideline
- Green gt0.05 (owned) gt0.12 (rented)
- Yellow 0.01-0.05 (owned) 0.03-0.12 (rented)
- Red lt0.01 (owned) lt0.03 (rented)
41Operating Profit Margin Ratio
- Formula
- Net Income Interest Exp Unpaid
Family Labor Mgmt - Gross Revenue
- Function Measures Return To Farm After Operator
Family Labor Mgmt Claims That Can Be Used For
Growth
42Summary
- Using These Ratios Will Aid Management In
Understanding Their Farms Financial Health
Performance. - Cannot Just Look At Ratios Alone ? Treat Them As
Indicators