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Financial Management

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Financial Management Returning To The Farm University of Nebraska- Lincoln Assets Things Of Value Owned By The Business Tangible (Real Estate ... – PowerPoint PPT presentation

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Title: Financial Management


1
Financial Management
  • Returning To The Farm
  • University of Nebraska-
    Lincoln

2
Assets
  • 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

3
Current Assets
4
Assets
  • 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

5
Intermediate Term Assets
6
Long Term Assets
7
Non-Farm Assets
8
Liabilities
  • Obligation To Pay A Debt
  • Current Liabilities Generally Must Be Paid Within
    1 Year
  • Accounts Payable
  • Current Years Principle Payment On Loan
  • Taxes Payable

9
Current Liabilities
10
Liabilities
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
11
Term Liabilities Intermediate
12
Term Liabilities Long
13
Non-farm Liabilities
14
Owners 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

15
The 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

16
The Balance Sheet
Owners Equity (Net Worth)
17
Assets 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

18
Balance Sheet
  • For Trend Analysis
  • Complete At Same Time Each Year
  • Value Assets Same Way Each Year
  • Asset Valuation
  • Cost
  • Cost Less Depreciation
  • Market Value

19
Balance Sheet Trend Analysis Multi-year look
at the Direction of progress In financial
performance
Measure progress in Net Worth
20
The 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

21
The 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)

22
The Income Statement
  • Net Income What Is Actually Made By The Farm
    Business After All Expenses Are Paid
  • Net Income Revenue - Expenses

23
Comparative 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

24
Income and Expense Trend Analysis
Net Farm Profit /-
25
Working 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

26
Rationale 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)

27
Ratio Analysis
  • Easy To Calculate, Compare, Understand
  • Four Categories Of Financial Ratios
  • Liquidity
  • Solvency
  • Efficiency
  • Profitability

28
Liquidity Ratios
  • Measures The Ability To Pay Bills Or Short Run
    Obligations
  • Working Capital
  • Current Ratio

29
Current 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

30
Solvency Ratios
  • The Ability To Pay Debt Or Long Run Obligations
  • Debt To Asset Ratio
  • Equity To Asset Ratio
  • Debt To Equity Ratio (Leverage)

31
Debt 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

32
Equity 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

33
Debt 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

34
Efficiency Ratios
  • Relative Activity Of The Farm With Respect To Its
    Assets, Inventory Levels, Customer Credit
    Payments, Its Own Bill Paying
  • Asset Turnover

35
Asset Turnover Ratio
  • Formula Gross Revenues
    Total Assets
  • Function Measure Intensity Of Asset Use
  • Guideline
  • The Higher The Better
  • Varies Across Industries Even Farm Enterprises

36
Asset 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
37
Profitability Ratios
  • Indicator Of Businesss Profitability
    Performance
  • Return On Equity
  • Return On Assets
  • Operating Profit Margin Ratio

38
Operational 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

39
Return 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

40
Return 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)

41
Operating 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

42
Summary
  • Using These Ratios Will Aid Management In
    Understanding Their Farms Financial Health
    Performance.
  • Cannot Just Look At Ratios Alone ? Treat Them As
    Indicators
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