Financial management concepts (FINPACK). – AgPlan Business Planning
Software. – MN Organic Farm Business Management Project. – Interpreting
Financial ...
Financial Management For Small Farms
© 2009, University of Minnesota
Dale Nordquist
Department of Applied Economics 800-234-1111 © 2009, University of Minnesota
www.cffm.umn.edu
Financial Management For Small Farms • Today’s agenda – Financial management concepts (FINPACK) – AgPlan Business Planning Software – MN Organic Farm Business Management Project – Interpreting Financial Statements and Measures workshop
© 2009, University of Minnesota
A comprehensive whole farm financial planning and analysis system © 2009, University of Minnesota
FINPACK Components • Balance sheets
Where Am I?
• FINAN
Annual Financial Analysis
• FINFLO
Monthly Cash Flow Planning
• Annual Plan
Annual Cash Flow Planning
• FINLRB
Financial Long Range Planning
© 2009, University of Minnesota
Financial Management For Small Farms
• Is there a difference?
© 2009, University of Minnesota
Financial Management For Small Farms • Small farms: – – – – – – –
Use less debt Rely more on labor than technology Manage risk through diversification Earn more off farm income Have more interests than just maximizing profit Tend to be more entrepreneurial Need to focus on margin (marketing and operating efficiencies)
© 2009, University of Minnesota
Financial Management For Small Farms • Is there a difference? – Yes and no – All want to be profitable – All want to be able to pay bills – All want to grow net worth
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Financial Management For Small Farms
• Commodity producers – Focus on producing at the lowest cost – Earn a small margin on sales – Make their money on volume
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Financial Management For Small Farms • Small farms – Focus on selling at a profitable margin – Need to earn a high margin on sales – Need to be entrepreneural to take advantage of niche markets and market opportunities
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Financial Analysis vs Business Management Financial Analysis • Uses the numbers • Diagnostic • Keep score (trends)
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Business Management • Uses knowledge of the business • Prescriptive • Decision-making
Financial Management For Small Farms
© 2009, University of Minnesota
Interpreting Financial Statements and Measures
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Farm Financial Standards Guidelines • Financial statements: – Balance sheet – Income statement – Statement of owner’s equity – Statement of cash flows or cash flow budget
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Farm Financial Standards Guidelines
• Financial ratios and measures: – Farm Financial Standards Sweet 16+
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Balance Sheet A snapshot of: – Assets – Liabilities – Net worth (owners equity)
• At a specific point in time
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Balance Sheet The accounting equation: Assets = Liabilities + Net worth (Equity)
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Balance Sheet • Assets – Everything owned or payable to the business
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Balance Sheet • Assets – Everything owned or payable to the business
• Liabilities – All obligations owed
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Balance Sheet • Assets – Everything owned or payable to the business
• Liabilities – All obligations owed
• Net worth/Owners Equity – Total assets minus total liabilities © 2009, University of Minnesota
Balance Sheet • Measures financial position:
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Balance Sheet • Measures financial position: – Liquidity •The ability of the business to generate cash when needed
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Balance Sheet • Measures financial position: – Liquidity •The ability of the business to generate cash when needed
– Solvency •The relation ship between total assets and total liabilities
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Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets Current (< 1 year) Intermediate (1–10 yrs) Long term (> 10 years)
Liabilities
Cash accounts Crop inventories Current Livestock held for sale Intermediate Prepaid expenses LongSupplies term Accounts receivable Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Machinery & equipment Intermediate Breeding livestock Long term
Long term (> 10 years)
Total liabilities Net worth Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Landterm Long Buildings Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets Accounts Current ( 10 years)
Liabilities Current Intermediate Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate yrs) term Loans with an(1–10 original of from 1 to 10 years Long term (> 10 years)
Intermediate Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Loans with(>an Long term 10original years) term of greater than 10 years
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year) Non-current Current Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term Total liabilities Net worth
Total assets
© 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term
Personal
Personal Total liabilities Net worth
Total assets © 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term
Personal
Personal Total liabilities Net worth
Total assets © 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term
Personal
Personal Total liabilities Net worth
Total assets © 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet Assets
Liabilities
Current (< 1 year)
Current
Intermediate (1–10 yrs)
Intermediate
Long term (> 10 years)
Long term
Personal
Personal Total liabilities Net worth
Total assets © 2009, University of Minnesota
Total Liabs + Net worth
Balance Sheet • Management implication – Match financing to asset life
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Balance Sheet: When • A snapshot at a specific point in time
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Balance Sheet Analysis • Current position • Financial structure • Total solvency • Net worth change
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Balance Sheet Analysis • Current position – Current assets vs. current liabilities – Measures of liquidity
• Balance sheet structure • Total solvency • Net worth change
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Working Capital = Current assets minus current liabilities • Important in financial risk management • Reduced by cash capital purchases and family withdrawals
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Balance Sheet Analysis • Current position • Balance sheet structure – Where is the equity – Are assets matched with liabilities – No right or wrong answer
• Total solvency • Net worth change
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Balance Sheet Structure • High current debt to assets – Liquidity problems
• High intermediate debt to assets – Capital replacement problems
• High long term debt to assets – Limited expansion capacity
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Balance Sheet Analysis • Current position • Balance sheet structure • Total solvency – Net worth – Overall financial risk position of the business – Future borrowing capacity – Debt to asset ratio = Total Debt ÷ Total Assets
• Net worth change © 2009, University of Minnesota
Balance Sheet Analysis
Let’s look at a balance sheet.
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Balance Sheet Analysis • Current position • Balance sheet structure • Total solvency • Net worth change – Measures overall progress
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Balance Sheet Analysis • Current position • Balance sheet structure • Total solvency • Net worth change – Measures overall progress – Net worth growth can only happen if: •Earnings exceed consumption or
© 2009, University of Minnesota
Balance Sheet Analysis • Current position • Balance sheet structure • Total solvency • Net worth change – Measures overall progress – Net worth growth can only happen if: •Earnings exceed consumption or •Market values are increased
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Earned Net Worth Change Net farm income Non-farm income Family living/owner withdrawals Income taxes Earned net worth change
© 2009, University of Minnesota
+ =
$75,000 25,000 50,000 10,000 $40,000
Balance Sheet Challenge
Asset Valuation
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Balance Sheet Challenge Asset Valuation • Market Valuation – assets valued at estimated fair market value – a price that could be expected is sold at arms length to an unrelated buyer – after selling costs
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Market Value Balance Sheet Total estimated market value of assets - Total debts = Net worth
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Market Value Balance Sheet •Advantage – Best estimate of solvency - amount remaining if all assets were sold and all debts paid
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Market Value Balance Sheet •Advantage – Best estimate of solvency - amount remaining if all assets were sold and all debts paid
•Disadvantage – Mixes net worth changes from earnings with market value changes
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Market Value Balance Sheet • Uses – Evaluate solvency – Evaluation of debt capacity – Collateral analysis – External comparison with other farms – Estate planning
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Balance Sheet Challenge Asset Valuation • Cost (Book) Valuation – assets valued at original cost less depreciation – land value never changes
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Cost Value Balance Sheet Total depreciated value of assets - Total debts = Retained earnings
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Cost Value Balance Sheet •Advantage – Includes only net worth changes resulting from earnings
© 2009, University of Minnesota
Cost Value Balance Sheet •Advantage – Includes only net worth changes resulting from earnings
•Disadvantage – Does not provide accurate solvency picture
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Cost Value Balance Sheet •Uses – Monitor earned net worth change – Internal periodic performance – Calculation of periodic net income
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Balance Sheet Challenge Asset Valuation • Market – Assets valued at a conservative market value adjusted for selling costs
• Cost of book value – Assets valued at original cost minus depreciation
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Balance Sheet Challenge Asset Valuation • Be consistent • Depreciation – Machinery 10% – Buildings 5%
© 2009, University of Minnesota
Balance Sheet A snapshot of: – Assets – Liabilities – Net worth (owners equity)
• At a specific point in time
© 2009, University of Minnesota
FFSC Financial Guidelines Four financial statements: – Balance sheet – Income statement – Statement of owners equity – Statement of cash flows
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Income Statement Purpose – Measure profitability – How much money did we make
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Income Statement Types of income statements – Cash – IRS Schedule F
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Income Statement Types of income statements – Cash – IRS Schedule F – Accrual
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Income Statement Accrual method – Revenues recognized when earned – Expenses recognized when incurred – More accurately matches income with the expenses incurred to produce that income
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Income Statement Types of income statements – Cash – IRS Schedule F – Accrual – Accrual adjusted
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Accrual Adjusted Income Statement
Cash Accounting Records
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Accrual Adjusted Income Statement
Beginning Balance Sheet
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Cash Accounting Records
Ending Balance Sheet
Accrual Adjusted Income Statement Smith Farm
Jones Farm Gross income
$500,000
Gross income
$500,000
Cash expenses
-450,000
Cash expenses
-450,000
Net cash income
50,000
Depreciation
-40,000
Schedule F income
10,000
© 2009, University of Minnesota
Net cash income
50,000
Depreciation
-40,000
Schedule F income
10,000
Accrual Adjusted Income Statement Jones Farm
Smith Farm
Gross income
$500,000
Gross income
$500,000
Cash expenses
-450,000
Cash expenses
-450,000
Net cash income
50,000
Inventory change
+100,000
Depreciation
-40,000
Schedule F income
10,000
© 2009, University of Minnesota
Net cash income
50,000
Depreciation
-40,000
Schedule F income
10,000
Accrual Adjusted Income Statement Jones Farm
Smith Farm
Gross income
$500,000
Gross income
$500,000
Cash expenses
-450,000
Cash expenses
-450,000
Net cash income
50,000
Inventory change
+100,000
Depreciation
-40,000
Net farm income
110,000
© 2009, University of Minnesota
Net cash income
50,000
Depreciation
-40,000
Schedule F income
10,000
Accrual Adjusted Income Statement Jones Farm
Smith Farm
Gross income
$500,000
Gross income
$500,000
Cash expenses
-450,000
Cash expenses
-450,000
Net cash income
50,000
Net cash income
50,000
Inventory change
+100,000
Inventory change
-100,000
Depreciation
-40,000
Depreciation
-40,000
Net farm income
110,000
Schedule F income
10,000
© 2009, University of Minnesota
Accrual Adjusted Income Statement Jones Farm
Smith Farm
Gross income
$500,000
Gross income
$500,000
Cash expenses
-450,000
Cash expenses
-450,000
Net cash income
50,000
Net cash income
50,000
Inventory change
+100,000
Inventory change
-100,000
Depreciation
-40,000
Depreciation
-40,000
Net farm income
110,000
Net farm income
-90,000
© 2009, University of Minnesota
