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  • 1. Managing Risks With Financial Analysis What's Your Plan?
  • 2. What's Your Plan?
    • Production
    • Financial
    • Marketing
    • Human Resource
  • 3. Are You a Risk Taker????? Production Financial Marketing Human Resource
  • 4.
    • Do You Take Unnecessary Risks????
  • 5. Objectives For This Session
    • Gain an understanding of:
      • Business’s financial position & performance analysis
      • Interaction among financial statements
      • Financial interaction/impact the family has on the business
      • Different types of risk affecting the business.
  • 6. Key Producer Items/Concerns
    • Adequate funds for family living (All Families)
    • Alternative enterprises, enterprise mix
    • Debt Load and Structure
    • Expansion plans/capabilities
    • Dependences
      • Government payments
      • Off Farm Inflows
    • Managing cost of production, financial info, marketing, labor (family)
    • Tight profit margins
  • 7. Financial Trends in Agriculture
    • Suggest several slides reviewing Ag financial health
    • Trends in
      • Farm Net Income
      • Debt Load and Structure
      • Number of farms
      • Sources of Ag Household income
    • Use these as background information
    • Three examples follow
  • 8. Net Farm Income
  • 9. Net Cash Farm Income
  • 10. Total Production Expenses
  • 11. Complete Financials Required
    • Beginning and Ending Balance Sheets
    • Cash Flow Statement
      • New form = Statement of Cash Flows
    • Accrual Adjusted Income Statement
    • Statement of Owner Equity
  • 12. Terminology Causes Us Problems
    • All cash inflows are not income
      • Loan proceeds from lenders
    • All cash outflows are not expenses
      • Principal payments to lenders
      • Expense versus Expenditure
    • You can have non-cash expenses
      • Depreciation most common
      • Also through accrual adjustments
    • You can have non-cash income
      • Accrual adjustments
  • 13. Just Like Balancing a Check Book
    • Beginning Cash Balance
    • + Inflows
    • - Outflows
    • = Ending Cash Balance
    • Your business performance is measured the same way using a complete set of financial statements
    These are Linked
  • 14. Statement of Owner Equity
    • Beginning Owner Equity
    • + Net Income
    • - Withdrawals
    • + Contributions
    • - Distributions
    • +/- Change in Valuation
    • = Ending Owner Equity
    Balancing a Checkbook Beginning Equity +/- Activity = Ending Equity
  • 15. Some Topics for Examination
    • Withdrawals
    • Non-business income
    • Government Payments
    • Cost of Production
    • Debt Load (asset and liability structure)
    • Asset revaluation
    • Capital asset purchase
    • Risk Protection Tools (Insurance)
    • Non-cash income
    • Non-cash expense (not depreciation)
    • Contributed capital
    • Distributed capital
  • 16. Withdrawals
    • Note the:
      • Net worth (equity) on the balance sheet and the change in equity from beginning to end of year
      • Note net income (Accrual Adjusted Income Statement)
      • The relationship between cash flow and the balance sheet, follow the red arrows.
    • Change family withdrawals to zero
    • What is relationship of Net Income and change in equity
    • What does this tell us about how equity growth in the business MUST occur
    • Change family withdrawals back to $30,000
  • 17. Continuation of Owner Withdrawals
    • With a positive Cash Flow
    • No operating loan carryover
    • May be a negative net worth change
    • If so, the system tells how much owner draw is impacting net worth
      • Also indicates the amount of money from non-business sources that must be brought into the operation
  • 18. Continuation of Owner Withdrawals
    • With a negative Cash Flow
    • Will have an operating loan carryover
      • Carryover amount indicates the dollar adjustment necessary from:
        • Off farm earnings
        • Income and/or expense adjustements
        • Combination of all the above
    • If from Off-Farm, enter as a nonbusiness cash inflow .
      • May still be a negative equity change
      • Correct with more non-business inflow
  • 19. Family Living & Form of Ownership
    • Sole Proprietor versus Corporation
    • Change family living withdrawal to a business expense
      • Zero out Owner Withdrawals and enter total dollars of “family living” on the “Other Cash Business Expense” line of the Cash Flow
      • Illustrates the effects of a corporate form of ownership
    • Review effects on
      • Income Statement,
      • Cash Flow,
      • Balance Sheets,
      • Relationship between Net Income and Net Worth Change
  • 20. Non Business Income
    • Income not generated by business assets
    • Types of non business income
      • Off farm wages
      • Non farm earnings (interest, dividends, etc)
    • Interest earned on a farm business checking account would be considered business income.
  • 21. Government Payments
    • Note current profit levels and cash flow position
    • Reduce/eliminate government payments on crops
    • Effects on cash flow, net income, equity
    • Implications for profit
      • Profit  Net Cash Flow  Taxable Income
    • Implications for the size of the business
      • Where is the risk?
  • 22. Cost of Production
    • Implications for this operation
    • Do you know your cost of production??????
      • Enterprise record keeping system
        • Quicken or QuickBooks
      • Spreadsheets that allow you to allocate income and expenses to enterprises
    • If you can not measure it, you can not manage it
  • 23. Debt Load and Structure
    • Example starts with approximately 16.5% debt load
    • What is the debt load that can be carried by an operation this size?
    • What about debt structure?
      • Short vs long term debt
    • How does family living withdrawal effect debt carrying capacity?
    • Crop vs Livestock operations
  • 24. Asset Revaluation
    • Assets are occasionally revalued to reflect inflationary pressures
      • Machinery, land, buildings, improvements, breeding livestock
    • Necessary to accurately reflect the market value of these assets
    • Do not misinterpret this increase in equity
      • Is not due to business performance
      • Can be very misleading and can mask serious business performance issues
  • 25. Capital Asset Purchase
    • Question: Will purchasing a new capital asset increase your net worth?
      • Pickup, new bull, combine, center pivot, etc.
    • What is affected
      • Ending asset balance, ending liabilities, cash inflows and cash outflows, net income
    • Bottom line, You CAN NOT buy equity
    • Equity or growth in equity must be earned
    • The only way to do this is make the new asset earn additional revenue and/or reduce costs
      • Increase net income
  • 26. Risk Protection Tools (Insurance)
    • Example used here is limited to the Basic Unit coverage provided by MPCI
    • Only three Basic Units are allowed in this example
    • Enter “example” levels of MPCI coverage for up to three Basic Units.
    • Set initial yields and prices at low levels to simulate bad year.
    • Turn MPCI section on/off to show affects of using MPCI insurance.
  • 27. Non-Cash Income
    • Non-cash income adjustments are made on the Accrual Adjusted Income Statement to reflect changes in Current Asset values on the beginning and ending balance sheet.
    • Include changes in:
      • Crops Held for Sale
      • Market Livestock
      • Other Current Assets
      • Cash Invested in Growing Crops
    • See the AccrualAdj tab for complete details
  • 28. Non-Cash Expense (Not Depreciation)
    • Non-cash expense adjustments are
      • Made on the Accrual Adjusted Income Statement
      • Reflect changes in Current Asset and Current Liabilities section of the beginning and ending Balance Sheet.
    • See the AccrualAdj tab of the spreadsheet for a detailed review of these adjustments
  • 29. Three Types of Contributed/Distributed Assets
    • Cash or Near Cash
      • Listed on the Current Assets portion of the Balance Sheet
    • Capital assets, which include:
      • Long term depreciable assets
      • Breeding livestock
      • Machinery and equipment
      • Buildings and improvements
      • Land
  • 30. What is Contributed Capital
    • Capital not generated by the operation but given to the operation to support our farming habit
      • Off farm income (wages/salary)
      • Nonbusiness income (dividends, etc.)
      • Gifts, inheritances, etc.
    • Will have affects on:
      • Equity, Profits, Cash Flow
    • Earned versus Unearned
  • 31. What is Distributed Capital
    • What is distributed capital?
      • Capital taken out of the operation
    • Will have different affects on:
      • Equity - Short term vs long term
        • Immediate reduction in asset value
      • Profits - Short term vs long term
        • Reduction in ability to produce income in the future
      • Cash flow - Short term vs long term
    • Swapping assets within a family structure run as one business?
  • 32. Income Taxes
    • The RDFinancial spreadsheet is distributed with the Income and S.S. tax estimator turned off.
      • It can be turned on in cell W8 on the Statements tab
    • Users can enter additional cash business expenses in cell I22 of the Statements tab to show the affects on the financials
      • Net Worth, Net Income, Cash Flow
  • 33. Summary
    • You MUST measure your Financial Business Positions and Performance
    • Must be efficient
      • Maximize output per unit of input
      • Often we try to maximize just output
      • Low cost producer
      • The right size producer (size matters)
      • Family structure matters
    • Manage marketing, production, family risk
    • Financial analysis measures the impact of these
  • 34. Business Position & Performance
    • What is key to your ability to survive?
      • Managing all forms of risk
        • Production, Human, Marketing, Financial, Legal
    • With respect to the financial end
      • Profits are critical
      • Profits  Net Cash Flow  Taxable Income
      • Earned positive Cash Flow also helps a great deal
    • If you can’t measure it, you can’t manage it!!
  • 35. Business Must Produce Net Worth Internally
    • Every dollar of income goes towards increasing net worth
    • Every dollar of expense goes towards decreasing net worth
    • If growth in Net Worth comes only from external sources, your on shaky ground
    • You must be profitable enough to pay for:
      • Family Living , Debt Principal, Savings, Reinvestment, Retirement
    • Positive Cash Flow is good but……
  • 36. Accrual Adjusted Financials:
    • Catch problems with:
      • Inventory sell down to manage cash needs
      • Selling capital asset base, your manufacturing plant (livestock, machinery, land, etc.)
      • Capital distributions
      • Unearned equity increases
    • Allows accurate business performance evaluation for each time period
    • Shows strengths and weaknesses
      • Will not be easy the first time through
  • 37. Must Do Your Own Detailed Analysis
    • “ RDFinancial ” = Readers Digest Version
    • “ WFBudgets ” = Intermediate version
    • “ Financial Statements ” = Very detailed
    • “ Machines ” = Enterprise budgeting for crops
    • “ CCFS ” = Cow-Calf, Feeder, Stocker enterprise budgeting
  • 38. How To Get There
    • What is your business plan?
    • Do you have a management team to help with:
      • Production decisions
      • Marketing decisions
      • Financial analysis
      • Human resources
    • Are communications good among team members?
    • Are team members missing that are critical to the overall success of the business?
  • 39. Parting Comment
    • Do not risk the future of your operation (family and business) with frustration over preparing detailed financial statements. Just do it!