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  • 1. Financial Management For Small Farms © 2009, University of Minnesota
  • 2. Dale Nordquist Department of Applied Economics 800-234-1111 www.cffm.umn.edu © 2009, University of Minnesota
  • 3. 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
  • 4. A comprehensive whole farm financial planning and analysis system © 2009, University of Minnesota
  • 5. 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
  • 6. Financial Management For Small Farms • Is there a difference? © 2009, University of Minnesota
  • 7. 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
  • 8. 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 © 2009, University of Minnesota
  • 9. 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 © 2009, University of Minnesota
  • 10. 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 © 2009, University of Minnesota
  • 11. Financial Analysis vs Business Management Financial Analysis Business Management • Uses the numbers • Uses knowledge of the • Diagnostic business • Keep score (trends) • Prescriptive • Decision-making © 2009, University of Minnesota
  • 12. Financial Management For Small Farms © 2009, University of Minnesota
  • 13. Interpreting Financial Statements and Measures © 2009, University of Minnesota
  • 14. Farm Financial Standards Guidelines • Financial statements: – Balance sheet – Income statement – Statement of owner’s equity – Statement of cash flows or cash flow budget © 2009, University of Minnesota
  • 15. Farm Financial Standards Guidelines • Financial ratios and measures: – Farm Financial Standards Sweet 16+ © 2009, University of Minnesota
  • 16. Balance Sheet A snapshot of: – Assets – Liabilities – Net worth (owners equity) • At a specific point in time © 2009, University of Minnesota
  • 17. Balance Sheet The accounting equation: Assets = Liabilities + Net worth (Equity) © 2009, University of Minnesota
  • 18. Balance Sheet • Assets – Everything owned or payable to the business © 2009, University of Minnesota
  • 19. Balance Sheet • Assets – Everything owned or payable to the business • Liabilities – All obligations owed © 2009, University of Minnesota
  • 20. 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
  • 21. Balance Sheet • Measures financial position: © 2009, University of Minnesota
  • 22. Balance Sheet • Measures financial position: – Liquidity •The ability of the business to generate cash when needed © 2009, University of Minnesota
  • 23. 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 © 2009, University of Minnesota
  • 24. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 25. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 26. Balance Sheet Assets Liabilities Cash accounts Current (< 1 year) Current inventories Crop Livestock held for sale Intermediate (1–10 yrs) Intermediate expenses Prepaid Long term (> 10 years) LongSupplies term Accounts receivable Total liabilities Net worth Total assets Total Liabs + Net worth © 2009, University of Minnesota
  • 27. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 28. Balance Sheet Assets Liabilities Current (< 1 year) Current Intermediate (1–10 yrs) Intermediate & equipment Machinery Breeding livestock Long term (> 10 years) Long term Total liabilities Net worth Total assets Total Liabs + Net worth © 2009, University of Minnesota
  • 29. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 30. Balance Sheet Assets Liabilities Current (< 1 year) Current Intermediate (1–10 yrs) Intermediate Long term (> 10 years) Land Long term Buildings Total liabilities Net worth Total assets Total Liabs + Net worth © 2009, University of Minnesota
  • 31. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 32. Balance Sheet Assets Liabilities Current (< 1 year) Accounts payable Current Accrued expenses Operating loans yrs) Intermediate (1–10 Intermediate Principal due on term debt Long term (> 10 years) Long term Total liabilities Net worth Total assets Total Liabs + Net worth © 2009, University of Minnesota
  • 33. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 34. Balance Sheet Assets Liabilities Current (< 1 year) Current Intermediate (1–10 yrs) Loans with an original term Intermediate of from 1 to 10 years Long term (> 10 years) Long term Total liabilities Net worth Total assets Total Liabs + Net worth © 2009, University of Minnesota
  • 35. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 36. Balance Sheet Assets Liabilities Current (< 1 year) Current Intermediate (1–10 yrs) Intermediate Loansterm (> 10original term Long with an years) Long term of greater than 10 years Total liabilities Net worth Total assets Total Liabs + Net worth © 2009, University of Minnesota
  • 37. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 38. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 39. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 40. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 41. 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 Total Liabs + Net worth © 2009, University of Minnesota
  • 42. Balance Sheet • Management implication – Match financing to asset life © 2009, University of Minnesota
  • 43. Balance Sheet: When • A snapshot at a specific point in time © 2009, University of Minnesota
  • 44. Balance Sheet Analysis • Current position • Financial structure • Total solvency • Net worth change © 2009, University of Minnesota
  • 45. Balance Sheet Analysis • Current position – Current assets vs. current liabilities – Measures of liquidity • Balance sheet structure • Total solvency • Net worth change © 2009, University of Minnesota
  • 46. Working Capital = Current assets minus current liabilities • Important in financial risk management • Reduced by cash capital purchases and family withdrawals © 2009, University of Minnesota
  • 47. 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 © 2009, University of Minnesota
  • 48. 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 © 2009, University of Minnesota
  • 49. 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
  • 50. Balance Sheet Analysis Let’s look at a balance sheet. © 2009, University of Minnesota
  • 51. Balance Sheet Analysis • Current position • Balance sheet structure • Total solvency • Net worth change – Measures overall progress © 2009, University of Minnesota
  • 52. 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
  • 53. 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 © 2009, University of Minnesota
  • 54. Earned Net Worth Change Net farm income $75,000 Non-farm income + 25,000 Family living/owner withdrawals - 50,000 Income taxes - 10,000 Earned net worth change = $40,000 © 2009, University of Minnesota
  • 55. Balance Sheet Challenge Asset Valuation © 2009, University of Minnesota
  • 56. 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 © 2009, University of Minnesota
  • 57. Market Value Balance Sheet Total estimated market value of assets - Total debts = Net worth © 2009, University of Minnesota
  • 58. Market Value Balance Sheet •Advantage – Best estimate of solvency - amount remaining if all assets were sold and all debts paid © 2009, University of Minnesota
  • 59. 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 © 2009, University of Minnesota
  • 60. Market Value Balance Sheet • Uses – Evaluate solvency – Evaluation of debt capacity – Collateral analysis – External comparison with other farms – Estate planning © 2009, University of Minnesota
  • 61. Balance Sheet Challenge Asset Valuation • Cost (Book) Valuation – assets valued at original cost less depreciation – land value never changes © 2009, University of Minnesota
  • 62. Cost Value Balance Sheet Total depreciated value of assets - Total debts = Retained earnings © 2009, University of Minnesota
  • 63. Cost Value Balance Sheet •Advantage – Includes only net worth changes resulting from earnings © 2009, University of Minnesota
  • 64. Cost Value Balance Sheet •Advantage – Includes only net worth changes resulting from earnings •Disadvantage – Does not provide accurate solvency picture © 2009, University of Minnesota
  • 65. Cost Value Balance Sheet •Uses – Monitor earned net worth change – Internal periodic performance – Calculation of periodic net income © 2009, University of Minnesota
  • 66. 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 © 2009, University of Minnesota
  • 67. Balance Sheet Challenge Asset Valuation • Be consistent • Depreciation – Machinery 10% – Buildings 5% © 2009, University of Minnesota
  • 68. Balance Sheet A snapshot of: – Assets – Liabilities – Net worth (owners equity) • At a specific point in time © 2009, University of Minnesota
  • 69. FFSC Financial Guidelines Four financial statements: – Balance sheet – Income statement – Statement of owners equity – Statement of cash flows © 2009, University of Minnesota
  • 70. Income Statement Purpose – Measure profitability – How much money did we make © 2009, University of Minnesota
  • 71. Income Statement Types of income statements – Cash – IRS Schedule F © 2009, University of Minnesota
  • 72. Income Statement Types of income statements – Cash – IRS Schedule F – Accrual © 2009, University of Minnesota
  • 73. Income Statement Accrual method – Revenues recognized when earned – Expenses recognized when incurred – More accurately matches income with the expenses incurred to produce that income © 2009, University of Minnesota
  • 74. Income Statement Types of income statements – Cash – IRS Schedule F – Accrual – Accrual adjusted © 2009, University of Minnesota
  • 75. Accrual Adjusted Income Statement Cash Accounting Records © 2009, University of Minnesota
  • 76. Accrual Adjusted Income Statement Beginning Cash Ending Balance Accounting Balance Sheet Records Sheet © 2009, University of Minnesota
  • 77. 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 Depreciation -40,000 Depreciation -40,000 Schedule F income 10,000 Schedule F income 10,000 © 2009, University of Minnesota
  • 78. 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 Depreciation -40,000 Depreciation -40,000 Schedule F income 10,000 Schedule F income 10,000 © 2009, University of Minnesota
  • 79. 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 Depreciation -40,000 Depreciation -40,000 Schedule F income 10,000 Net farm income 110,000 © 2009, University of Minnesota
  • 80. 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
  • 81. 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