Survivor, the Balance Sheet Challenge


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  • A potentially humorous slide to stress the importance of good records, useful financial statements and analysis. Some one who plans on selling only $500 worth of product per year for the rest of their life might invest less time and money in a system than someone who was working to grow into $1,000,000 in sales per year. Information is only worthwhile if you are able and intend to use it.
  • Good financial records and information help managers Make good decisions, Manage Change – what to grow and market Deal with risk Meet goals Solve problems Engineering language is a set up for the next slide related to the language of business. Engineers need to know the language to communicate So do businesses.
  • Understanding the terminology and workings of Financial Records and Analysis is an important language of business
  • 03-Financial Statements: 3 Steps Estimated Time: We create a historical picture => an impact on life. Why do we do this? Why do we keep financial statements? - a plan for the future - planning for decision-making Keeping that in mind …
  • 04-Financial Statements: 3 Step Definitions Estimated Time: Keeping that in mind …( define) : - Records - Management Reports - Decision-Making – each have functions and tools. Records: Collecting and Organizing Accounting System: AAIMS, Quickbooks, Shoebox Management Reports: Organizing, analyzing, reporting Financial Statements: list Management Reporting still has us organizing but moving the process towards analysis. All have been historical => move to, chg to future Decision-Making: Planning: feasibility, profitability, risk-ability. Illustrate difference btw functions: dairy operation losing $ per cow (not profit), inherit $ (feasibility), expand (risk-ability) Financial Statements: list
  • I added this slide because I thought it did a good job of illustrating the operational and cash flow activity that takes a business from one Balance Sheet (snapshot in time) to the next balance Sheet (snapshot in time)
  • 09-Financial Statements: Balance Sheet Review Estimated Time: After group exercise, view performance and discuss. Answer questions participants may have. Review Balance Sheet concept. Go over each section. Stress BS is at one point in time. REVIEW next 5 slides depending on comfort level .
  • Farm Financial Standards Task Force– 16 measures – liquidity, solvency, profitablility, repayment capacity, financial efficiency --
  • This slide is a good place to start before talking about a couple of the financial ratios. Good to compare to Olympic athletes and their need to measure performance against benchmarks and achievable goals.
  • Cash is King Farmers that are equity rich and cash poor can get stranded if they don’t watch their cash gauge.
  • The colored part of this slide is one aspect of solvency, but I think it is also helpful to discuss the leverage part of the funding mix, and the positives and negatives of using debt to fund a business or enterprise. Debt can help an individual with limited resources make more money, like a lever helps him move a bigger rock. Debt can also cause a person to lose more money and eat up equity in a hurry. Need to understand an appropriate level of risk for their business. Might mention that banks are reluctant to lend to new unproven ideas, unless there is a good level of collateral to back it up the debt. They often feel more comfortable with a dairy farm – they have lots of experience with that.
  • I would tend to focus on the first one of these which is a measure of the percentage of assets that are funded by debt. They all measure the same thing, just in different terms
  • FFSTF – Farm Financial Standards Task Force
  • Survivor, the Balance Sheet Challenge

    1. 1. Survivor… The Balance Sheet Challenge Presented by: Carol Roth, Outreach Specialist, Program on Agricultural Technology Studies (PATS) Rose Skora, UWEX Agricultural Educator, Racine & Kenosha Counties Power Point Content Developed by Bob Cropp, Agriculture Agent, UWEX-Pepin County Balance Sheet Challenge Developed by: UW-Extension Building a Vision Team
    2. 2. Goals For This Workshop <ul><li>Participants will: </li></ul><ul><li>Understand the value of balance sheets </li></ul><ul><ul><ul><li>Why we create them </li></ul></ul></ul><ul><li>Learn the components of balance sheets </li></ul><ul><ul><ul><li>What goes in </li></ul></ul></ul><ul><li>Learn what a balance sheet measures </li></ul><ul><ul><ul><li>What comes out </li></ul></ul></ul>
    3. 3. INFORMATION = POWER The Right Amount of Information is Powerful What is Right for YOU?
    4. 4. Good Business Managers <ul><li>Make Good Decisions </li></ul><ul><li>Manage Change Well </li></ul><ul><ul><li>Rate of Change, Adaptability, Innovation Treadmill </li></ul></ul><ul><li>Confident Risk Takers – Knowledge and Skill </li></ul><ul><li>Mission – Vision – Goals - Benchmarks </li></ul><ul><li>Problem Solvers – Engineering Language </li></ul>
    5. 5. A Language of Business Who will you be Talking To? Financial Statements & Financial Analysis Tools Yourself Where are you Where do you want to be How will you get there
    6. 6. Financial Statements Serving Management’s Needs Records Management Reports Decision-Making
    7. 7. Financial Statements serving management’s needs Records Management Reports Decision-Making Collecting & Organizing Accounting System <ul><li>Organizing, Analyzing, & Reporting </li></ul><ul><li>- Financial Position </li></ul><ul><li>- Financial Performance </li></ul><ul><li>Financial Statements </li></ul><ul><li>BALANCE SHEET </li></ul><ul><li>Income Statement </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Statement of Owner Equity </li></ul>Planning - Feasibility - Profitability - Risk-ability 5. Cash Budget Partial Budget Enterprise Budget
    8. 9. Balance Sheet – a “ balance” concept Assets are everything in the business Liabilities are the claims upon the assets Equity is the part the farmer owns <ul><li>Financial position at a point in time </li></ul><ul><li>Liquidity - measured by current ratio and working capital </li></ul><ul><li>Solvency - measured by net worth and equity/asset ratio or </li></ul><ul><li>debt/asset ratio or debt/equity ratio </li></ul>
    9. 10. Balance Sheet <ul><li>Also known as a “Net Worth Statement” </li></ul><ul><li>Measures position …not performance </li></ul><ul><li>A snapshot In time </li></ul><ul><li>Usually compared on an annual basis </li></ul><ul><li>Reveals liquidity and solvency </li></ul><ul><li>Five of sixteen FFSTF measurements </li></ul>
    10. 11. Balance Sheet Components <ul><li>Assets – Everything in place that is needed to run the business </li></ul><ul><li>Liabilities – The portion of Assets claimed by a lender </li></ul><ul><li>Equity or Net Worth – The portion of the assets contributed or owned by the business owner </li></ul>
    11. 12. Balance Sheet Categories (Assets and Liabilities) <ul><ul><li>Current – 12 months or less </li></ul></ul><ul><ul><li>Non-current </li></ul></ul><ul><ul><ul><li>Intermediate – 1 to 10 years </li></ul></ul></ul><ul><ul><ul><li>Long-term – Over 10 years </li></ul></ul></ul>
    12. 13. Current Items <ul><li>Cash on hand (Business </li></ul><ul><li>Savings (Business) </li></ul><ul><li>Prepaid items </li></ul><ul><li>Purchased inventories </li></ul><ul><li>Raised crops </li></ul><ul><li>Growing crops </li></ul><ul><li>Accounts receivable </li></ul>Non-Current Items <ul><li>Intermediate (1-10 years) </li></ul><ul><ul><li>Machinery </li></ul></ul><ul><ul><li>Farm Vehicle </li></ul></ul><ul><ul><li>Kitchen Equipment </li></ul></ul><ul><li>Long-term (over 10 years) </li></ul><ul><ul><li>Buildings </li></ul></ul><ul><ul><li>Land </li></ul></ul>
    13. 14. The Balance <ul><li>Assets = Equity + Liabilities </li></ul>
    14. 15. Examples of Assets
    15. 16. Time for Active Learning …practice makes better.
    16. 17. Let’s Help Blue and Straw Berries Farm With Their Balance Sheet <ul><li>Input the Balance Sheet Items onto the blank balance sheet </li></ul><ul><li>Calculate </li></ul><ul><ul><li>Total assets, </li></ul></ul><ul><ul><li>Liabilities </li></ul></ul><ul><ul><li>Equity (net worth) </li></ul></ul>
    17. 18. The Answers!
    18. 19. Current Assets and Liabilities
    19. 21. <ul><li>Blue and Straw Berries Farm Balance Sheet </li></ul>
    20. 24. Why is EQUITY important ? <ul><li>Equity… </li></ul><ul><ul><li>is the portion of the business assets contributed by the owners </li></ul></ul><ul><ul><li>growth is part of the annual business profit </li></ul></ul><ul><ul><li>trends over time help measure the overall health and profitability of the business </li></ul></ul>
    21. 25. Liquidity and Solvency* (As determined from the Balance Sheet) <ul><li>Liquidity </li></ul><ul><ul><li>Current Ratio </li></ul></ul><ul><ul><li>Working Capital </li></ul></ul><ul><li>Solvency </li></ul><ul><ul><li>Debt to asset ratio </li></ul></ul><ul><ul><li>Equity to asset ratio </li></ul></ul><ul><ul><li>Debt to equity ratio </li></ul></ul>*First Five FFSTF (Farm Financial Standards Task Force) Measures
    22. 26. Liquidity <ul><li>The ability of your farm business to: </li></ul><ul><ul><li>Meet financial obligations when they come due. </li></ul></ul><ul><ul><li>Generate enough cash to pay your family living expenses and taxes, and make debt payments on time. </li></ul></ul>“ Can you pay your bills?” Equity Rich Cash Poor
    23. 28. Measuring Liquidity <ul><li>Current ratio </li></ul><ul><ul><li>Compares current assets with current liabilities </li></ul></ul><ul><ul><li>Current assets/current liabilities </li></ul></ul><ul><ul><li>Should be at least 1.5 (2.0 preferred) </li></ul></ul><ul><li>Working capital </li></ul><ul><ul><li>Current assets minus current liabilities </li></ul></ul><ul><ul><li>Needs to be a positive dollar amount </li></ul></ul>
    24. 29. Solvency (Leverage) <ul><li>The ability of your farm business to pay all its debts if it were sold tomorrow. Measured as ratios of: Debt, Equity, Assets. </li></ul>How are you funding your Assets? “ Can you sell your business?
    25. 30. Measuring Solvency <ul><li>Debt-to-asset ratio </li></ul><ul><ul><li>Total debt/total assets </li></ul></ul><ul><li>Equity-to-asset ratio </li></ul><ul><ul><li>Total equity (net worth)/total assets </li></ul></ul><ul><li>Debt-to-equity ratio </li></ul><ul><ul><li>Total debt/total equity (net worth) </li></ul></ul>
    26. 31. Farm Financial Score Card <ul><li>Developed by Universities of Vermont and Minnesota </li></ul><ul><li>Is found at: </li></ul><ul><li>Scores financial condition of your farm business with 16 measures, with the first 5 result from the Balance Sheet! </li></ul>
    27. 32. Assignment <ul><li>Compute the following for the Blue and Straw Berries Farm: </li></ul><ul><ul><ul><ul><li>Current ratio </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Working capital </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Debt-to-asset ratio </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Equity-to-asset ratio </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Debt-to-equity ratio </li></ul></ul></ul></ul><ul><li>Mark them on the Farm Finance Scorecard </li></ul>
    28. 33. Assignment Answers <ul><li>Current Ratio </li></ul><ul><ul><li>Current Assets / Current Liabilities </li></ul></ul><ul><ul><li>$1900 / $17,413 = .11 </li></ul></ul><ul><li>Working Capital </li></ul><ul><ul><li>Current Assets minus Current Liabilities </li></ul></ul><ul><ul><li>$1,900 - $17,413 = - $15,513 </li></ul></ul><ul><li>Debt-to-Asset Ratio </li></ul><ul><ul><li>Total Liabilities / Total Assets </li></ul></ul><ul><ul><li>$131,500 / $187,900 = 70% </li></ul></ul><ul><li>Equity-to-Asset Ratio </li></ul><ul><ul><li>Total Equity (net worth) / Total Assets </li></ul></ul><ul><ul><li>$56,400 / $187,900 = 30% </li></ul></ul><ul><li>Debt-to-Equity Ratio </li></ul><ul><ul><li>Total Debt (liabilities) / Total Equity (net worth) </li></ul></ul><ul><ul><li>$131,500 / $56,400 = 233% </li></ul></ul>How would you assess the financial position of the Blue and Straw Berry Farm, at this point in time?
    29. 34. Balance Sheets…Take Home Stuff! <ul><li>About position…not performance </li></ul><ul><li>Net worth = equity </li></ul><ul><li>Assets =Equity + Liabilities </li></ul><ul><li>Liquidity…Can you pay your bills? </li></ul><ul><li>Solvency…Could you sell your business? </li></ul><ul><li>Gives you 5 of 16 FFSTF measurements </li></ul>
    31. 36. Survivor… The Balance Sheet Challenge Presented by: Carol Roth, Outreach Specialist, Program on Agricultural Technology Studies (PATS) Rose Skora, UWEX Agricultural Educator, Racine & Kenosha Counties Power Point Content Developed by Bob Cropp, Agriculture Agent, UWEX-Pepin County Balance Sheet Challenge Developed by: UW-Extension Building a Vision Team