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  1. 1. Financial Planning with FAST Tools By Paul N. Ellinger Gary Schnitkey Travis Farley
  2. 2. FAST Tools <ul><li>farmdoc companion project initiated in 1999 </li></ul><ul><li>Development of 42 spreadsheet-based tools to aid decisions for producers, lenders, consultants and investors </li></ul><ul><li>Facilitate use, access, distribution of tools and resources through CD and internet distribution </li></ul><ul><ul><li>Quarterly subscription </li></ul></ul><ul><ul><li>farmdoc download </li></ul></ul><ul><ul><li>via workshops </li></ul></ul><ul><li>Approximately, 30,000 CDs produced and another 35,000 downloads </li></ul><ul><li>Increased demand for education and training </li></ul>
  3. 3. Current Resources and Activities <ul><li>45 laptop computer lab </li></ul><ul><li>FAST educator / coordinator </li></ul><ul><li>CD duplication </li></ul><ul><ul><li>internal and cooperate w/other extension programs </li></ul></ul><ul><li>50+ annual meetings in Illinois / integrated FAST </li></ul><ul><ul><li>80% were supported w/RMA </li></ul></ul><ul><li>Teaching modules for each program </li></ul><ul><ul><li>Case studies and examples </li></ul></ul>Theme & Focus Teach Decision Making Integrate and utilize FAST Not just computer training
  4. 4. Educational Efforts 3 Dimensions Content/ Meeting Type Intended Audience Host(s)
  5. 5. Content: Modules <ul><li>Financial planning </li></ul><ul><li>Crop insurance </li></ul><ul><li>Grain inventory pricing and management </li></ul><ul><li>Machinery management </li></ul><ul><li>Land investment and lease analysis </li></ul><ul><li>Enterprise analysis </li></ul>
  6. 6. Audiences Targeted and General <ul><li>Farmers </li></ul><ul><ul><li>General and women via Annie’s project </li></ul></ul><ul><li>Lenders </li></ul><ul><li>FSA </li></ul><ul><li>Farm bureau managers </li></ul><ul><li>College and High School Students </li></ul><ul><li>Educators (train the trainer programs) </li></ul><ul><ul><li>College and Jr College instructors </li></ul></ul><ul><ul><li>Vo-Ag Teachers </li></ul></ul><ul><ul><li>Extension Educators </li></ul></ul><ul><ul><li>State record fieldstaff (Iowa, KY, Illinois and Alabama) </li></ul></ul>
  7. 7. Hosts “Getting the right people at the table” <ul><li>Typical Extension Channels </li></ul><ul><li>Farm Bureau </li></ul><ul><li>Farm Credit System </li></ul><ul><li>Commercial Banks </li></ul><ul><li>Growmark </li></ul><ul><li>State Record Keeping Associations </li></ul>
  8. 8. FAST Tools - Overview farmdoc materials Computerized Decision Aids Financial Analysis Investment Analysis Loan Analysis Farm Management Grain Marketing & Management Risk Management Yield and Land Database Utilities AgMas Crop Insurance Proceedings: Farm Management Financial Management Policy Law and Taxation Grain Marketing
  9. 9. Financial Analysis <ul><li>Appraisal of current financial position </li></ul><ul><li>Balance sheet </li></ul><ul><li>Ratio calculator </li></ul><ul><li>Cash flow planning </li></ul><ul><li>Cash to accrual income approximation </li></ul><ul><li>Estimates of deferred taxes </li></ul><ul><li>Repayment capacity analysis </li></ul><ul><li>Personal financial planning </li></ul><ul><li>Longer-term planning – in development </li></ul><ul><li>Net worth allocation </li></ul>Assist in preparing and interpreting financial information and measuring financial health
  10. 10. Investment Analysis Assist in measuring the economic returns and performance of alternative types of investments. <ul><li>Capital budgeting </li></ul><ul><li>Grain bin analysis </li></ul><ul><li>Land purchase analysis </li></ul><ul><li>Lease versus purchase </li></ul><ul><li>Machinery financing </li></ul><ul><li>MACRS calculator </li></ul><ul><li>Savings calculator </li></ul><ul><li>Time value of money calculator </li></ul>
  11. 11. Loan Analysis <ul><li>Loan amortization </li></ul><ul><li>Loan comparison </li></ul><ul><li>Revolving loan calculator </li></ul>Assist in calculating loan payments and schedules; comparing alternative loans; and measuring the sensitivity of payments to changes in loan parameters
  12. 12. Farm Management Assist in developing enterprise budgets and breakeven levels; estimating costs of machinery operations; and comparing crop insurance and farmland leasing alternatives <ul><li>Break even analysis </li></ul><ul><li>Crop budgeting tool </li></ul><ul><li>Crop insurance calculator </li></ul><ul><li>Enterprise allocation and analysis </li></ul><ul><li>Farmland lease analysis </li></ul><ul><li>Machinery lease analysis </li></ul>
  13. 13. Grain Marketing and Management Assist in tracking grain inventory and estimating the costs and returns of grain storage and delivery <ul><li>Crop storage analysis </li></ul><ul><li>Grain delivery model </li></ul><ul><li>Grain pricing model </li></ul><ul><li>Grain inventory management </li></ul>
  14. 14. Risk Management Assist in evaluating the impact of farmland lease types as well as marketing and crop insurance strategies on revenue and income distributions. <ul><li>Crop insurance historical evaluator </li></ul><ul><li>Farm rent evaluator </li></ul><ul><li>Marketing and crop insurance risk model </li></ul>
  15. 15. Yield and Land Database Utilities Assist in analyzing county-level historical crop yields and land prices and assist with common computations related to soil productivity measures and yield predictions <ul><li>Illinois, Indiana, Iowa crop yield database </li></ul><ul><li>Illinois farmland sales database </li></ul><ul><li>Illinois soil productivity index utilities </li></ul>
  16. 16. Financial Planning Modules
  17. 17. Day Program <ul><li>Repayment analysis </li></ul><ul><li>Ratio analysis </li></ul><ul><li>Financial Planning </li></ul><ul><ul><li>Annual and multi-year </li></ul></ul>
  18. 18. Repayment Capacity <ul><li>Critical for determining and understanding the income needs from the farming operation </li></ul><ul><li>Good discussions regarding family living budgets </li></ul><ul><ul><li>Resources: </li></ul></ul><ul><ul><ul><li>Illinois record keeping data </li></ul></ul></ul><ul><ul><ul><li>Consumer expenditure studies </li></ul></ul></ul><ul><ul><ul><li>www.bls.gov/cex/ </li></ul></ul></ul>
  19. 19. Repayment Capacity, cont.
  20. 20. Stage 1: Repayment Analysis
  21. 21. Stage 2: Repayment Analysis
  22. 22. For Illinois: Risk Analysis <ul><li>Enter Budget and Crop Insurance Data </li></ul><ul><li>Based on 31 years of county level production and price data </li></ul><ul><li>Assess the likelihood of achieving income levels needed </li></ul>
  23. 24. Ratio Calculator <ul><li>Designed to assess financial health through ratio and trend analysis </li></ul><ul><li>Minimum set of data needed to complete the “sweet 16” ratios </li></ul><ul><li>Calculate “scaled” health and trend index for each ratio. </li></ul><ul><li>Store multiple years </li></ul><ul><li>Professional version for multiple customers </li></ul>
  24. 25. Educational Programs <ul><li>Case study </li></ul><ul><li>Drawbacks and cautions of financial ratios </li></ul><ul><li>Evaluate the strong and weak areas (liquidity, profitability, leverage, repayment capacity) </li></ul><ul><li>Assess strategies to improve the various areas </li></ul>
  25. 27. Why Budget? <ul><li>Decision analysis benchmarks </li></ul><ul><ul><li>Cost control </li></ul></ul><ul><ul><li>Marketing </li></ul></ul><ul><ul><li>Identify opportunities </li></ul></ul><ul><ul><li>Contingency planning </li></ul></ul><ul><ul><li>Meet financial goals – discipline </li></ul></ul><ul><ul><li>Managing cash surplus/deficits profitably </li></ul></ul><ul><li>Organization </li></ul><ul><li>Communication </li></ul><ul><li>Monitor performance </li></ul><ul><li>And … my lender wanted one </li></ul>
  26. 28. Desired Components of a Financial Plan <ul><li>Focus on projected profitability of a plan – not just cash flow </li></ul><ul><ul><li>What do we need to break even? </li></ul></ul><ul><ul><li>What cushion do we have to meet debt payments? </li></ul></ul><ul><li>Sensitivity analysis (stress testing) </li></ul><ul><ul><li>Prices </li></ul></ul><ul><ul><li>Production </li></ul></ul><ul><ul><li>Costs </li></ul></ul><ul><ul><li>Interest rates </li></ul></ul><ul><li>Basis of comparison and validation </li></ul><ul><ul><li>Benchmarks </li></ul></ul><ul><ul><li>Previous year comparison </li></ul></ul><ul><ul><li>Comparison to actual </li></ul></ul>
  27. 29. Getting Organized <ul><li>Synchronize cash, loan, and inventory balances </li></ul><ul><li>Total cash expenses for 2005 </li></ul><ul><li>Current inventories </li></ul><ul><ul><li>Units and price </li></ul></ul><ul><li>Status of government payments </li></ul><ul><ul><li>Due from 2005 crop </li></ul></ul><ul><li>Balance and payment schedules for loans </li></ul><ul><ul><li>Interest owed at end of year </li></ul></ul><ul><ul><li>Scheduled payments </li></ul></ul><ul><li>Items prepaid for 2006 crop and payable for 2005 crop at the end of the year </li></ul>
  28. 30. Getting Organized, continued <ul><li>Enterprise cropping plan </li></ul><ul><ul><li>acres </li></ul></ul><ul><ul><li>share of acres </li></ul></ul><ul><ul><li>lease type and share </li></ul></ul><ul><ul><li>expected production </li></ul></ul><ul><ul><li>government payments </li></ul></ul><ul><ul><li>costs per acre </li></ul></ul><ul><li>Crop insurance protection </li></ul><ul><ul><li>Level of yield or revenue protection </li></ul></ul><ul><li>Livestock plan </li></ul><ul><ul><li>Expected production </li></ul></ul><ul><ul><li>Expected sales and purchase price </li></ul></ul><ul><ul><li>Feed costs </li></ul></ul><ul><ul><li>Other livestock expenses </li></ul></ul>
  29. 31. Getting Organized, continued <ul><li>Planned capital purchases </li></ul><ul><ul><li>Expected level and cost of financing </li></ul></ul><ul><li>Nonfarm sources and uses of cash </li></ul><ul><ul><li>Wages </li></ul></ul><ul><ul><li>Business income/expenses </li></ul></ul><ul><ul><li>Family withdrawals </li></ul></ul><ul><li>Before visiting lender </li></ul><ul><ul><li>Check if lender is using suggested commodity prices </li></ul></ul><ul><ul><li>View Consumer Credit Report: See handout </li></ul></ul>
  30. 32. Financial Analysis <ul><li>Case Study </li></ul><ul><li>Enter complete set of cash flow information </li></ul><ul><li>Customize budget entries per site location </li></ul>
  31. 33. Financial Planning Attributes <ul><li>Built-in risk parameters </li></ul><ul><li>Quarterly projections </li></ul><ul><ul><li>Cash flow </li></ul></ul><ul><ul><li>Income statements </li></ul></ul><ul><ul><li>Commodity sensitivity and break even </li></ul></ul><ul><ul><li>Previous year comparison </li></ul></ul><ul><ul><li>Scenario analysis </li></ul></ul>
  32. 34. Financial Planning Demos
  33. 35. Comments and Questions <ul><li>Complimentary CDs </li></ul><ul><li>Looking for reviewers, partners and ideas </li></ul><ul><li>Cooperate in CD production </li></ul><ul><li>Facilitate your programs </li></ul>