Mary Sobba Agriculture Business Specialist Financial Statements in Agriculture
Accounting Better Farming (Canada) asked farm financial advisors and accountants about bookkeeping practices of farmers. 2...
Why? Using a simple cash system it is possible a farmer could have expenses but no income because the crop was not sold pr...
Accrual Simply means that a farmer is matching expenses to revenue and also keeps an inventory account for crops that are ...
Financial Statements and Financial Ratios The Balance Sheet(s), Income Statement, Statement of Owner’s Equity, Statement o...
What is ahead…….. <ul><li>Financial statements … purpose and use of the Balance Sheet(s), Income Statement, Statement of O...
Relationship between Financial Statements (Beginning of Year) Balance Sheet (End of Year) Balance Sheet P L U S EQUA L S I...
Balance Sheet(s) <ul><li>Prepared at the beginning of each year or business cycle  </li></ul><ul><li>A “snapshot” of what ...
Balance Sheet(s)  (cont’d) <ul><li>Assets – everything owned or payable to the  business as of the balance sheet date </li...
Income Statement <ul><li>Prepared at the end of the year or business cycle  </li></ul><ul><li>Also referred to as a profit...
Income Statement  (cont’d) <ul><li>Revenues – income from sales, direct payments, and other sources </li></ul><ul><li>Expe...
Statement of Owner’s Equity <ul><li>Prepared at the end of the year or business cycle with the Balance Sheet and Income St...
Statement of Owner’s Equity  (cont’d) <ul><li>Beginning Net Worth </li></ul><ul><li>+ Earned changes (Retained Earnings) <...
Statement of Owner’s Equity  (cont’d) <ul><li>Sources of earned change in owners equity </li></ul><ul><ul><li>Net farm inc...
Statement of Owner’s Equity  (cont’d) <ul><li>Sources of unearned change in owners equity </li></ul><ul><ul><li>Change in ...
Cash Flow Projections <ul><li>Cash Flow Projections are a financial tool that looks at the past and projects into a future...
Cash Flow Projections  (cont’d) <ul><li>Cash Flows are commonly confused with a profit & loss statement which they are  no...
Cash Flow Projections  (cont’d) <ul><li>Most cash flows are done on a month by month basis but can be done on a quarterly ...
Cash Flow Projections  (cont’d) <ul><li>All income sources should be included, including non-farm.  </li></ul><ul><li>Don’...
Cash Flow Projections  (cont’d) <ul><li>Once you’ve completed it, go over it once more to be sure you haven’t missed anyth...
Cash Flow Projections  (cont’d) <ul><li>Remember  that the cash flow projection is for your use first.  </li></ul><ul><li>...
Cash Flow Projections  (cont’d) <ul><li>Many lenders now require a cash flow projection of their borrowers every year.  </...
Cash Flow Projections  (cont’d) <ul><li>While not an exact science, cash flows can assist you in planning the next year.  ...
Moving on…….to ratios <ul><li>While not an exact science, cash flows can assist you in planning the next year.  </li></ul>...
Financial Ratios <ul><li>Measures of financial position and performance </li></ul><ul><li>Why?  to anticipate and diagnose...
Financial Ratios  (cont’d) <ul><li>Financial ratios are most useful to: </li></ul><ul><ul><li>Compare past to present perf...
Financial Ratios  (cont’d) <ul><li>Five categories of financial ratios: </li></ul><ul><ul><li>Liquidity  – the ability to ...
Financial Ratios  (cont’d) <ul><li>Five categories of financial ratios  (cont’d) : </li></ul><ul><ul><li>Repayment Capacit...
Financial Ratios  (cont’d) <ul><li>Liquidity </li></ul><ul><li>Current ratio  =  total current farm assets  . </li></ul><u...
Financial Ratios  (cont’d) <ul><li>Liquidity  (cont’d) </li></ul><ul><li>Working capital  =  total current farm assets   –...
Financial Ratios  (cont’d) <ul><li>Solvency </li></ul><ul><li>Debt to Asset ratio  =  total farm liabilities  . </li></ul>...
Financial Ratios  (cont’d) <ul><li>Solvency  (cont’d) </li></ul><ul><li>Equity to Asset ratio  =  total farm equity  . </l...
Financial Ratios  (cont’d) <ul><li>Solvency  (cont’d) </li></ul><ul><li>Debt to Equity ratio  =  total farm liabilities  ....
Financial Ratios  (cont’d) <ul><li>Profitability </li></ul><ul><li>Net Farm Income  =  Gross cash farm income  </li></ul><...
Financial Ratios  (cont’d) <ul><li>Profitability  (cont’d) </li></ul><ul><li>Rate of return on  =  (Net farm income </li><...
Financial Ratios  (cont’d) <ul><li>Profitability  (cont’d) </li></ul><ul><li>Rate of return on  =  (Net farm income – unpa...
Financial Ratios  (cont’d) <ul><li>Profitability  (cont’d) </li></ul><ul><li>Operating profit  =  Return on farm assets  ....
Financial Ratios  (cont’d) <ul><li>Repayment Capacity </li></ul><ul><li>Term debt  =  (Net farm operating income + net non...
Financial Ratios  (cont’d) <ul><li>Repayment Capacity  (cont’d) </li></ul><ul><li>Capital    Net farm operating income  </...
Financial Ratios  (cont’d) <ul><li>Financial Efficiency </li></ul><ul><li>Asset turnover  =  Gross farm income  . </li></u...
Financial Ratios  (cont’d) <ul><li>Financial Efficiency   (cont’d) </li></ul><ul><li>Operating   (Total farm operating </l...
Financial Ratios  (cont’d) <ul><li>Financial Efficiency   (cont’d) </li></ul><ul><li>Depreciation    (Depreciation and oth...
Financial Ratios  (cont’d) <ul><li>Financial Efficiency   (cont’d) </li></ul><ul><li>Interest expense  =  Farm interest ex...
Financial Ratios  (cont’d) <ul><li>Financial Efficiency   (cont’d) </li></ul><ul><li>Net farm income ratio  =  Net farm in...
Farm Finance Scorecard Developed by:  Rick Wackernagel, Dennis Kauppila, and Glenn Rogers, Univ. of Vermont Extension   (h...
Farm Finance Scorecard  (cont’d) 70% 40% % 4. Farm equity-to-asset ratio 43% 150% % 5. Farm debt to equity ratio 60% Weak ...
Farm Finance Scorecard  (cont’d) 35% 20% % 9. Operating profit margin 5% 1% % 7. Rate of return on farm assets 10% 5% % 8....
Farm Finance Scorecard  (cont’d) $   . 11. Capital replace-ment margin 110% Weak 135% % 10. Term-debt cover-age ratio Stro...
Farm Finance Scorecard  (cont’d) 10% 20% % 15. Interest-expense ratio 60% 80% % 13. Operating expense ratio 10% 20% % 14. ...
Questions? Mary Sobba (573) 581-3231 [email_address]
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Financial Statements in Agriculture

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Financial Statements in Agriculture

  1. 1. Mary Sobba Agriculture Business Specialist Financial Statements in Agriculture
  2. 2. Accounting Better Farming (Canada) asked farm financial advisors and accountants about bookkeeping practices of farmers. 25-30% use accrual statements to track farm income and expenses and account for 80% of farm production in Ontario.
  3. 3. Why? Using a simple cash system it is possible a farmer could have expenses but no income because the crop was not sold prior to December 31. It makes it difficult to track crops and to know whether or not the enterprise is profitable
  4. 4. Accrual Simply means that a farmer is matching expenses to revenue and also keeps an inventory account for crops that are carried to the next year.
  5. 5. Financial Statements and Financial Ratios The Balance Sheet(s), Income Statement, Statement of Owner’s Equity, Statement of Cash Flows, and Measures of Financial Position and Performance
  6. 6. What is ahead…….. <ul><li>Financial statements … purpose and use of the Balance Sheet(s), Income Statement, Statement of Owner’s Equity, and Statement of Cash Flows </li></ul><ul><li>Financial Ratios ……Define and understand measures of financial position and performance </li></ul>
  7. 7. Relationship between Financial Statements (Beginning of Year) Balance Sheet (End of Year) Balance Sheet P L U S EQUA L S Income Statement Statement of Owner’s Equity Statement of Cash Flows
  8. 8. Balance Sheet(s) <ul><li>Prepared at the beginning of each year or business cycle </li></ul><ul><li>A “snapshot” of what your business has and owes OR </li></ul><ul><li>How funds are invested in your business (assets) and how they are financed (liabilities and equity) at a point in time </li></ul>
  9. 9. Balance Sheet(s) (cont’d) <ul><li>Assets – everything owned or payable to the business as of the balance sheet date </li></ul><ul><ul><li>Current and Non-current (Intermediate and Long Term) </li></ul></ul><ul><ul><li>Valued at cost and market </li></ul></ul><ul><li>Liabilities – everything that is owed by the business as of the balance sheet date </li></ul><ul><ul><li>Current and Non-current (Intermediate and Long Term) </li></ul></ul><ul><ul><li>Deferred liabilities </li></ul></ul>
  10. 10. Income Statement <ul><li>Prepared at the end of the year or business cycle </li></ul><ul><li>Also referred to as a profit - loss statement </li></ul><ul><li>Is a statement of earnings and comprehensive income (FFSC) </li></ul><ul><li>Required to do income taxes </li></ul>
  11. 11. Income Statement (cont’d) <ul><li>Revenues – income from sales, direct payments, and other sources </li></ul><ul><li>Expenses – outlays in order to conduct business </li></ul><ul><li>Inventory Changes (ending minus beginning) </li></ul><ul><li>Depreciation – changes in capital values (ending minus beginning) </li></ul>
  12. 12. Statement of Owner’s Equity <ul><li>Prepared at the end of the year or business cycle with the Balance Sheet and Income Statement </li></ul><ul><li>Shows sources of earned and unearned change in owner’s equity </li></ul><ul><li>Combined with Income Statement, reconciles Balance Sheets </li></ul>
  13. 13. Statement of Owner’s Equity (cont’d) <ul><li>Beginning Net Worth </li></ul><ul><li>+ Earned changes (Retained Earnings) </li></ul><ul><li>+ Unearned changes (Market Value Changes) </li></ul><ul><li>= Ending Net Worth </li></ul>
  14. 14. Statement of Owner’s Equity (cont’d) <ul><li>Sources of earned change in owners equity </li></ul><ul><ul><li>Net farm income </li></ul></ul><ul><ul><li>Non-farm income (+) </li></ul></ul><ul><ul><li>Family living withdrawals (-) </li></ul></ul><ul><ul><li>Income and Social Security Taxes (-) </li></ul></ul><ul><li>= Retained Earnings </li></ul>
  15. 15. Statement of Owner’s Equity (cont’d) <ul><li>Sources of unearned change in owners equity </li></ul><ul><ul><li>Change in market value of assets (+) </li></ul></ul><ul><ul><li>Change in deferred liabilities (-) </li></ul></ul><ul><li>= Change in Market Values </li></ul>
  16. 16. Cash Flow Projections <ul><li>Cash Flow Projections are a financial tool that looks at the past and projects into a future year. </li></ul><ul><li>It serves as a guide or blueprint for the coming year’s business operation. </li></ul>
  17. 17. Cash Flow Projections (cont’d) <ul><li>Cash Flows are commonly confused with a profit & loss statement which they are not . </li></ul><ul><li>Cash Flows can be as simple or detailed as you want but must provide what information you need. </li></ul>
  18. 18. Cash Flow Projections (cont’d) <ul><li>Most cash flows are done on a month by month basis but can be done on a quarterly as well. </li></ul><ul><li>The information you’ll need before you start are your last couple of year’s records, year end financial statement and next year’s plans. </li></ul>
  19. 19. Cash Flow Projections (cont’d) <ul><li>All income sources should be included, including non-farm. </li></ul><ul><li>Don’t forget crops and livestock that were on hand the first of the year! </li></ul><ul><li>Expenses may be easier to figure by looking over the last year or 2. </li></ul><ul><li>Look for trends over the years so that projections are a little easier to do. </li></ul>
  20. 20. Cash Flow Projections (cont’d) <ul><li>Once you’ve completed it, go over it once more to be sure you haven’t missed anything. </li></ul><ul><li>Look it over a few times a year to see how close you’re coming to your projection. If you’re off a lot, figure out why. </li></ul>
  21. 21. Cash Flow Projections (cont’d) <ul><li>Remember that the cash flow projection is for your use first. </li></ul><ul><li>However, it can also be very helpful for your lenders. </li></ul>
  22. 22. Cash Flow Projections (cont’d) <ul><li>Many lenders now require a cash flow projection of their borrowers every year. </li></ul><ul><li>Government (FSA - Ag Credit, etc.) agencies will not loan money without it anymore. </li></ul>
  23. 23. Cash Flow Projections (cont’d) <ul><li>While not an exact science, cash flows can assist you in planning the next year. </li></ul><ul><li>It can help you measure the financial risk of your operation. </li></ul>
  24. 24. Moving on…….to ratios <ul><li>While not an exact science, cash flows can assist you in planning the next year. </li></ul><ul><li>It can help you measure the financial risk of your operation. </li></ul>
  25. 25. Financial Ratios <ul><li>Measures of financial position and performance </li></ul><ul><li>Why? to anticipate and diagnose financial problems and identify financial strengths and or trends </li></ul><ul><li>Used in a vacuum are ABSOLUTELY meaningless ! ! ! </li></ul>
  26. 26. Financial Ratios (cont’d) <ul><li>Financial ratios are most useful to: </li></ul><ul><ul><li>Compare past to present performance </li></ul></ul><ul><ul><li>Compare present to anticipated performance </li></ul></ul><ul><ul><li>Identify multi-year trends </li></ul></ul><ul><li>Also may be used to compare to benchmarks or other farms </li></ul>
  27. 27. Financial Ratios (cont’d) <ul><li>Five categories of financial ratios: </li></ul><ul><ul><li>Liquidity – the ability to meet obligations as they come due (from the Balance Sheet) </li></ul></ul><ul><ul><li>Solvency – the ability to pay all debts (from the Balance Sheet) </li></ul></ul><ul><ul><li>Profitability – the difference between value and cost of goods produced (from the Income Statement) </li></ul></ul>
  28. 28. Financial Ratios (cont’d) <ul><li>Five categories of financial ratios (cont’d) : </li></ul><ul><ul><li>Repayment Capacity – the ability to repay term debts on time (from the Cash Flow Statement) </li></ul></ul><ul><ul><li>Financial Efficiency – how effectively assets are used to generate income (from all statements) </li></ul></ul>
  29. 29. Financial Ratios (cont’d) <ul><li>Liquidity </li></ul><ul><li>Current ratio = total current farm assets . </li></ul><ul><li> total current farm liabilities </li></ul><ul><ul><li>The extent that current farm assets, if sold tomorrow, would pay off current farm liabilities. </li></ul></ul>
  30. 30. Financial Ratios (cont’d) <ul><li>Liquidity (cont’d) </li></ul><ul><li>Working capital = total current farm assets – total current farm liabilities . </li></ul><ul><ul><li>Operating capital available in the short term from within the business. </li></ul></ul>
  31. 31. Financial Ratios (cont’d) <ul><li>Solvency </li></ul><ul><li>Debt to Asset ratio = total farm liabilities . </li></ul><ul><li> total farm assets </li></ul><ul><ul><li>Measures the lenders’ share of the business. </li></ul></ul>
  32. 32. Financial Ratios (cont’d) <ul><li>Solvency (cont’d) </li></ul><ul><li>Equity to Asset ratio = total farm equity . </li></ul><ul><li> total farm assets </li></ul><ul><ul><li>Measures your share of the business. </li></ul></ul>
  33. 33. Financial Ratios (cont’d) <ul><li>Solvency (cont’d) </li></ul><ul><li>Debt to Equity ratio = total farm liabilities . </li></ul><ul><li> total farm equity </li></ul><ul><ul><li>Compares the lenders’ share of the business to your share of the business. Measures how much you have leveraged your equity. </li></ul></ul>
  34. 34. Financial Ratios (cont’d) <ul><li>Profitability </li></ul><ul><li>Net Farm Income = Gross cash farm income </li></ul><ul><li>– total farm cash expenses </li></ul><ul><li>+ inventory changes </li></ul><ul><li>+ depreciation and other </li></ul><ul><li> capital adjustments </li></ul><ul><ul><li>Measures the return to your labor, management, and equity. </li></ul></ul>
  35. 35. Financial Ratios (cont’d) <ul><li>Profitability (cont’d) </li></ul><ul><li>Rate of return on = (Net farm income </li></ul><ul><li>farm assets + farm interest </li></ul><ul><li> – unpaid family labor) . </li></ul><ul><li>Average farm assets </li></ul><ul><ul><li>Measures the average “interest rate” being earned on all (yours and lenders’) investments in the farm business. </li></ul></ul>
  36. 36. Financial Ratios (cont’d) <ul><li>Profitability (cont’d) </li></ul><ul><li>Rate of return on = (Net farm income – unpaid </li></ul><ul><li>farm equity family labor) . </li></ul><ul><li> Average farm net worth </li></ul><ul><ul><li>Measures the average “interest rate” being earned on all your investments in the farm business. </li></ul></ul>
  37. 37. Financial Ratios (cont’d) <ul><li>Profitability (cont’d) </li></ul><ul><li>Operating profit = Return on farm assets . </li></ul><ul><li>margin Gross farm income </li></ul><ul><ul><li>Shows the operating efficiency of the farm business </li></ul></ul>
  38. 38. Financial Ratios (cont’d) <ul><li>Repayment Capacity </li></ul><ul><li>Term debt = (Net farm operating income + net non-farm </li></ul><ul><li>coverage income + scheduled interest on term </li></ul><ul><li>ratio debt – family living & taxes paid) . </li></ul><ul><li> Scheduled P&I on term debt </li></ul><ul><ul><li>Did the farm business produce enough cash to cover all (farm & non-farm) non-current debt payments? </li></ul></ul>
  39. 39. Financial Ratios (cont’d) <ul><li>Repayment Capacity (cont’d) </li></ul><ul><li>Capital Net farm operating income </li></ul><ul><li>replacement = + net non-farm income </li></ul><ul><li>margin – family living & taxes paid </li></ul><ul><li> – scheduled principal payments </li></ul><ul><li> on term debt </li></ul><ul><ul><li>Is there money left to buy new capital? </li></ul></ul>
  40. 40. Financial Ratios (cont’d) <ul><li>Financial Efficiency </li></ul><ul><li>Asset turnover = Gross farm income . </li></ul><ul><li>ratio Average farm assets </li></ul><ul><ul><li>Measures the efficiency of capital use. </li></ul></ul>
  41. 41. Financial Ratios (cont’d) <ul><li>Financial Efficiency (cont’d) </li></ul><ul><li>Operating (Total farm operating </li></ul><ul><li>expense = expense – farm interest) . </li></ul><ul><li>ratio Gross farm income </li></ul><ul><ul><li>Measures the portion of farm income used to pay operating expenses. </li></ul></ul>
  42. 42. Financial Ratios (cont’d) <ul><li>Financial Efficiency (cont’d) </li></ul><ul><li>Depreciation (Depreciation and other </li></ul><ul><li>expense = capital adjustments) . </li></ul><ul><li>ratio Gross farm income </li></ul><ul><ul><li>Indicates how fast capital is worn out . </li></ul></ul><ul><ul><li>What portion of farm income is needed to maintain business capital? </li></ul></ul>
  43. 43. Financial Ratios (cont’d) <ul><li>Financial Efficiency (cont’d) </li></ul><ul><li>Interest expense = Farm interest expense . </li></ul><ul><li>ratio Gross farm income </li></ul><ul><ul><li>Indicates what portion of farm income is used to pay for borrowed capital. </li></ul></ul>
  44. 44. Financial Ratios (cont’d) <ul><li>Financial Efficiency (cont’d) </li></ul><ul><li>Net farm income ratio = Net farm income . </li></ul><ul><li> Gross farm income </li></ul><ul><ul><li>Indicates what portion of gross income is left after all farm expenses, except unpaid labor and management, are paid. </li></ul></ul>
  45. 45. Farm Finance Scorecard Developed by: Rick Wackernagel, Dennis Kauppila, and Glenn Rogers, Univ. of Vermont Extension (handout) $ . 2. Working capital 1.0 Weak 2.0 . : 1 . 1. Current ratio Strong Stable Liquidity
  46. 46. Farm Finance Scorecard (cont’d) 70% 40% % 4. Farm equity-to-asset ratio 43% 150% % 5. Farm debt to equity ratio 60% Weak 30% % 3. Farm debt-to-asset ratio Strong Stable Solvency (market)
  47. 47. Farm Finance Scorecard (cont’d) 35% 20% % 9. Operating profit margin 5% 1% % 7. Rate of return on farm assets 10% 5% % 8. Rate of return on farm equity Weak $ . 6. Net farm income Strong Stable Profitability
  48. 48. Farm Finance Scorecard (cont’d) $ . 11. Capital replace-ment margin 110% Weak 135% % 10. Term-debt cover-age ratio Strong Stable Repayment capacity
  49. 49. Farm Finance Scorecard (cont’d) 10% 20% % 15. Interest-expense ratio 60% 80% % 13. Operating expense ratio 10% 20% % 14. Depreciation-expense ratio 10% 20% Weak 20% % 16. Net farm income ratio 40% % 12. Asset turnover ratio (market) Strong Stable Financial efficiency
  50. 50. Questions? Mary Sobba (573) 581-3231 [email_address]

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