Financial Statements

892 views

Published on

Published in: Economy & Finance, Business
  • Be the first to comment

Financial Statements

  1. 1. Financial Statements
  2. 2. Finance Operations Marketing Personnel Strategy Business Plan
  3. 4. Financial statements? <ul><li>What? </li></ul><ul><li>Where? </li></ul><ul><li>When? </li></ul><ul><li>Why? </li></ul><ul><li>How? </li></ul><ul><li>Who? </li></ul>
  4. 5. Can You Answer These Questions? <ul><li>Is the business headed in the right direction? </li></ul><ul><li>Does it provide enough income to: </li></ul><ul><ul><li>Show a profit? </li></ul></ul><ul><ul><li>Cover your loan payments? </li></ul></ul><ul><ul><li>Pay family living expenses? </li></ul></ul><ul><li>What are your production costs? </li></ul><ul><li>What price do you need to receive for your product to break even? </li></ul>
  5. 6. Measuring Financial Position and Performance <ul><li>Liquidity </li></ul><ul><ul><li>Ability to pay bills as they come due and cover unanticipated events </li></ul></ul><ul><li>Solvency </li></ul><ul><ul><li>Ability to cover all debts if the business were sold </li></ul></ul><ul><li>Profitability </li></ul><ul><ul><li>Returns to labor and management generated by the operation </li></ul></ul><ul><li>Financial efficiency </li></ul><ul><ul><li>Efficiency with which assets generate income </li></ul></ul><ul><li>Repayment capacity </li></ul><ul><ul><li>Ability to repay term debt in a timely fashion </li></ul></ul>
  6. 7. Business Analysis <ul><li>Financial statements </li></ul><ul><ul><li>Historical </li></ul></ul><ul><ul><li>Projected </li></ul></ul><ul><ul><li>Multi-year </li></ul></ul><ul><li>Spending plan (budget) </li></ul><ul><li>Enterprise analysis </li></ul><ul><ul><li>Cow/calf </li></ul></ul><ul><ul><li>Crop </li></ul></ul><ul><ul><li>Custom work </li></ul></ul><ul><ul><li>Partner shares </li></ul></ul><ul><li>Break-even analysis </li></ul><ul><li>Marketing plan </li></ul><ul><li>Investment analysis </li></ul><ul><li>Risk assessment </li></ul>
  7. 8. Financial statements <ul><li>Income statement </li></ul><ul><li>Cash income </li></ul><ul><li>Cash expenses </li></ul><ul><li>Changes in assets </li></ul><ul><li>Changes in liabilities </li></ul><ul><li>Net farm income, accrual adjusted (profit) </li></ul>AGEC- 753 AGEC-791 792 752 AGEC- 751 http://pods.dasnr.okstate.edu/docushare/ <ul><li>Cash flow statement </li></ul><ul><li>Cash income </li></ul><ul><li>Cash expenses </li></ul><ul><li>Balance sheet </li></ul><ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Net worth (owner equity) </li></ul>
  8. 9. Balance Sheet <ul><li>Summary sheet of items owned and owed. </li></ul><ul><ul><li>Assets </li></ul></ul><ul><ul><ul><li>Current </li></ul></ul></ul><ul><ul><ul><li>Non-current </li></ul></ul></ul><ul><ul><li>Liabilities </li></ul></ul><ul><ul><ul><li>Current </li></ul></ul></ul><ul><ul><ul><li>Non-current </li></ul></ul></ul><ul><ul><li>Net Worth = Assets - Liabilities </li></ul></ul><ul><li>Done at the beginning and end of each fiscal time period. </li></ul>
  9. 10. North Central Oklahoma http://agecon.okstate.edu/oklandvalues/
  10. 11. Which Method to Use? <ul><li>Market Value </li></ul><ul><ul><li>Typically used by most lending institutions </li></ul></ul><ul><ul><li>Easiest to determine </li></ul></ul><ul><ul><li>Easiest to over or under estimate </li></ul></ul><ul><ul><li>Due to rapidly changing markets, could overstate or understate net worth. </li></ul></ul><ul><li>Cost Basis </li></ul><ul><ul><li>Must have good records </li></ul></ul><ul><ul><li>Must know depreciation of assets </li></ul></ul><ul><ul><li>Gives a truer picture of the value of the business </li></ul></ul>
  11. 12. Current Assets <ul><li>Current assets are assets that will be used up or sold during the next twelve months. </li></ul><ul><li>Examples include: </li></ul><ul><li>Cash, checking accounts, savings </li></ul><ul><li>Investments </li></ul><ul><li>Accounts receivable </li></ul><ul><li>Prepaid expenses </li></ul><ul><li>Cash investments in growing crops </li></ul><ul><li>Inventories </li></ul><ul><ul><li>Market livestock, stored crops, purchased feed, supplies </li></ul></ul>
  12. 13. Non-Current Assets <ul><li>Non-current assets are assets that have a useful life of more than 1 year. </li></ul><ul><li>Examples include: </li></ul><ul><li>Breeding livestock </li></ul><ul><li>Machinery, equipment </li></ul><ul><li>Vehicles </li></ul><ul><li>Investments in capital leases </li></ul><ul><li>Land </li></ul><ul><li>Buildings and improvements </li></ul>
  13. 14. Current Liabilities <ul><li>Accounts payable </li></ul><ul><li>Notes payable </li></ul><ul><li>Current portion of term debt </li></ul><ul><li>Accrued interest </li></ul><ul><li>Taxes payable </li></ul><ul><li>Deferred taxes </li></ul>
  14. 15. Non-current Liabilities <ul><li>Notes payable, non-real estate </li></ul><ul><li>Notes payable, real estate </li></ul><ul><li>Deferred taxes </li></ul>
  15. 16. Net Worth <ul><li>Net worth of the business is the difference between the total value of the assets and the total value of the liabilities. </li></ul>Current Assets + Non-current Assets – Current Liabilities - Non-current Liabilities = Net Worth
  16. 17. Balance Sheet Exercise
  17. 18. Cash Flow Statement <ul><li>Cash Inflows </li></ul><ul><li>Operating receipts </li></ul><ul><ul><li>Crop and livestock sales, government payments, other farm income </li></ul></ul><ul><li>Capital sales </li></ul><ul><li>Contributed capital </li></ul><ul><li>Cash Outflows </li></ul><ul><li>Operating expenses (feed, fertilizer, etc.) </li></ul><ul><li>Capital purchases </li></ul><ul><li>Family living and other withdrawals </li></ul>
  18. 19. Uses of a Cash Flow Statement <ul><li>Establishes target levels for income and expenses which can be used in monitoring progress towards goals </li></ul><ul><li>Points out potential problems in meeting financial obligations </li></ul><ul><li>Indicates when cash is available for new investments </li></ul>
  19. 20. Cash Flow Exercise
  20. 21. The Accrual Adjusted Income Statement <ul><li>Net Farm Income, Accrual Adjusted = </li></ul><ul><li>Gross Farm Revenues </li></ul><ul><li>- Total Operating Expenses </li></ul><ul><li>- Total Interest Expense </li></ul><ul><li>+/- Gain/Loss on Sale of Farm Capital </li></ul><ul><li>Assets </li></ul>
  21. 22. The Accrual Adjusted Income Statement <ul><li>Revenues </li></ul><ul><ul><li>Livestock and crop sales </li></ul></ul><ul><ul><li>Government payments & other farm income </li></ul></ul><ul><ul><li>Plus…. </li></ul></ul>
  22. 23. Changes in Inventories <ul><li>Market livestock </li></ul><ul><li>Raised crops/feed inventories </li></ul>
  23. 24. Accrual Adjustments (Assets) <ul><li>Change in: </li></ul><ul><li>Accounts receivable </li></ul><ul><li>Prepaid expenses </li></ul><ul><li>Cash investment in growing crops </li></ul><ul><li>Supplies </li></ul><ul><li>Contracts and notes receivable </li></ul><ul><li>Investment in cooperatives </li></ul>
  24. 25. Gains/Losses on Sale of Farm Capital Assets <ul><li>Difference between the value for which the items is sold and the adjusted basis (cost minus depreciation taken) </li></ul>
  25. 26. Gains/Losses on Sale of Culled Breeding Livestock <ul><li>Purchased breeding stock: subtract cost basis from the sale proceeds </li></ul><ul><li>Raised breeding stock: subtract base value from the sale proceeds </li></ul>
  26. 27. Change in Value Due to Change in Raised Breeding Livestock Numbers <ul><li>Number of head transferring from one classification to another, e.g., replacement heifers to cows </li></ul><ul><li>Differences in base values of the two classifications </li></ul>
  27. 28. The Accrual Adjusted Income Statement <ul><li>Expenses </li></ul><ul><ul><li>Purchased market livestock </li></ul></ul><ul><ul><li>Cash operating expenses </li></ul></ul><ul><ul><li>Accrual adjustments </li></ul></ul><ul><ul><ul><li>Purchased feed inventories </li></ul></ul></ul><ul><ul><ul><li>Accounts payable </li></ul></ul></ul><ul><ul><ul><li>Ad valorem taxes </li></ul></ul></ul><ul><ul><ul><li>Employee payroll withholdings </li></ul></ul></ul><ul><ul><ul><li>Accrued expenses </li></ul></ul></ul><ul><ul><ul><li>Accrued interest </li></ul></ul></ul>
  28. 29. Depreciation <ul><li>Different methods of depreciation </li></ul><ul><li>Tax </li></ul><ul><ul><li>Farmer’s Tax Guide at http://www.irs.gov/publications/p225/index.html </li></ul></ul><ul><ul><li>Methods Modified Accelerated Cost Recovery System (MACRS) </li></ul></ul><ul><ul><li>General Depreciation System (GDS) </li></ul></ul><ul><ul><li>Alternative Depreciation System (ADS) </li></ul></ul><ul><ul><li>Which one depends type of property </li></ul></ul><ul><li>Economic </li></ul><ul><ul><li>Straight Line Depreciation: </li></ul></ul><ul><li>Cost – Salvage Value </li></ul><ul><li>Years of Life </li></ul>
  29. 30. Difference Between Cash Flow and Income Statement <ul><li>Cash flow statement does not include: </li></ul><ul><li>Depreciation </li></ul><ul><li>Changes in inventory, other accrual adjustments </li></ul><ul><li>Gains/losses on capital asset sales </li></ul><ul><li>Income statement does not include: </li></ul><ul><li>Capital sales and contributed capital </li></ul><ul><li>Principal payments </li></ul><ul><li>Family living expenses </li></ul>
  30. 31. Income Statement Exercise
  31. 33. Financial statements <ul><li>Income statement </li></ul><ul><li>Cash income </li></ul><ul><li>Cash expenses </li></ul><ul><li>Changes in assets </li></ul><ul><li>Changes in liabilities </li></ul><ul><li>Net farm income, accrual adjusted (profit) </li></ul>AGEC- 753 AGEC-791 792 752 AGEC- 751 http://pods.dasnr.okstate.edu/docushare/ <ul><li>Cash flow statement </li></ul><ul><li>Cash income </li></ul><ul><li>Cash expenses </li></ul><ul><li>Balance sheet </li></ul><ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Net worth (owner equity) </li></ul>
  32. 34. Measuring Financial Position and Performance <ul><li>Liquidity </li></ul><ul><ul><li>Ability to pay bills as they come due and cover unanticipated events </li></ul></ul><ul><li>Solvency </li></ul><ul><ul><li>Ability to cover all debts if the business were sold </li></ul></ul><ul><li>Profitability </li></ul><ul><ul><li>Returns to labor and management generated by the operation </li></ul></ul><ul><li>Financial efficiency </li></ul><ul><ul><li>Efficiency with which assets generate income </li></ul></ul><ul><li>Repayment capacity </li></ul><ul><ul><li>Ability to repay term debt in a timely fashion </li></ul></ul>
  33. 35. What does business analysis offer? <ul><li>Cold, hard facts </li></ul><ul><li>Ability to compare to benchmarks </li></ul><ul><li>Insights into strengths/weaknesses, problem identification </li></ul><ul><li>Direction for maximizing the returns to owned resources </li></ul><ul><li>Documentation to obtain/maintain credit </li></ul>
  34. 36. Communication <ul><li>Business partners </li></ul><ul><li>Lenders </li></ul><ul><li>Landlords </li></ul><ul><li>Heirs </li></ul><ul><li>Family </li></ul>
  35. 37. IFMAPS <ul><li>A free, confidential service assisting Oklahoma farmers and ranchers with financial planning since 1985 </li></ul><ul><li>Trained financial specialists work with families one-on-one to develop financial statements and evaluate alternative plans </li></ul><ul><li>Contact the local Extension office, an area Agricultural Economics specialist, or call the IFMAPS office in Stillwater at 1-800-522-3755 </li></ul>
  36. 38. Damona’s 30 + 1 plan <ul><li>Spend 30 minutes each week maintaining and using records </li></ul><ul><li>Take one step each month to improve your record-keeping system and financial summaries </li></ul>
  37. 39. Just do it! <ul><li>References: </li></ul><ul><li>OSU Ag Econ Department, http://agecon.okstate.edu/websites.asp </li></ul><ul><li>OSU Extension publications, www.osuextra.com </li></ul><ul><li>National Ag Risk Management Library, http://www.agrisk.umn.edu/ </li></ul><ul><li>Annie’s Project, http://www.extension.iastate.edu/feci/annie/ </li></ul><ul><li>Business Planning Guidebook, Minnesota Institute for Sustainable Agriculture, http://www.misa.umn.edu/vd/bizplan.html </li></ul>

×