RDFinancial PowerPoint, Outline for your adaptation


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RDFinancial PowerPoint, Outline for your adaptation

  1. 1. Managing Risks With Financial Analysis What's Your Plan?
  2. 2. What's Your Plan? <ul><li>Production </li></ul><ul><li>Financial </li></ul><ul><li>Marketing </li></ul><ul><li>Human Resource </li></ul>
  3. 3. Are You a Risk Taker????? Production Financial Marketing Human Resource
  4. 4. <ul><li>Do You Take Unnecessary Risks???? </li></ul>
  5. 5. Objectives For This Session <ul><li>Gain an understanding of: </li></ul><ul><ul><li>Business’s financial position & performance analysis </li></ul></ul><ul><ul><li>Interaction among financial statements </li></ul></ul><ul><ul><li>Financial interaction/impact the family has on the business </li></ul></ul><ul><ul><li>Different types of risk affecting the business. </li></ul></ul>
  6. 6. Key Producer Items/Concerns <ul><li>Adequate funds for family living (All Families) </li></ul><ul><li>Alternative enterprises, enterprise mix </li></ul><ul><li>Debt Load and Structure </li></ul><ul><li>Expansion plans/capabilities </li></ul><ul><li>Dependences </li></ul><ul><ul><li>Government payments </li></ul></ul><ul><ul><li>Off Farm Inflows </li></ul></ul><ul><li>Managing cost of production, financial info, marketing, labor (family) </li></ul><ul><li>Tight profit margins </li></ul>
  7. 7. Financial Trends in Agriculture <ul><li>Suggest several slides reviewing Ag financial health </li></ul><ul><li>Trends in </li></ul><ul><ul><li>Farm Net Income </li></ul></ul><ul><ul><li>Debt Load and Structure </li></ul></ul><ul><ul><li>Number of farms </li></ul></ul><ul><ul><li>Sources of Ag Household income </li></ul></ul><ul><li>Use these as background information </li></ul><ul><li>Three examples follow </li></ul>
  8. 8. Net Farm Income
  9. 9. Net Cash Farm Income
  10. 10. Total Production Expenses
  11. 11. Complete Financials Required <ul><li>Beginning and Ending Balance Sheets </li></ul><ul><li>Cash Flow Statement </li></ul><ul><ul><li>New form = Statement of Cash Flows </li></ul></ul><ul><li>Accrual Adjusted Income Statement </li></ul><ul><li>Statement of Owner Equity </li></ul>
  12. 12. Terminology Causes Us Problems <ul><li>All cash inflows are not income </li></ul><ul><ul><li>Loan proceeds from lenders </li></ul></ul><ul><li>All cash outflows are not expenses </li></ul><ul><ul><li>Principal payments to lenders </li></ul></ul><ul><ul><li>Expense versus Expenditure </li></ul></ul><ul><li>You can have non-cash expenses </li></ul><ul><ul><li>Depreciation most common </li></ul></ul><ul><ul><li>Also through accrual adjustments </li></ul></ul><ul><li>You can have non-cash income </li></ul><ul><ul><li>Accrual adjustments </li></ul></ul>
  13. 13. Just Like Balancing a Check Book <ul><li>Beginning Cash Balance </li></ul><ul><li>+ Inflows </li></ul><ul><li>- Outflows </li></ul><ul><li>= Ending Cash Balance </li></ul><ul><li>Your business performance is measured the same way using a complete set of financial statements </li></ul>These are Linked
  14. 14. Statement of Owner Equity <ul><li>Beginning Owner Equity </li></ul><ul><li>+ Net Income </li></ul><ul><li>- Withdrawals </li></ul><ul><li>+ Contributions </li></ul><ul><li>- Distributions </li></ul><ul><li>+/- Change in Valuation </li></ul><ul><li>= Ending Owner Equity </li></ul>Balancing a Checkbook Beginning Equity +/- Activity = Ending Equity
  15. 15. Some Topics for Examination <ul><li>Withdrawals </li></ul><ul><li>Non-business income </li></ul><ul><li>Government Payments </li></ul><ul><li>Cost of Production </li></ul><ul><li>Debt Load (asset and liability structure) </li></ul><ul><li>Asset revaluation </li></ul><ul><li>Capital asset purchase </li></ul><ul><li>Risk Protection Tools (Insurance) </li></ul><ul><li>Non-cash income </li></ul><ul><li>Non-cash expense (not depreciation) </li></ul><ul><li>Contributed capital </li></ul><ul><li>Distributed capital </li></ul>
  16. 16. Withdrawals <ul><li>Note the: </li></ul><ul><ul><li>Net worth (equity) on the balance sheet and the change in equity from beginning to end of year </li></ul></ul><ul><ul><li>Note net income (Accrual Adjusted Income Statement) </li></ul></ul><ul><ul><li>The relationship between cash flow and the balance sheet, follow the red arrows. </li></ul></ul><ul><li>Change family withdrawals to zero </li></ul><ul><li>What is relationship of Net Income and change in equity </li></ul><ul><li>What does this tell us about how equity growth in the business MUST occur </li></ul><ul><li>Change family withdrawals back to $30,000 </li></ul>
  17. 17. Continuation of Owner Withdrawals <ul><li>With a positive Cash Flow </li></ul><ul><li>No operating loan carryover </li></ul><ul><li>May be a negative net worth change </li></ul><ul><li>If so, the system tells how much owner draw is impacting net worth </li></ul><ul><ul><li>Also indicates the amount of money from non-business sources that must be brought into the operation </li></ul></ul>
  18. 18. Continuation of Owner Withdrawals <ul><li>With a negative Cash Flow </li></ul><ul><li>Will have an operating loan carryover </li></ul><ul><ul><li>Carryover amount indicates the dollar adjustment necessary from: </li></ul></ul><ul><ul><ul><li>Off farm earnings </li></ul></ul></ul><ul><ul><ul><li>Income and/or expense adjustements </li></ul></ul></ul><ul><ul><ul><li>Combination of all the above </li></ul></ul></ul><ul><li>If from Off-Farm, enter as a nonbusiness cash inflow . </li></ul><ul><ul><li>May still be a negative equity change </li></ul></ul><ul><ul><li>Correct with more non-business inflow </li></ul></ul>
  19. 19. Family Living & Form of Ownership <ul><li>Sole Proprietor versus Corporation </li></ul><ul><li>Change family living withdrawal to a business expense </li></ul><ul><ul><li>Zero out Owner Withdrawals and enter total dollars of “family living” on the “Other Cash Business Expense” line of the Cash Flow </li></ul></ul><ul><ul><li>Illustrates the effects of a corporate form of ownership </li></ul></ul><ul><li>Review effects on </li></ul><ul><ul><li>Income Statement, </li></ul></ul><ul><ul><li>Cash Flow, </li></ul></ul><ul><ul><li>Balance Sheets, </li></ul></ul><ul><ul><li>Relationship between Net Income and Net Worth Change </li></ul></ul>
  20. 20. Non Business Income <ul><li>Income not generated by business assets </li></ul><ul><li>Types of non business income </li></ul><ul><ul><li>Off farm wages </li></ul></ul><ul><ul><li>Non farm earnings (interest, dividends, etc) </li></ul></ul><ul><li>Interest earned on a farm business checking account would be considered business income. </li></ul>
  21. 21. Government Payments <ul><li>Note current profit levels and cash flow position </li></ul><ul><li>Reduce/eliminate government payments on crops </li></ul><ul><li>Effects on cash flow, net income, equity </li></ul><ul><li>Implications for profit </li></ul><ul><ul><li>Profit  Net Cash Flow  Taxable Income </li></ul></ul><ul><li>Implications for the size of the business </li></ul><ul><ul><li>Where is the risk? </li></ul></ul>
  22. 22. Cost of Production <ul><li>Implications for this operation </li></ul><ul><li>Do you know your cost of production?????? </li></ul><ul><ul><li>Enterprise record keeping system </li></ul></ul><ul><ul><ul><li>Quicken or QuickBooks </li></ul></ul></ul><ul><ul><li>Spreadsheets that allow you to allocate income and expenses to enterprises </li></ul></ul><ul><li>If you can not measure it, you can not manage it </li></ul>
  23. 23. Debt Load and Structure <ul><li>Example starts with approximately 16.5% debt load </li></ul><ul><li>What is the debt load that can be carried by an operation this size? </li></ul><ul><li>What about debt structure? </li></ul><ul><ul><li>Short vs long term debt </li></ul></ul><ul><li>How does family living withdrawal effect debt carrying capacity? </li></ul><ul><li>Crop vs Livestock operations </li></ul>
  24. 24. Asset Revaluation <ul><li>Assets are occasionally revalued to reflect inflationary pressures </li></ul><ul><ul><li>Machinery, land, buildings, improvements, breeding livestock </li></ul></ul><ul><li>Necessary to accurately reflect the market value of these assets </li></ul><ul><li>Do not misinterpret this increase in equity </li></ul><ul><ul><li>Is not due to business performance </li></ul></ul><ul><ul><li>Can be very misleading and can mask serious business performance issues </li></ul></ul>
  25. 25. Capital Asset Purchase <ul><li>Question: Will purchasing a new capital asset increase your net worth? </li></ul><ul><ul><li>Pickup, new bull, combine, center pivot, etc. </li></ul></ul><ul><li>What is affected </li></ul><ul><ul><li>Ending asset balance, ending liabilities, cash inflows and cash outflows, net income </li></ul></ul><ul><li>Bottom line, You CAN NOT buy equity </li></ul><ul><li>Equity or growth in equity must be earned </li></ul><ul><li>The only way to do this is make the new asset earn additional revenue and/or reduce costs </li></ul><ul><ul><li>Increase net income </li></ul></ul>
  26. 26. Risk Protection Tools (Insurance) <ul><li>Example used here is limited to the Basic Unit coverage provided by MPCI </li></ul><ul><li>Only three Basic Units are allowed in this example </li></ul><ul><li>Enter “example” levels of MPCI coverage for up to three Basic Units. </li></ul><ul><li>Set initial yields and prices at low levels to simulate bad year. </li></ul><ul><li>Turn MPCI section on/off to show affects of using MPCI insurance. </li></ul>
  27. 27. Non-Cash Income <ul><li>Non-cash income adjustments are made on the Accrual Adjusted Income Statement to reflect changes in Current Asset values on the beginning and ending balance sheet. </li></ul><ul><li>Include changes in: </li></ul><ul><ul><li>Crops Held for Sale </li></ul></ul><ul><ul><li>Market Livestock </li></ul></ul><ul><ul><li>Other Current Assets </li></ul></ul><ul><ul><li>Cash Invested in Growing Crops </li></ul></ul><ul><li>See the AccrualAdj tab for complete details </li></ul>
  28. 28. Non-Cash Expense (Not Depreciation) <ul><li>Non-cash expense adjustments are </li></ul><ul><ul><li>Made on the Accrual Adjusted Income Statement </li></ul></ul><ul><ul><li>Reflect changes in Current Asset and Current Liabilities section of the beginning and ending Balance Sheet. </li></ul></ul><ul><li>See the AccrualAdj tab of the spreadsheet for a detailed review of these adjustments </li></ul>
  29. 29. Three Types of Contributed/Distributed Assets <ul><li>Cash or Near Cash </li></ul><ul><ul><li>Listed on the Current Assets portion of the Balance Sheet </li></ul></ul><ul><li>Capital assets, which include: </li></ul><ul><ul><li>Long term depreciable assets </li></ul></ul><ul><ul><li>Breeding livestock </li></ul></ul><ul><ul><li>Machinery and equipment </li></ul></ul><ul><ul><li>Buildings and improvements </li></ul></ul><ul><ul><li>Land </li></ul></ul>
  30. 30. What is Contributed Capital <ul><li>Capital not generated by the operation but given to the operation to support our farming habit </li></ul><ul><ul><li>Off farm income (wages/salary) </li></ul></ul><ul><ul><li>Nonbusiness income (dividends, etc.) </li></ul></ul><ul><ul><li>Gifts, inheritances, etc. </li></ul></ul><ul><li>Will have affects on: </li></ul><ul><ul><li>Equity, Profits, Cash Flow </li></ul></ul><ul><li>Earned versus Unearned </li></ul>
  31. 31. What is Distributed Capital <ul><li>What is distributed capital? </li></ul><ul><ul><li>Capital taken out of the operation </li></ul></ul><ul><li>Will have different affects on: </li></ul><ul><ul><li>Equity - Short term vs long term </li></ul></ul><ul><ul><ul><li>Immediate reduction in asset value </li></ul></ul></ul><ul><ul><li>Profits - Short term vs long term </li></ul></ul><ul><ul><ul><li>Reduction in ability to produce income in the future </li></ul></ul></ul><ul><ul><li>Cash flow - Short term vs long term </li></ul></ul><ul><li>Swapping assets within a family structure run as one business? </li></ul>
  32. 32. Income Taxes <ul><li>The RDFinancial spreadsheet is distributed with the Income and S.S. tax estimator turned off. </li></ul><ul><ul><li>It can be turned on in cell W8 on the Statements tab </li></ul></ul><ul><li>Users can enter additional cash business expenses in cell I22 of the Statements tab to show the affects on the financials </li></ul><ul><ul><li>Net Worth, Net Income, Cash Flow </li></ul></ul>
  33. 33. Summary <ul><li>You MUST measure your Financial Business Positions and Performance </li></ul><ul><li>Must be efficient </li></ul><ul><ul><li>Maximize output per unit of input </li></ul></ul><ul><ul><li>Often we try to maximize just output </li></ul></ul><ul><ul><li>Low cost producer </li></ul></ul><ul><ul><li>The right size producer (size matters) </li></ul></ul><ul><ul><li>Family structure matters </li></ul></ul><ul><li>Manage marketing, production, family risk </li></ul><ul><li>Financial analysis measures the impact of these </li></ul>
  34. 34. Business Position & Performance <ul><li>What is key to your ability to survive? </li></ul><ul><ul><li>Managing all forms of risk </li></ul></ul><ul><ul><ul><li>Production, Human, Marketing, Financial, Legal </li></ul></ul></ul><ul><li>With respect to the financial end </li></ul><ul><ul><li>Profits are critical </li></ul></ul><ul><ul><li>Profits  Net Cash Flow  Taxable Income </li></ul></ul><ul><ul><li>Earned positive Cash Flow also helps a great deal </li></ul></ul><ul><li>If you can’t measure it, you can’t manage it!! </li></ul>
  35. 35. Business Must Produce Net Worth Internally <ul><li>Every dollar of income goes towards increasing net worth </li></ul><ul><li>Every dollar of expense goes towards decreasing net worth </li></ul><ul><li>If growth in Net Worth comes only from external sources, your on shaky ground </li></ul><ul><li>You must be profitable enough to pay for: </li></ul><ul><ul><li>Family Living , Debt Principal, Savings, Reinvestment, Retirement </li></ul></ul><ul><li>Positive Cash Flow is good but…… </li></ul>
  36. 36. Accrual Adjusted Financials: <ul><li>Catch problems with: </li></ul><ul><ul><li>Inventory sell down to manage cash needs </li></ul></ul><ul><ul><li>Selling capital asset base, your manufacturing plant (livestock, machinery, land, etc.) </li></ul></ul><ul><ul><li>Capital distributions </li></ul></ul><ul><ul><li>Unearned equity increases </li></ul></ul><ul><li>Allows accurate business performance evaluation for each time period </li></ul><ul><li>Shows strengths and weaknesses </li></ul><ul><ul><li>Will not be easy the first time through </li></ul></ul>
  37. 37. Must Do Your Own Detailed Analysis <ul><li>http://www.montana.edu/extensionecon/softwaredownloads.html </li></ul><ul><li>“ RDFinancial ” = Readers Digest Version </li></ul><ul><li>“ WFBudgets ” = Intermediate version </li></ul><ul><li>“ Financial Statements ” = Very detailed </li></ul><ul><li>“ Machines ” = Enterprise budgeting for crops </li></ul><ul><li>“ CCFS ” = Cow-Calf, Feeder, Stocker enterprise budgeting </li></ul>
  38. 38. How To Get There <ul><li>What is your business plan? </li></ul><ul><li>Do you have a management team to help with: </li></ul><ul><ul><li>Production decisions </li></ul></ul><ul><ul><li>Marketing decisions </li></ul></ul><ul><ul><li>Financial analysis </li></ul></ul><ul><ul><li>Human resources </li></ul></ul><ul><li>Are communications good among team members? </li></ul><ul><li>Are team members missing that are critical to the overall success of the business? </li></ul>
  39. 39. Parting Comment <ul><li>Do not risk the future of your operation (family and business) with frustration over preparing detailed financial statements. Just do it! </li></ul>