Managing for Today and Tomorrow

Managing for Today and Tomorrow Business Planning Part One The Balance Sheet

Agenda • Financial Terminology • Balance Sheet (net worth statement) • Balance Sheet Activity • Income Statement • Cash Flow • Trend Analysis

Income Statement (Profitability) Commit This Diagram to Memory Balance Sheet #1 Balance Sheet #2 Cash Flow Meeting financial obligations Good old-fashioned recordkeeping Financial Snapshot Financial Snapshot Working Capital Debt/Asset Ratio Net Worth Working Capital Debt/Asset Ratio Net Worth Statement of cash flow (Sources and uses of money)

Financial Terms Vocabulary Handout & Benchmark Handout • Liquidity - working capital, current ratio and look to cash flow statement • Solvency - what is left over after paying all debts; look to balance sheet • Profitability - difference between expenses and income • Repayment Capacity - generate cash to pay int. & prin. • Financial Efficiency - percent of expenses to pay for interest, operating costs, depreciation, etc.

Balance Sheet as of [a single date] Consolidated Personal Business Cur rent Current Assets Current Liabilities Non Current Assets Non Current Liabilities Non Current Net Worth or Owner Equity Net Worth = Assets - Liabilities

Traditional Format Balance Sheet Current Liabilities Operating loan, Int. & L.T. principal payments Current Assets Grain, market hogs Intermediate Assets Cows, sows, plows Intermediate Liabilities Long Term Assets Buildings, Land Long Term Liabilities Net Worth = Assets - Liabilities

Balance Sheet Basics • Done annually on the same date (kids’ school pictures) • Some balance sheets are “Cost Basis” • Some balance sheets are “Market Basis” • Some are both • Most don’t include “Deferred Tax Liabilities” • Note changes from adjustments in asset values

Key Ratios from theBalance Sheet • Working Capital • Current Ratio • Debt/Asset Ratio • Net Worth Benchmark Ratios

Current Ratio • A ratio that measures the ability of the business to pay off current farm debts if current farm assets were sold • Current Farm Assets / Current Farm Liabilities $1,197,000 / $111,021 = $10.78 For every $1.00 of current debt there is $10.78 to pay it If less than 1 you have problems!

Working Capital (WC) • The amount of operating capital available to the business in the short run to pay bills and support family living. Might think in terms of $/ crop acre or $/ cow. Current Farm Assets – Current Farm Liabilities = WC $1,197,000 - $111,021 = $1,085,979

Measures of Solvency • Debt to Asset Ratio • Equity to Asset Ratio • Debt to Equity Ratio

Farm Debt to Asset Ratio The percentage of total assets financed by debt Total Farm Liabilities / Total Farm Assets X 100 $111,021 / $1,197,000 = .12 or 12% of assets are financed

Profitability • Net Farm Income (from the Income Statement) • Operating Profit Margin (Revenue less cash expenses)

Net Farm Income Net farm income, as calculated by the accrual or inventory method, represents the economic return to your contributions to the farm business: labor, management, and net worth in land and other farm assets.

Family Living withdrawal Pay Social Security and Income Taxes Pay principle payments or invest Return to farm management Uses of Net Farm Income

Net Income Farm Revenue (income) - Farm Expenses (costs) +/- Inventory Adjustments = Net Farm Income + Non-farm Income = Total Net Income (before taxes) - Taxes Paid and Accrued = Net Income

Efficiency • Operating Expense Ratio • How much of revenue is used in production costs excluding principle and interest? • Net Farm Income Ratio • How much of revenue is left for you?

Cash Flow (Timing of Money) • A cash flow statement is a listing of cash flows that occurred during the past accounting period. • Aprojection of future flows of cash is called a cash flow budget. • Think of it as a “check book registry”.

Homework: Look up five years of data.

Homework • Look at your most current Balance Sheet and calculate working capital, current ratio, debt to asset ratio and net worth • Try to fill in a five year trend summary from past Balance Sheets • If you can’t find Balance Sheets try to find five years worth of income statements; if not, five years of income tax returns.

Managing for Today and Tomorrow