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High-Stakes Workshop

High-Stakes Workshop. December 17, 2010 Doug Marshall Farm Mgt. Instructor Madison Area Technical College. Looking At The Numbers…. Whose Perspective?. Farm Transfers. Is there enough money for everyone? 2 projections need to be done Exiting Cash Flow (Parents) Entering (You).

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High-Stakes Workshop

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  1. High-Stakes Workshop December 17, 2010 Doug Marshall Farm Mgt. Instructor Madison Area Technical College

  2. Looking At The Numbers… Whose Perspective?

  3. Farm Transfers • Is there enough money for everyone? • 2 projections need to be done • Exiting Cash Flow (Parents) • Entering (You)

  4. Exiting Cash Flow Budget • Enough Money to be “Comfortable” • Living costs • Food • Household operating • Travel • Car • Any remaining debt • Health care / insurance • Nursing home / insurance

  5. Entering Farmer Questions? • Same or different type of farm? • Same or different management? • Same or different financial control? • Answers dictate budgeting numbers…

  6. What Type of Operation Are You Going to Have? • Where have we been? = Analyze past performance • New Management = New ways? • Coordinated effort with prior generation?

  7. Commercial Commodity Production? • High level of Competition between Producers • Long run, who produces the cheapest • Slim margins • High Volume X Slim Margin = Living • Higher Investment

  8. Value Added Commodity Production? • Specialty product • Name, organic, natural, humane, etc. • Lower Volume • Wider margin • Lower Volume x wider margin = living • Higher labor pay rate

  9. Get Help!!!!! • UW Extension Agents • Tech School Farm Business Instructors • Independent Consultants • Wisconsin Farm Center - DATCP

  10. Entering Farmer Must Do Feasibility / Cash Flow Budgets • FINPACK Computer program to see where the farm is now and determine long run feasibility of your farming operation as you intend to run it…. • Looks at everything: • Investment • Income/Expense • Cropping & livestock • Added debt and repayment • Calculates profitability and cash surplus/deficit • Tax impact

  11. Determine it’s Feasible, Then…. • Do monthly cash flow budgets to see how you get there. • This is your best estimate of how money will move in your business. • First 2 years the hardest.

  12. Where Do I Go for Planning Numbers? • Depends on direction you’re going… • Same operation mode ? • Same management ? • Etc.

  13. Where do I go for planning numbers? • Industry benchmarks or standards are a good place to start. • Use as a guide and interject past actual farm numbers where applicable. • Every farm is different: • Graze or not • Tillable acres • Genetic potential • Etc.

  14. Benchmarks? • Wisconsin • UW Center for Dairy Profitability • www.cdp.wisc.edu • Click on Financial Benchmarks • Ag Financial Advisor • Several hundred Wisconsin Dairies • Sort by herd size, production level, crop acres, etc. • Production and Financial performance benchmarks • Handout

  15. Benchmarks • University of Minnesota • Center for Farm Financial Management • “Finbin” • Production data on all types of farms • Crops, dairy, hogs, cattle • www.cffm.umn.edu/

  16. Assessing past and future performance????

  17. Each Leg is Important Productivity Cost Control Debt/Investment

  18. Cost Control is Important… • Expense including Interest as % of Income should be 70% or less. • Expense without Interest 60% or less

  19. Debt & Investment Structure is Important • Limit Investment to $10000 per cow • Limit debt to $2500 to $5000 per cow • Asset/liabilities = 40% or less • Not feasible at the start….

  20. Productivity is Important • Decent production per cow 22000+ • Good crop yields 5-7 TDM Alfalfa 160-180 bu corn 50+ bu beans 20-25 ton Silage

  21. Liquidity Measures • Indicators of positive cash flow • Current Ratioof 1.5 to 2.0 • Working Capital should be positive

  22. Solvency Measures • Debt / Asset Ratio< .4 or 40% in debt • Not at entry • Equity / Asset Ratio > .6 • Debt / Equity Ratio < .66

  23. Profit Measures • Net Farm Income should be as high as possible --- really no standard • Rate of Return On Assets > 5% • Rate of Return on Equity > RROA • Operating Profit Margin > 15%

  24. Loan Repayment Capacity Measures • Term Debt Coverage Ratio > 1.2

  25. Financial Efficiency Measures • Asset Turnover > 30% • Operating Expense Ratio < 70% Without Interest < 60% • Depreciation Expense Ratio < 15% • Interest Expense Ratio < 10% • Net Farm Income Ratio > 15%

  26. Breeding fees Purchased feed Supplies Vet, Medicine Seed, Chemicals, Fertilizer Fuel Repairs Other $56. $600. add $40/1000Lb RHA $150. $125 $500 $125 $225 $ 364 Thumb-rule per cow costs

  27. Generally Looks Like This Per Cow…. • Gross Farm Income = $3300 • Gross Operating Expense = $2145 65% • Debt Service = $ 500 15% • Family Living = $ 500 15% • Left for Cap. Replacement = $ 155 5%

  28. Dr. David Kohl’s Quick Analysis

  29. Business Success Factors

  30. Business Success Factors

  31. Business Success Factors

  32. In Summary…. • Analyze past business performance • Strengths/weaknesses • Determine future production scheme • Project feasibility and cash flow • Monitor financial performance

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