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Business analysis of a custom farming operation

Business analysis of a custom farming operation

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Business analysis of a custom farming operation

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  1. Business analysis of a custom farming operation June 23, 2009

  2. What is business analysis? • Breaking down the financial information of a business and comparing it to a set of standards • Spending time looking at and trying to understand the financials of a business

  3. Financial information • Collect financial information • Balance sheet(usually as of 12/31) • List of assets and liabilities • Earnings statement(tax return) • List of income and expenses • Cash or accrual information • Statement of cash flow • On a monthly basis

  4. Balance sheet • Current assets • Checking, savings, cash • Accounts receivable • Inventories, grain in storage, feed in storage, market livestock • Supplies, prepaid expenses • Growing crops

  5. Balance sheet • Non current assets • Breeding livestock • Machinery and equipment • Vehicles • Real estate • Investments • Other(other business ownership, co-op equity)

  6. Balance sheet • Current liabilities • Accounts payable • Operating loans • Accrued liabilities • Current portion of term debt

  7. Balance sheet • Non current liabilities • Capital loans, equipment, vehicles, livestock • Real estate loans • Home loans, Home equity loan • Credit cards • Leases?

  8. Analyzing the balance sheet • Key ratios • Net worth, measure of financial strength • Net worth(owner equity)= total assets – total liabilities • % net worth= net worth/total assets • Working capital, measure of liquidity • Working capital = current assets- current liabilities

  9. Earnings Statement • Income • Sale of grain • Sale of livestock & livestock products(milk, pork, beef) • Custom hire • Government payments • Insurance(crop, fire, hazard) • Co-op dividends

  10. Earnings Statement • Expenses • Car and truck exp • Chemicals & fertilizer • Custom hire • Freight and trucking • Gas, fuel and oil • Insurance • Interest

  11. Earnings Statement • Expenses(cont.) • Labor • Feed • Rent/lease • Repairs • Seed • Supplies • Taxes

  12. Earnings statement • Expenses, con’t • Utilities • Vet and med • other • Depreciation? • Prepaid expenses?

  13. Analyzing the earnings statement • Key ratio • Net Income Total income -Total expenses Net Income

  14. Cash flow analysis Debt servicing requirement= Principal and interest paid on debt within 12 months Family living= money taken out of business to pay for living costs Income taxes

  15. Cash flow analysis • Figuring a coverage ratio • Overview • Calculating how much income the business has generated to cover all expenses, family living and debt service • Funds available after family living, taxes/ Debt service requirements = coverage ratio

  16. What do these key ratios mean? • Net worth • Financial strength of the business, ability to withstand some adversity • Goal: >50% NW • Working capital • Liquidity of the business, ability to pay bills on time in the next year • Goal: >120% WC • Coverage ratio • Earnings capability of the business, ability to generate sufficient profits to meet all obligations • Goal: >115% CR

  17. Custom operation points • Net worth • Tend to be more leveraged, especially in early stages of the business • Working capital • Can fluctuate rapidly depending on type of customers they are working with • Cash flow • Tend to be more seasonal and earnings are somewhat more controlled by owner

  18. Contact info • Dean Recker, credit administrator Ag Credit, ACA 610 W. Lytle St. Fostoria, OH 44830 • drecker@agcredit.net • (419) 619-9118