Farm Finances: Part 1 National Farm Viability Conference Albany, NY May 22nd -24th Mark Cannella Mark.Cannella@uvm.edu Web: www.blog.uvm.edu/farmvia

Ag Business Programs blog.uvm.edu/farmvia/ Management Education Forest Business Business Planning Transfer Planning Applied Research

Financial Goals: Business Cash flow and owner draws Increased Equity and Net Worth Profitability: Covering all costs and generating a positive return on capital investments.

Financials: The Adviser Translation of real life to numbers #’s Accurate and Complete Building a case for information based decisions.

Financial Statements Balance Sheet Cash Flow Statement Income Statement or Profit and Loss

Balance Sheet A snapshot of the farm worth at a single point in time. Inventories and their value Assets: Items with a useful life over 1 year Liabilities: Obligations owed by the business Net Worth or Equity

Equity Looks Like

Equity or Net Worth Assets – Liabilities = Net Worth Generating wealth over time through ownership of assets Can be liquidated (converted to cash)

Valuation Technique Historical Cost: the initial cost of asset, plus improvement, less accumulated depreciation Market Value (FMV) Estimated value using current prices (less selling costs?)

C and C Consistent Conservative Don’t let market shifts distort analysis of the farming operation

Depreciation Straight-Line Annual Depreciation = (Purchase Price less Salvage Value) ÷ Lifespan ($50,000 - $10,000) ÷ 10 years = $4,000 per year Equipment Lifespan: 5 or 10 years Improvements Lifespan: 15 or 20 years

Key Points Inventory gets discounted! Real estate may trump improvements Collateral – Taxes - Analysis – Sale -Collateral - Liquidation

Sample Balance Sheet The next skills: Solvency Measures Term Structure Ag Lending Exit Planning

Having sufficient cash on hand to pay bills as they come due. Cash Flow Having sufficient cash on hand to pay bills as they come due. Will you need to borrow, when? How much can you draw for salary? Unplanned opportunities or problems

Cash Flow Statements The focus is on transactions Cash Flow Statement: summarizes all cash in-flows and cash out-flows over a specific period of time Cash Flow Budget/Projection: Forecasts cash activity for a future time period.

Expense Categories Variable Expenses: Expenses that go up or down in relation to changes in production level. What expenses change when this farm adds 500 more layers

Expense Categories Fixed Expenses: Expenses that hold steady even if the business produces more or less goods

Expense Categories Capital Expenses: A special category for the purchase of items or improvements that have a useful life more than one year. (not $100 pruning sheers)

Capital Activity + Capital Sales or Contributions + Sale of Farm Assets Contributions from Savings New Loans/Borrowing - Capital Expenses - Purchase of Equipment and Real Estate Loan Payments Cash Draw to Owners

Clues to Improved Management Find the major expenses Identify where the income comes from Measure how much the business supports the livelihood of owners What else can you find?

Profitability Next time…..

Valuation Extras 1 Land: Farmstead: $2,500 per A if more than 30 acres. $6,000 per A if less than 30 acres Farmstead: ~$200,000 depending on residence and infrastructure

Valuation Extras 400 lb stockers: $600 each Breeding Stock: $1,000 - $1,500 What if they die before they are harvested?