Ratios and Affordability Barclays Agriculture Ratios and Affordability Richard Thomas – Regional Agricultural Manager Steve Brown – Relationship Director Richard Freeman – Agricultural Manager Non Confidential  Internal Only  Internal Only

An overview of the current position of the farm and assets. Balance Sheet Is a statement of all the assets & liabilities held by the business at a given date in time. It shows a snapshot in time as to the value/worth of a business and usually prepared on an annual basis. Profit & Loss Account Details the income and expenditure of a business and therefore profit or loss over a given period of time, usually prepared for a 12 month period. Forecast P&L As above but it details the projected income and expenditure of a business over a period of time. Farmers Balance Sheet An overview of the current position of the farm and assets. Summary of Key Financial Information Are BBMs comfortable with what these are and how to use them?  Internal Only

Aged Debtor/Creditor lists Cash Flow Forecast A projected flow of cash in and out of the business over a given period of time. Often prepared on a month by month basis for a period of 12 months. Quick Figures Measures the liquidity of a business and is the relationship between current assets and current liabilities. This will give an indication as to whether a business can pay its liabilities quickly in cash. Aged Debtor/Creditor lists List of debtors (monies owed to a business) or creditors (monies owed by the business) and how long the debtors/creditors have been outstanding. Erosion Rate The rate as which security is being consumed by losses. Summary of Key Financial Information Are BBMs comfortable with what these are and how to use them?  Internal Only

COLD Financial analysis Understanding the FINANCIALS Capital structure Debt service Operating performance COLD handouts Liquidity FINANCIAL RISK  Internal Only

Capital Structure Take a look at the Balance Sheet: Snapshot of the Assets & Liabilities Value of the Business Profits retained in the business / Drawings Borrowed money (Gearing) Hidden Reserves / Deficits  Internal Only

Capital Structure Ratios Net Tangible Assets – excludes intangibles Gearing – Ratio of total loans & HP to net worth  Internal Only

Operating Performance Take a look at the Profit & Loss A/C: Sales Contracted income Other income Profits / Losses Gross / Net Profit Margins Directors Remuneration Dividend Policy  Internal Only

Operating Performance Ratios Gross Profit Margin Net Profit Margin Sales Breakeven Margin of Safety  Internal Only

Liquidity Take a look at the Balance Sheet: Focuses on solvency How quickly profit turns to cash Working capital / operating cycle How cash is used / sources Debtor turnover Creditor turnover Stock turnover  Internal Only

Liquidity Working Capital Cycle Cash Purchase goods or raw materials Collect cash from customers Produce goods or services for sale Sell goods or services  Internal Only  Internal Only

COLLECTION PERIOD PAYMENT PERIOD HOLDING PERIOD CASH FLOW TIMING DIFFERENCE Discuss liquidity and the working capital cycle Bring to life with examples e.g manufacturer and Tesco?? PAYMENT PERIOD  Internal Only

Liquidity Ratios Current Ratio Acid Test Trade Debtor Turnover Stock Turnover Trade Creditor Turnover  Internal Only

Debt Service Calculations to enable us to assess: Ability to repay debt Based on profits  Internal Only

EBITDA – Dividends/Drawings Total of ALL annual repayments Debt Service Cover WHAT HOW 1. Start with: NET PROFIT EBITDA – Dividends/Drawings 2. Add: INTEREST = X cover 3. Add: TAX 4. Add: DEPRECIATION / AMORTISATION Total of ALL annual repayments 5. Total = EBITDA 6. Deduct: Dividends / Drawings 7. Total = Adjusted EBITDA 8. Divide by: All Annual Repayments 9. Total = Number of times cover  Internal Only

Debt Service Practice Bus makes annual Earnings of £29,500 after interest charges of £500 and depreciation of £250. The proprietor draws £20,000 An application is received for a loan with monthly repayments of £220 and has existing finance of £130 pm NP Int Dep Draw £29,500 + £500 + £250 - £20,000 = £10,250 £220 + £130 x 12 £4,200 Annual Repayments = 2.4 times cover  Internal Only

C O L D RATIOS CASHFLOW Reduction in Assets and Increase in Gearing = Total Liabilities x 100 NTA O Gross Margin = Gross Profit x 100 Net Sales Net Profit Margin = Net Income before Tax x 100 Breakeven Sales = Fixed Costs x Sales Gross Profit Margin of Safety = Sales – Breakeven Sales x 100 Sales L Debtors Days = Trade Debtors x 365 Sales Stock Days = Stock x 365 COGS Creditor Days = Trade Creditors x 365 Current Ratio = Total Current Assets Total Current Liabilities Acid Test = Trade Debtors + Cash D Debt Service = EBITDA – Drawings / Dividends All Loan & HP Annual Capital & Interest Interest Cover = PBIT or EBIT Interest CASHFLOW Reduction in Assets and Increase in Liabilities are Sources of Cash Increase in Assets and Reduction in Liabilities are Uses of Cash Risk Coaching & Training  Internal Only  Internal Only

Questions Questions?  Internal Only