Business analysis of a custom farming operation June 23, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Contact info Dean Recker, credit administrator Ag Credit, ACA 610 W. Lytle St. Fostoria, OH (419)