Assessing Financial Performance: How Am I Doing?

Topics Data required Calculation worksheet Interpretation Financial assessment worksheets

Data required Balance sheets – Beginning of the accounting period – Ending of the accounting period Schedule F and Form 4797 from federal tax return Miscellaneous information

Worksheet 1- Schedule F Data

Worksheet 1- Balance Sheet Data

Worksheet 1- Miscellaneous Data

Worksheet 1- Case Problem Data

Worksheet 1 - Net Farm Income Calculations

Net Farm Income Calculations for Case Problem

Worksheet 2

Worksheet 2 - Case Problem

Diagnosis Assessment in four areas – Profitability – Liquidity – Solvency – Financial efficiency

Indicators of Financial Strength Values larger than benchmark – ROA – ROE – Operating profit margin – Asset turnover ratio – Revenue per full-time worker – Net farm income ratio

Indicators of Financial Strength Values smaller than benchmark – Debt-to-asset ratio – Operating expense ratio – Depreciation expense ratio – Interest expense ratio

Worksheet 2 - Assessing Financial Performance

Source of problems Scale Employment Efficiency Debt structure

Diagnostic tree Not OK Diagnostic factors EfficiencyScaleDebt structure Courses of action OK Not OK OK Not OK …………. Source:Financial Troubleshooting

Courses of action to improve efficiency Increase analysis of production records looking for clues that will lead to improved efficiency Use advisory services to help focus on productivity and thruput Work at improving production skills Improve marketing skill and performance Devote more time to management

Courses of action to improve scale Examine whether management ability is sufficient to handle business of the current size or an expansion Use fixed resources fully by adding enterprises and/or custom work Expand existing enterprises with low-capital requirements Merge with another farming unit

Courses of action to improve employment Increase off-farm employment Eliminate hired family employees Add labor intensive enterprises with low capital requirements (increase the scale) Reduce family withdrawals to a level that is consistent with efficiency or part-time employment

Courses of action to improve debt structure Restructure debt Sell unproductive assets to reduce debt Reduce debt through write-off Scale back farm to allow significant increases in off-farm employment Don’t own what you can control through leases Evaluate the rate of return expected from capital investments and compare to interest rate

Summary Utilize existing data Identify appropriate benchmarks Assess efficiency, scale, employment, and debt structure to identify actions that will improve performance

Strategic Business Planning for Commercial Producers