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Financial Performance Analysis Charles Brown Field Specialist - Farm Management crbrown@iastate.edu 641-673-5841
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9 The Concept of Performance Analysis 1.Where did the money come from? 2.How was the money used?
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9 The Concept of Performance Analysis Two step process: –Evaluates the operations area of the business for profits/efficiency/consistency –Capital performance evaluated – areas of equity, liabilities, and assets Components of this evaluation: –Operating efficiency –Use of operating profit
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10 Analyzing Cash Flow from Operations Profit for the needs of the areas of assets, liabilities, equity and family living? Operating efficiency of the business? Is operating efficiency consistent? (Trends)
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11 Operating Profit Operating profit measures how much capacity is available from operations. Operating Profit Formula Total Revenue or Gross Profit (Value of Farm Production) – whichever is less Minus all expenses except interest, depreciation, and amortization Equals Operating Profit - Think of your Schedule F from your tax return - Take your net profit and add back in interest expense, depreciation and possibly amortization Other adjustments to consider - Breeding livestock sales - Wages paid to spouse and Section 105 Plans for spouse
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11 Operating Efficiency Operating efficiency measures how well the business produces capacity (cash). Operating Efficiency Formula Operating Profit Divided by Total Revenues, *Gross Profits or VFP (whichever is less) Equals Operating Efficiency Percentage The higher the percentage, the better the efficiency. -Again think of your Schedule F -Take your Net Profit(addback, interest, depreciation and feed cost if livestock operation)/ Gross Revenues(minus feed costs if livestock operation)
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Effects of OP Efficiency on Business
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21 Operational Summary Is there a reasonable amount of operating profit? Is the operating efficiency acceptable? Is the operating efficiency consistent?
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22 How is Operating Profit Used? The use of capital is divided into four areas, which are: 1.Interest 2.Owner withdrawals, usually family and taxes for sole proprietors, dividends for corporations and draws for partnerships 3.Debt-Principal Repayment 4.Assets – Growth/Replacement and Risk
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Rules of Thumb
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9 Asset Turnover Ratio Total Revenue or VFP divided by Average Farm Assets Example - Total Revenue = $1,000,000 - Average Farm Assets = $3,000,000 ATO = $1,000,000/$3,000,000 =.33
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12 Asset Turnover Ratio What is a good ATO?.60 or greaterHI.30 to.59AVE.29 or lessLOW ATOAsset Utilization
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ATO Effects on $ Available
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ASSETS REVENUE PROFITS DEBT & EQUITY $1,000,000 ATO =.30 $300,000 40% = $120,000 LIVING & INTEREST D/A =.30 Debt = $300,000 $30,000 $15,000 $20,000 $55,000
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ASSETS REVENUE PROFITS DEBT & EQUITY $1,000,000 ATO =.10 $100,000 40% = $40,000 LIVING & INTEREST D/A =.30 Debt = $300,000 $10,000 $15,000 $20,000 -$5,000
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Financial Performance
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Thank You!
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