1. Spencer Ag Business Curriculum 2012
FINANCIAL ANALYSIS
Spencer Ag Business Curriculum
2012

2. Financial Analysis How can we tell if a farm is doing well?
What are the strengths and weaknesses of the farm?

3. Net Worth Statement Provides information at a point in time
ASSETS-LIABILITIES= Net Worth
Assets: all items that have value
Current Assets
Items that are converted to cash within one year
Examples: Cash, purchased seed/supplies, feeder livestock, grain on hand

4. Net Worth Statement Intermediate Assets Long Term Assets
Items that are used for more than one year- up to 7,8 years
Examples: Breeding livestock, machinery/equipment
Long Term Assets
10-15 years and up
Examples: Land, buildings

5. Net Worth Statement Liabilities: monetary obligations or debt
ASSETS-LIABILITIES= Net Worth
Current Liabilities
Money owed within one year
Examples: Accounts payable, operating loan balance

6. Net Worth Statement Intermediate Liabilities Long Term Liabilities
Money owed beyond one year
Examples: Remaining loan balance (under 10 years) Like a car payment
Long Term Liabilities
Money Owed on long term Mortgage
Examples: Land, Long term building improvements (house loan)

7. Net Worth Statement Components
Total Assets (TA) – Total Liabilities (TL)
Also known as Owner’s Equity (OE)

8. Financial Analysis Types of Financial Analysis Comparative Analysis
Projected Analysis
Ratio Analysis

9. Financial Analysis
Solvency
Liquidity
Profitability

10. Net Worth Statement Analysis
Liquidity
Ability to convert to cash
Pay off short term debt
Current Ratio (CR) = Current Assets (CA)
Current Liabilities (CL)
Intermediate Ratio (IR) = (CA + IA)
(CL + IL)

11. Liquidity (having cash when needed)
Current ratio = current assets current liabilities
Working capital =
(current assets - current liabilities)

12. LIQUIDITY Current ratio should be 2.0 or better
Farms with continuous sales can have 1.5, but farms with infrequent sales may need 3.0
Working capital typically equals 25 % to 35 % of total expenses (annual)

13. Net Worth Statement Analysis
Solvency
Collateral: ability to pay off long term debt
Net Capital Ratio = Total Assets (TA)
Total Liabilities (TL)
Debt to Equity Ratio (IR) = Total Liabilities
Owner’s Equity
Lenders typically loan amounts equal to or less than 50% of assets

14. SOLVENCY: Comparing assets to liabilities
Net worth - $
Debt-to-asset ratio (or other ratio)
Debt-to-asset ratios of 30 % to 40 % are typical, though many farms have no debt.

15. Leverage: degree in debt
Total debt-to-asset ratio
<---10% % % %-->
low average high
High leverage means the farm net worth will grow faster when margins are high and lose equity faster when margins are low.

16. Income Statements Provides information between points Receipts
Expenses
Operating (Variable)
Fixed
Net Cash Income =
Gross Receipts (GR) – Cash Expenses (CE)
Adjustments

17. Income Statement Analysis
Operating Ratio = Operating Expenses
Gross Income
Fixed Ratio = Fixed Expenses
Gross Ratio = Total Expenses

18. Income Statement Analysis
Income to Investment Ratio
Capital Turnover =
(Unadjusted Gross Income + Non-cash Adjustments)
Average Capital Investments
Higher Ratio = quicker asset turnover
At least 0.2 ratio desired

19. More Ratio Analysis Return on Equity Capital =
Net Farm Income – Operator Allowance
Return on Total Capital =
(Net Farm Income + Interest) – Operator Allowance
Rate of Return on Total Capital =
Return on Capital
Average Capital Investment

20. More Ratio Analysis Rate of Return on Equity Capital =
Average Net Worth
Rate of Return on Borrowed Capital =
(Return on Total Capital – Return to Equity Capital)
(Average Capital Investment – Average Net Worth)
Comparisons

21. In the End… Ending Assets = Ending Liabilities = Ending Equity =
Beginning Assets + Non-Cash Reinvestment + Change in Inventory – Depreciation
Ending Liabilities =
Beginning Liabilities + New Debt – Debt Paid
Ending Equity =
Beginning OE + Net Farm Income – Family Expenses – Taxes

22. Final Key Considerations
Long Term Assets
Appropriately Value—Be Conservative
Net Worth Statements
Base Values on Current Values not Market Values