2. Farm Size: Am I Big Enough?

3. Objectives Establish criteria for how big a business should be Estimate minimum viable size by assessing owner’s need for income Understand relationship between financial growth and earned income

4. How Big Should the Business Be? The business is big enough when: – Internal Dimension 1.It is low cost – economies of size

5. Economies of Size Cost$Cost$ Units of Output The Farmer

6. How Big Should the Business Be? The business is big enough when: – Internal Dimension 1.It is low cost – economies of size 2.It meets its operator’s needs for income – minimum viable size from family income needs perspective – External Dimension 3.Its size permits access to markets, information, and competitive technologies – minimum viable size from industry perspective

7. Income Needs Analysis What is the minimum amount of net income that will satisfy operator’s needs? What gross income would normally be required to produce this much net income? How much investment (financial assets) would normally be required to produce this much gross income?

8. Part I. Income Needs Analysis Spendable Income NeedsForecast A. Family living expense B. Term debt service (principal only) C. Carryover debts (principal only) D. Income and self employment taxes E. Reinvestment in the farm business F. Saving for retirement, college, etc. G. Other wants/needs H. Total income needed I. Less non-farm income available J. Income needed from the farm

9. Part I. Income Needs Analysis Spendable Income NeedsForecast A. Family living expense150,000 B. Term debt service (principal only)91,648 C. Carryover debts (principal only)0 D. Income and self employment taxes0 E. Reinvestment in the farm business71,234 F. Saving for retirement, college, etc.30,000 G. Other wants/needs0 H. Total income needed342,882 I. Less non-farm income available20,000 J. Income needed from the farm322,882

10. Part II: Income Needs Analysis: Historical Performance K. Net Farm Income from Operations Ratio Net Farm Income divided by Gross Farm Revenues = NFIFO L. Asset Turnover Ratio Gross Farm Revenues divided by Total Farm Assets = Asset Turnover Ratio

11. Part II: Income Needs Analysis: Historical Performance K. Net Farm Income from Operations Ratio Net Farm Income280,519 divided by Gross Farm Revenues1,796,651 = NFIFO0.156 L. Asset Turnover Ratio Gross Farm Revenues1,796,651 divided by Total Farm Assets4,655,476 = Asset Turnover Ratio0.386

12. Part II: Income Needs Analysis: Results M. Gross farm revenues required to generate needed spendable income Total Income Needed (J) divided by NFIFO (K) = N. Assets required to generate gross revenue Required Gross Revenues (M) divided by Asset Turnover Ratio (L) =

13. Part II: Income Needs Analysis: Results M. Gross farm revenues required to generate needed spendable income Total Income needed (J) (from Part I.)322,882 divided by NFIFO (K)0.156 =2,069,756 N. Assets required to generate gross revenue Required Gross Revenues (M)2,069,756 divided by Asset Turnover Ratio (L)0.386 =5,362,062

14. More Spendable Income From the Farm Without Getting Bigger Increase NFIFO Ratio – Reduce costs – Outsource Increase Asset Turnover Ratio – Increase prices or output – Reduce investment

15. Can the Business Grow? Growth is dependent on: 1)Identifying opportunities for profitable expansion 2)Acquiring resources to implement expansion

16. Two Behaviors Critical to Internally Funded Growth Earnings behavior Savings behavior

17. Leverage and Growth In the short run, a farm can growing by borrowing, the potential to grow with debt capital is limited by earnings and assets Earnings leverage growth, as well as fuel it directly Appreciation in capital asset values may increase borrowing ability, but won’t increase the ability to service debt Financial performance should be monitored annually using cost value ROA versus ROE (ROE should exceed ROA) and SGR trend

18. Profitability, Size, and Growth are Interdependent Which button do we push to achieve competitiveness? A.Profitability B.Size C.Growth D.All of the above ProfitabilitySize Growth Business Control Panel

19. How Would You Respond? First scenario – The farm’s asset turnover ratio is 18%, when 38% would be typical for average competitors. The operating profit margin ratio is 12%. The farm has no debt and substantial equity, but little cash. A. Improve performance B. Expand operation

20. How Would You Respond? Second Scenario – The farm’s asset turnover ratio is a remarkable 50%. The farm’s operating profit margin ratio is 5%. The farm has little or no debt, but little cash. A. Improve performance B. Expand operation Should a manager ever consider expanding an unprofitable business?

21. Summary - Keys to Achieving a High Sustainable Growth Rate High profit Retention of income as opposed to distributing income to owners Optimum leverage Outside equity capital Strategic fit with industry scale

22. Strategic Business Planning for Commercial Producers