1. Kelvin Leibold Farm Management Field Specialist Phone 641-648-4850 E-mail kleibold@iastate.edu Farm Finance for Women 101

2. Financial Terms Liquidity Solvency Profitability Repayment Capacity Financial Efficiency

3. http://www.extension.iastate.edu/Publications/FM1791.pdf

4. Net Worth Statement or Balance Sheet AssetsLiabilities Short Term < 1 yearShort Term Intermediate ? 1-7Intermediate? Long Term 7 or longerLong term Total AssetsTotal Liabilities Net Worth = T.A. – T. L.

5. Net Worth Chart Assets Net Worth Liabilities

6. Measuring Liquidity Working Capital Current Ratio This information comes from the balance sheet

7. Current Ratio A ratio that measures the ability of the business to pay off current farm debts if current farm assets were sold Current Assets / Current Liabilities $140,000 / $100,000 = 1.4 if less than 1 you have problems!

8. Working Capital The amount of operating capital available to the business in the short run to pay bills and support family living Current Assets – Current Liabilities = WC $140,000 - $100,000 = $40,000

9. Solvency The ability of the farm business to pay all of its debts if it were sold. Look to “net worth statement” Look for “contingent liabilities”, probably not listed – that is why we call them “contingent”

10. Measures of Solvency Debt to asset ratio Equity to asset ratio Debt to equity ratio All give the same information only in a different index All come from “net worth statement”

11. Farm Debt to Asset Ratio The percentage of total assets financed by debt Total Farm Debt / Total Farm Assets X 100 $400,000 / $1,000,000 X 100 = 40%

12. Farm Debt to Equity How much of the business do the creditors own compared to how much you own Total Debt / Net Worth X 100 = D/E $400,000 / $600,000 X 100 = 67%

13. Liquidity The ability of the farm or business to meet financial obligations as they come due with assets or income from the business including family living expenses. Look to “cash flow” and current ratio on “net worth statement”

14. http://www.extension.iastate.edu/Publications/FM1792.pdf http://www.extension.iastate.edu/Publications/FM1792.pdf Cash Flow

15. Farm Equity to Assets Your share of the business Farm Net Worth / Total Farm Assets X 100 $600,000 / $1,000,000 X 100 = 60%

16. Return on Farm Equity Average interest rate earned by the money you have invested in the business Change in Net worth / Ave. Net Worth X 100 = $50,000 / [($600,000 + $650,000) / 2] X 100 = 8%

17. Profitability The difference between the cost of resources used and the value of the goods sold. Look to “income statement” and Look at inventory change.

18. http://www.extension.iastate.edu/Publications/FM1816.pdf

19. Repayment Capacity Your ability to repay intermediate and long term debts on time Look at “current ratio” and “cash flow”

20. Financial Efficiency How well your business is able to use assets to generate income. Look to “income statement”

21. Rate of Return on Farm Assets Average interest rate being earned by the money invested in the business. Net Farm Income + interest expense – owner withdrawals / average assets X 100 = ROA Needs to be higher than the cost of borrowing money or “you got troubles”.

22. Repayment Capacity Profit available to repay term debt and replace capital assets

23. Measures of Financial Efficiency Asset Turnover Ratio Operating Expense Ratio Depreciation Ratio Interest Expense Ratio Net Farm Income from Operations Ratio

24. Asset Turnover Ratio How quickly does the business turn over the revenue or capital it requires.

25. Operating Expense Ratio The proportion of farm income that is used to pay operating expense excluding principal and interest

26. Depreciation Expense Ratio How fast the depreciable assets wear out and need to be replaced May be inversely correlated with repairs

27. Interest Expense Ratio Indicates how much of the farm income is used to pay for borrowing capital

28. Net Farm Income Ratio Shows the net farm income from the whole operation compared to the gross revenue of the farm operation not including unpaid labor or charge for management

29. Variable rate note

30. Real Estate Mortgage

31. Legal Description

32. Take my home clause

33. Release of Mortgage

34. EWG.ORG

35. http://www.sos.state.ia.us/UCC_Search/

36. UCC RA9 Search

37. Financing Statement

39. Estate Tax Planning If the “pie” is a small pie ( $1.5 million in 2004) look at impact of inflation and legal costs Don’t worry about Federal Estate Tax, focus on income tax issues, possible Iowa inheritance tax

40. Estate Planning If total “pie” for husband and wife is between $1,500,000 and $3,000,000 consider dividing equally and using life estate or trust.

41. Estate Tax Planning If you have a “Big Pie” seek specialized help and wait a few years to die. Look at special tools to reduce valuation, consider a gifting program, charitable donations, Special Use, minority discounts and other tools estate planners would suggest.

42. Social Security

45. Social Security What is the impact of dollars contributed today? Step 5: Multiply the first $606 in Step 4 by 90% $___________ Multiply the amount in Step 4 over $606 and less than or equal to $3,653 by 32% $___________ Multiply the amount in Step 4 over $3,653 by 15% $___________

46. Assume $7,075 / month of SE earnings $606 times 90% = $545 of AIME $3,653 times 32% = $1169 of AIME so $4,259 / mo. Equals $1,714 of AIME $2,816 times 15% = $422 of AIME so $7,075 / mo equals $2,136 of AIME

47. Normal Retirement Age 1937 and prior65 193865 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943-5466 195566 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later67 Note: Persons born on January 1 use the NRA for the previous year

48. Spousal Benefit If your full retirement age is 67, the reduction for starting your: Retirement benefit at 62 is about 30 percent. The reduction for starting benefits at age 63 is about 25 percent 64 is about 20 percent 65 is about 13.3 percent and 66 is about 6.7 percent Benefits as a spouse at 62 is about 67.5 percent of the benefit your spouse would receive if his or her benefits started at full retirement age. The reduction for starting benefits as a spouse at age 63 is 65 percent 64 is 62.5 percent 65 is about 58.3 percent 66 is about 51.5 percent 67 is about 50 percent

49. http://www.extension.iastate.edu/Publications/PM1167E.pdf http://www.extension.iastate.edu/Publications/PM1167E.pdf Estimated Costs of Living

50. Retirement Income Social Security Farm property – rent or sale Other Retirement Income Other sources?

51. How Much Retirement Income? Three phases of retirement a)Go Go Years – travel, entertainment b)Slow down years – housing, c)Health Issue years – insurance, drugs, nursing home Kelvin’s Rule - plan for 100 % of current spending because of tax issues.

52. Questions???