1. Session 4 – Keeping Your Financial Score

2. Course Flow [MH to insert course flow chart here]

3. Program-at-a-glance Advanced Farm Management Program Schedule 2014/15 - An Overview DAY 1DAY 2DAY 3DAY 4DAY 5 9:00am to 9:30am Course Introduction Risk Management Review & MAP Update Review & MAP UpdateReview & MAP update Financial Analysis III (Scorecard) 9:30am to 10:00am Business Planning and MAP Introduction Financial Analysis I (Business Structure, Financial Statements, Taxation) Financial Analysis II (Ratios & Operating Efficiency) 10:00am to 10:30am 10:30am to 11:00am Case Study SWOT Personal Leadership (Kolbe A) 11:00am to 11:30am Branding & Marketing Your Farm 11:30am to 12:00pm 12:00pm to 12:30pm Lunch Break 12:30pm to 1:00pm 1:00pm to 1:30pm Risk ManagementMobile Technology Human Resources Commodity Marketing MAP Continued 1:30pm to 2:00pm 2:00pm to 2:30pm Farm Business Vision & Strategic Direction Core Values & Beliefs 2:30pm to 3:00pm Case Study & Wrap-up 3:00pm to 3:30pm Building Your Management Team 3:30pm to 4:00pm Kolbe A PreparationManagement Action PlanCompletion

4. Remember the Rules of Engagement Class participation Work assignments Build your Management Action Plan (MAP) Instructor feedback/coaching

5. Session 4 Agenda 9:00amReview and MAP Update 9:30am Financial Analysis II (Ratios and Operating Efficiency) 12:00pmLunch 1:00pmCommodity Marketing with John DePutter 3:45pmEvaluations and Adjourn

6. Session 3 Review Business Structure and Taxation Proprietorship Partnership Corporation

7. Session 3 Review Manage assets not taxes - 15½% Cash vs. accrual Matching principle Proprietorship, Partnership, Corporation We talk about tax because we do not know what to ask

8. Session 3 Review Where Are We Now? Completion of your MAP Vision SWOT Strategy Risk Communications – Kolbe

9. Review of Session 3 Financial statements: Cash versus accrual method Matching principle Variable, fixed and mixed expenses Balance Sheet Statement of Income Statement of Cash Flow

10. ASSET TURNOVER (ROI) EBITDA (Efficiency) CASH CASH IS KING Review of Session 3

11. “I’ve always wanted to be somebody, but I see now I should have been more specific.” - Lily Tomlin

12. Review of Session 3  Understand the components of a solid Human Resources program  Know your primary responsibilities as an employer  Assess your most pressing HR issues  Evaluate your own practices against some HR best practices If the Human Resources session was successful, you should…

13. Review of Session 3 Core elements of a solid HR platform Stage I - Foundational Legislative compliance Employment contract Health and Safety Defined job duties Competitive compensation Basic HR policies

14. Review of Session 3 Core elements of a solid HR platform Stage II - Supporting Growth Organizational structure Clear roles and responsibilities Compensation strategy Training and development Group Benefits HR Policies – handbook Performance Management

15. Conflict Resolution Modes* Competing Collaborating Avoiding Accommodating Compromising ASSERTIVENESSASSERTIVENESS COOPERATIVENESS *Sources: Thomas-Killman Conflict Mode Instrument and the Canadian Management Centre

16. Specific Learning Objectives When you leave today, you will be able to: Understand importance of ratio analysis using liquidity, profitability and solvency ratios Understand EBITDA

17. Industry Overview – Producer Perspective The following issues impact success: –Knowledge vs. Task Orientation (head or labour tasks) –Response to required skills –Response to the new Business Rules –Understanding ag trends –Adoption of business tools –Knowledgeable financial and economic performance

18. Knowledge, the Premier Input “The emerging reality of the 21st Century will be that those businesses which are organized around knowledge, rather than tasks, will have the opportunity to create wealth.” Peter Drucker Knowledge has become “the premier input in every production system.”

19. What’s Happening In Ag Today Consolidation in many sectors Rapid integration of technology Increased volatility –Market prices –Input prices Competition on a global scale Lending environment due to the economy

20. Lending Changes in Agriculture Who thinks lending criteria has changed?

21. Commitment to Education CANEI “It’s not about getting 1000% better in one thing, it’s about getting 1% better in 1000 things.”

22. Potential Education Benefits Are all problems, people problems? People Problems –Missing skills –Missing knowledge –Missing understanding

23. Six Steps to Success Jack Welch, former CEO, General Electric Face reality as it is: not as it was, not as you wish it were. Be candid with everyone Do things right; do right things Change before you have to If you don’t have a competitive advantage -- don’t compete Control your own destiny or someone else will

24. “You can have a better future if you stop trying to have a better past”. Dan Sullivan The Strategic Coach Inc.

25. Excellent Analytical Skills and Capabilities are Essential How do you get these? Options: Employ a professional Learn (become) a professional yourself Combination of both

26. Chart of Accounts Manual of Accounts

27. Competitive Advantages 1.Managerial Competence 2.Revenue Management 3.Asset Management 4.Cost Control

28. Components of any business Operations: How well do you generate operating profit? Capital: How well do you utilize this profit?

29. Taking Control How do we evaluate the financial performance of your business? Solution: –Answer the question - How well you generated operating profit (Operations Management) –Answer the question - How you used the operating profit (Capital Management)

30. Big Picture Improvement When developing big picture, first decide how you want each area to perform in that year of focus. The performance areas are: –Operations –Interest –Personal living –Loan repayment –Asset growth/risk

31. How Do You Fund Business Growth? Debt Equity Profit Which do you prefer?

32. Debt Limitations 1.Requires interest/principal payments 2.Others control your access to debt 3.Lenders and their policies change 4.Interest rates fluctuate Benefits of its use Can acquire profitable assets without sharing ownership and cost is usually lower

33. Equity Limitations 1.Three components of Equity –Contributed capital, profit, market value change 2.Investors –Funding, selling and management 3.Market value changes –Are out of our control, up, down Benefits of its use Subordinated to debt Less or no present or future cash cost required Can add contributed capital

34. Profit Limitations 1.Growth limited to amount of profit 2.Profits fluctuate 3.Profit by itself rarely is adequate to fund all expansion needs Benefits of its use No required present or future cash for interest or principle Less risk

35. Only Two Problems Assets do not generate adequate revenue to provide Operations with enough capacity to convert to Profit. Operations are not efficient enough in converting Revenue to Profit to service capital requirements. DEBT IS NEVER A CORE PROBLEM.

36. Assessing viability Viability is a measurement of a business’ ability to realize long-term success Three important areas to monitor: EfficiencyIncome statementProfitability Statements and ratiosBalance sheetSolvency Statements and ratiosBalance sheetLiquidity In workshopFocus on

37. Assessing viability Ratio analysis involves the calculation of specific amounts that are proven indicators of optimum financial performance Ratios are calculated from key figures within the financial statements

38. Ratio analysis Why bother? The trends that these ratios highlight are valuable tools for longer- term analysis Trends, comparison and benchmarking Lenders use ratios to monitor your financial health Assist with decision making on business major business transactions Financial toolkit

39. Financial Performance Analysis of Capital Capital financial performance analysis measures how operating profit was used.

40. Operating Efficiency Formula Measures how well operations produce capacity (cash). How much does it cost to produce $1.00 of revenue? Operating Costs Divided by Total Adjusted Revenues * 100 Equals Operating Efficiency Percentage *The lower the percent, the better the efficiency.

41. Application of the Operating Profit Use Rule CategoryProduction Expense Percentage 30%40%50% Adjusted revenue300,000 Production expenses90,000120,000150,000 EBITDA / Operating Profit210,000180,000150,000 Interest Cost / Lease / Rent52,50045,00037,500 Living52,50045,00037,500 Principal52,50045,00037,500 Growth/Risk52,50045,00037,500

42. Adjusted revenue: Revenue$ Add: Closing inventory Less: Opening inventory( ) Adjusted revenue (A)$ Operating expenses: Cost of production$ Less:Opening inventory( ) Short-term interest( ) Rent( ) Leases( ) Other – to normalize( ) Plus:Administrative expenses Less:Amortization( ) Long-term interest( ) Management wages( ) Other – to normalize( ) Other – to normalize( ) Adjusted expenses (B)$ Operating expense ration (B)  (A) x 100 % Operating Efficiency Exercise 4.1 – use appendix E

43. Operating Efficiency Exercise 4.1 – Answer Key - use appendix E Adjusted revenue: Revenue$ 2,174,561 Add: Closing inventory 882,419 Less: Opening inventory (1,333,607) Adjusted revenue (A)$ 1,723,373 Operating expenses: Cost of production$ 2,245,492 Less:Opening inventory (1,333,607) Short-term interest (11,881) Rent (149,300) Leases (8,000) Other – to normalize( ) Plus:Administrative expenses 574,985 Less:Amortization (368,625) Long-term interest (119,000) Management wages (7,000) Other – to normalize( ) Other – to normalize( ) Adjusted expenses (B)$ 823,064 Operating efficiency(B)  (A) x 100 47.75%

44. Operating Efficiency * Using your own operation’s financial statements, calculate your own operating efficiency – Exercise 4.1(a)

45. Your Farm Operating Efficiency Exercise 4.1(a) Revenue$ Adjustments: Other Other Other Other Adjusted revenue $ (A) Expenses (*): $ Total expenses $(B) Operating efficiency ((B/A)x100) Expenses exclude interest, leases, amortization, family wages, rent, income taxes, property taxes.

46. Liquidity The ability of a business to meet its financial obligations as they come due in the ordinary course of business Key Figures: 1.Working Capital 2.Current Ratio 3.Debt Structure Ratio

47. Calculating working capital Net current assets available to finance operations into the next operating cycle current assets – current liabilities = working capital Health check! –Aim for minimum 3 months expenses

48. Calculating current ratio The measure of working capital expressed as a ratio of current assets to current liabilities current assets / current liabilities = current ratio Health check! –A ratio greater than 1 is preferable but aim for greater than 2 –A high ratio (>4) can indicate inefficient use of resources

49. Exercise 4.2 Calculate Working Capital/Ratio Current assets:$ (A) Current liabilities:$ (B) Working capital:$ (A-B) Working capital ratio: : 1:00 (A/B) Using appendix C

50. Exercise 4.2 Calculate Working Capital/Ratio Answer Key Current assets:$ 1,168,269 (A) Current liabilities:$ 383,806 (B) Working capital:$ 784,463 (A-B) Working capital ratio: 3.04 : 1:00 (A/B) Using appendix C or Answer Key – Exercise 1.1

51. Exercise 4.2(a) Calculate Your Own Working Capital/Ratio Current assets:$ (A) Current liabilities:$ (B) Working capital:$ (A-B) Working capital ratio: : 1:00 (A/B) Use your own balance sheets based on an accrual basis

52. Calculating Debt Structure Current debt as a percentage of total debt Health Check: Good - < 20% Poor - > 35%

53. Exercise 4.3 Calculate Months of Working Capital Cash outflows:$ 1,400,000 (A) Working capital:$ (B) # of Months Months Using exercise 4.2 How long does working capital last?

54. Exercise 4.3 Calculate Months of Working Capital Answer Key Cash outflows :$ 1,400,000 (A) Working capital:$ 784,463 (B) # of Months 6.7Months [B/(A/12)] Using exercise 4.2 How long does working capital last?

55. Exercise 4.4 Calculated Debt Structure Current debt:$ (A) Divided by total debt:$ (B) Percentage % (A/B*100) Using Appendix C Exclude due to shareholder

56. Exercise 4.4 Calculated Debt Structure – Answer Key Current debt:$ 383,806 (A) Divided by total debt:$ 2,696,009 (B) Percentage 14.24% (A/B*100) What percentage of total debt is due within 12 months? Exclude due to shareholder

57. Exercise 4.4(a) Calculate Your Own Debt Structure Current debt:$ (A) Divided by total debt:$ (B) Percentage % (A/B*100) What percentage of total debt is due within 12 months?

58. Linking to the balance sheet Balance sheet Assets Current assets Long-term assets Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Owner’s equity Total liabilities & owner’s equity Liquidity Current ratio Working capital +

59. Solvency Key Figures: 1.Debt to Equity Ratio (Leverage)* 2.Equity Ratio* 3.Debt Servicing Ratio *Use a FMV balance sheet Measure of debt compared to the amount of capital invested in the business

60. Calculating debt to equity ratio Compares the usage of debt and equity to finance the farm total liabilities / owner’s equity –A leverage ratio used by lenders who base the calculation on the fair market value of the equity as opposed to book value Health check! –Lower ratios are preferable; aim for less than 0.4 –A higher ratio (>.5) indicates greater long-term risk and less flexibility

61. Exercise 4.5 Calculate Debt to Equity (Leverage)* Ratio Total liabilities$ (A) Total equity at FMV$ (B) Leverage ratio$ (A/B) For every $1.00 in equity, how many dollars of debt? Use appendix C and exercise 1.3 *Done using FMV *Exclude shareholder loan

62. Exercise 4.5 Calculate Debt to Equity (Leverage)* Ratio – Answer Key Total liabilities$ 2,696,009 (A) Total equity at FMV$ 12,818,858 (B) Leverage ratio$ 21.03% (A/B) For every $1.00 of equity, how many dollars of debt? Use appendix C and exercise 1.3 *Done using FMV *Exclude due to shareholder

63. Exercise 4.5(a) Calculate Your Own Debt to Equity (Leverage)* Ratio Total liabilities$ (A) Total equity at FMV$ (B) Leverage ratio$ (A/B) For every $1.00 in equity, how many dollars of debt? Use appendix C and exercise 1.3 *Done using FMV

64. Calculating equity ratio Measures the proportion of assets financed by the owners total equity / total assets –The higher the ratio, the more resources are supplied by the owners as opposed to the creditors. Based on assets at FMV Health check! –Higher ratios are preferable; aim for.5 –A higher ratio indicates more likelihood of solvency

65. Exercise 4.6 Calculating Equity Ratio* Owner’s equity at FMV$ (A) Total assets at FMV$ (B) Equity ratio % (A/B*100) What percentage of farm assets is financed by the owner? Use appendix C and exercise 1.2 (total assets at FMV) *Done using FMV

66. Exercise 4.6 Calculating Equity Ratio* Answer Key Owner’s equity at FMV$ 12,818,858 (A) Total assets at FMV$ 15,514,867 (B) Equity ratio 82.62% (A/B*100) What percentage of farm assets is financed by the owner? Use appendix C and exercise 1.2 (total assets at FMV) *Done using FMV

67. Exercise 4.6(a) Calculate Your Own Equity Ratio* Owner’s equity at FMV$ (A) Total assets at FMV$ (B) Equity ratio % (A/B*100) What percentage of farm assets is financed by the owner?

68. Linking to the balance sheet Balance sheet Assets Current assets Long-term assets Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Owner’s equity Total liabilities & owner’s equity Solvency Debt to asset ratio Debt to equity ratio Equity ratio

69. EBITDA What is it? Earning Before Interest, Taxes, Depreciation and Amortization Leases/Rent Family Wages/Draws

70. Calculating debt servicing ratio Measure of debt service capacity Indicates the ability to continually generate cash to repay term debt debt servicing capacity / annual term principal and interest –A linking ratio (links the income statement and balance sheet) –A measure of long-term solvency used by lenders Health check! –Higher ratios are preferable; aim for higher than 2.0 –A higher ratio indicates ability to repay term debt

71. Exercise 4.7 Calculating Pellegrino EBITDA Income before taxes$ x,xxx,xxx Add: Amortization xxx,xxx Interest – long-term xxx,xxx – short-term xx,xxx Amortizationxxx,xxx Rentsxx,xxx Leasesxx,xxx Family wagesxxx,xxx EBITDAx,xxx Less family living (110,500) Available for debt servicing$xx,xxxx (A) Use appendix C

72. Exercise 4.7 (cont’d) Available for debt servicing$ x,xxx(A) Less: Principal (current portion)$xxx,xxx Interest – Short-termxx,xxx – Long-term xxx,xxx Rentxxx,xxx Leasexx,xxxx.xxx.xxx Surplus$x,xxx,xxx(B) Debt servicing ratiox.xx (A/B * 100) How many dollars are available to service commitments? Use appendix C

73. Exercise 4.7 Calculating Pellegrino EBITDA – Answer Key Income before taxes$236,503 Add: Amortization368,625 Interest – long-term119,000 – short-term11,881 Amortization Rents149,300 Leases8,000 Family wages7,000 EBITDA900,309 Less family living (110,500) Available for debt servicing$789,809 Use appendices C and E

74. Exercise 4.7 (cont’d) Answer Key Available for debt servicing$ 789,809 (A) Less: Principal (current portion)$264,396 Interest – Short-term11,881 – Long-term 119,000 Rent – arms length149,300 Lease8,000552,577 Surplus$237,232(B) Debt servicing ratio1.43 How many dollars of surplus are available to service commitments? Appendices C and E

75. Exercise 4.7(a) Calculate Your Own EBITDA

76. Financial Performance Analysis Surplus - $900,309

77. Linking to the financial statements Debt servicing ratio Solvency Income statement Revenue less Cost of goods sold equalsContribution margin lessOverhead (fixed) costs equalsNet income (Adjusted net income) Statement of cash flow Cash inflow Cash outflow Opening cash balance Closing cash balance

78. Review the viability process Calculate liquidity –Working capital –Current ratio –Debt structure ratio Calculate solvency –Debt to equity ratio –Debt to asset ratio –Equity ratio –Debt servicing ratio Calculate operating efficiency EBITDA

79. Your MAP Do you have a clear vision for the future direction of your farm? Are you using your financial information to manage your farm? Do you use the cash or accrual method of accounting? Why did you choose this method?

80. Your financial statements What types of financial statements do you have? Balance sheet showing all your farm assets, liabilities and equity Income statement prepared using the accrual basis Statement of cash flows

81. Your Map Chose your liquidity ratios Chose your solvency ratios Calculate your operating efficiency

82. Calculate your ratios Scorecard Description/Ratio200820092010201120122013F2014F Adjusted Revenue Production Expense EBITDA Operating Efficiency % Net Worth Working Capital Ratio

83. Actions Responsibility (Who)Timeline (When) OPERATING EFFICIENCY: Goal: Action: INNOVATION: Goal: Action: FINANCIAL: Goal: Action: SUCCESSION PLAN: Goal: Action: HUMAN CAPITAL: Goal: Action: COMMODITY MARKETING: Goal: Action: SALES & MARKETING: Goal: Action: OTHER: Goal: Action:

84. The Gazelle “Every morning when the sun comes up a gazelle wakes. The gazelle knows that he must outrun the fastest lion or he will be eaten. When the sun comes up the lion also wakes. The lion knows that he must outrun the slowest gazelle or he will starve. The lesson is simple; it doesn’t matter whether you are a gazelle or a lion, when the sun comes up you had better be running.”