Breakeven Analysis: Program Overview

Transcription

1 Breakeven Analysis: Program Overview The Grain Farm Breakeven Price and Cash Flow Projector, here after referred to as the Breakeven Analysis program, calculates breakeven prices for grains. It also prepares projected income statements, cash flow reports, and repayment capacity reports. The Breakeven Analysis worksheet works well for grain farms with no livestock enterprises because it does not include an assessment of livestock costs. It is a projection tool designed to quickly provide information useful for grain marketing and financing decisions. The information needed to run this program can come from: 1. An individual s farm records. 2. Completed crop budgets. 3. Loan records (schedule of principal & interest payments and interest rates). To make use of this program, you must be able to provide estimates of your costs, yields, and financial information. The program requests the following information: A. Acreage Information for Each Crop: Number of acres for each crop that are owned, share rented, and cash rented. B. Revenues and Expenses on a Per Acre Basis: Yield, price per bushel, and FAIR payments, as well as fertilizer, pesticides, seed, drying, storage, machinery repair, crop insurance, and vehicle expenses. C. Other Costs and Revenues: Utilities, building repair, hired labor, insurance, miscellaneous, taxes, cash rent, settlements, and other expenses. Other farm revenue, non-farm income, family living expenditures, capital expenditures, depreciation, and income and social security taxes. D. Loan Information: Total interest and principal due for all loans or the length of the loan, interest rate, and loan balance for each loan is listed individually.

2 Navigating the Breakeven Analysis program The Breakeven Analysis program has the following main menu. The main menu contains 5 buttons that help the user move between the input screens and reports. Each button represents a different Excel spreadsheet found within the Breakeven Analysis program. Input takes you to the worksheet that collects the input information. Breakeven Prices takes you to the breakeven prices output reports. This section contains a table of per bushel breakeven prices, as well as breakeven charts for different yields. Projected Statements takes you to the projected statements output reports. This section contains projected net farm income, statement of cash flow, and capital recovery capacity reports. Print automatically prints the breakeven price report, projected statements, and input worksheets if your computer is hooked up to a printer. Reset All Entries to Zero changes all of the input entries to zero. There are tabs at the bottom of the Excel spreadsheet screen that help navigate the user between the input and output worksheets. Click on the name of the screen you wish to view. Input takes you to the input worksheet, as does the Input button described above. Break prices takes you to the breakeven prices output report, as does the Breakeven Price button described above. Projected takes you to the projected statements output reports, as does the Projected Statements button described above. Reconcile takes you to the reconcile worksheet. This is described in the Input Worksheet 2 section of this report.

3 How to use the Input Sections To explain the input required to use this program, an example has been developed for the Cline Farm. As you read, the example is presented such that the input sections are filled in for you. Note: Only enter inputs where the text and number is blue. The other numbers shown (in black) are calculated using formulas that include the inputs. These boxes are protected so that formulas cannot be accidentally changed. If you click on a protected box, you will receive the following message: To remove this message from the screen, click on the OK button. Input Worksheet 1: Farm Information and Acreage Per Crop Enter the acreage per crop according to the ownership/arrangement. Breakeven allows the share rented acres to be entered as split 1 or split 2. These split categories allow for different share rent arrangements to be entered. Allocations of revenue and costs between the farmer and landlord are entered in Input Worksheet 3: Revenue and Cost Splits on Share Rent Acres. Example: Cline Farm On November 1, 2000, Mr. and Mrs. Cline decide to project the breakeven price for their crops, as well as project the cash flows for their operation. They share rent 960 acres and cash rent 340 acres. This acreage is equally planted in corn and soybeans. The Cline s have entered 480 acres of corn that are share rented; 480 acres of soybeans that are share rented; 170 acres of corn that are cash rented; and 170 acres of soybeans that are cash rented.

4 Input Worksheet 2: Per Acre Budgets for Owned and Cash Rented Acres This worksheet represents a per acre budget for each crop grown. Enter total per acre amounts whether the farmer or the share-rent landlord makes the payments. Adjustments for share rent acres are made in the next section. Example (continued) The Cline s records from last year report a corn yield of 157 bushels per acre and a soybean yield of 50 bushels per acre. The current corn price is $2.29 per bushel and the soybean price is $5.80 per bushel. The Cline s received FAIR payments of $30 for all of their acreage farmed. An excerpt from their farm records is shown below displaying the total costs for owned and cash rented cropland. (Entries = total cost/ # of acres) Total Cost Per Crop Corn Soybeans Fertilizer $5,950 $2,210 Pesticides $7,820 $8,160 Seed $5,610 $3,230 Drying $2,040 $680 Storage $7,310 $3,570 Machinery Fuel $4,930 $4,420 pickup truck $680 $680 The Cline s have entered their yields, prices, and costs below.

5 The four navigation buttons found on Input Worksheet 2 are described below: Help displays a screen that includes directions for the input screen. Menu displays the main menu. Defaults displays the Budget Default screen shown below. This screen contains default data for both corn and soybeans for the northern, central, and southern parts of Illinois. The central part of Illinois contains data for high- and low- quality soils. The budget values provided may be entered into the input screen. The user must specify which column of Worksheet 2 to place the numbers in (ie. corn, soybeans, wheat, or other). Reconcile displays the reconciliation worksheet provided for double-checking the variable costs entries. This worksheet calculates the total value of the va riable costs for the entire farming operation. In this worksheet, updated values for variable costs may be inserted where there is blue text. The per acre values that give reconcile values for each crop is calculated from the newly entered reconcile values. To use the reconciled values, click on the Use reconcile button. If you choose not to use the values, select the Return button.

6 Input Worksheet 3: Revenue and Cost Splits on Share Rent Acres This worksheet represents a per acre budget for each crop grown on share rented acres. Do not make entries for owned or cash rented acres in these budgets. Entries for owned and cash rented acres may be made in Input Worksheet 2. Input worksheet 3 contains two sections, or splits. In Input Worksheet 1, share rented acres are divided between share rent split 1 and share rent split 2. For entries in this worksheet (worksheet 3), the Split 1 and Split 2 columns refer to revenue and costs for the number of share rented acreage entered in Worksheet 1. Percent entries in this section indicate the farmer s percentage of revenue and costs under share rent arrangements. For example, an entry of 66 percent for crop revenue means that the farmer receives 66 percent of the revenue from the share rent acres. The value per acre column for each split represents the farmer s total per acre revenue and costs for the respective share rent arrangement. Values in these columns represent a weighted average of all crops grown under that arrangement. The total farm column provides the total revenue and expense values for the entire farming operation. Values include returns from ALL categories: owned, share rented, and cash rented land. Comparing these projected values to previous actual values allows validation of the input into this spreadsheet. Example (continued) The Cline s split most of the farming revenue and expenses with their landlord in a 50/50 arrangement. The machinery and vehicle expenses are paid solely by Mr. and Mrs. Cline. This is reflected in the input sheet shown below.

7 Input Worksheet 4: Other Costs and Revenue This worksheet collects revenue and expense information that was not gathered in other input worksheets. Entries in this screen are for the total farm. The other costs listed in this worksheet include overhead items that are not easily allocated on a per acre basis. These costs flow into the income statement. The income and social security tax may be entered or calculated by the program. By selecting the Estimate Tax button, the program will estimate and enter the tax liabilities. The tax routine assumes that the farmer is married and filing jointly. Example (continued) The Cline Family accrues additional costs with their farming operation. They ve entered the following costs and revenues in the input worksheet shown below: $4,100 on utilities, $1,640 on building repairs and rent, $2,000 for hired labor, $16,400 for insurance, $4,920 on miscellaneous expenses, and a depreciation expense of $24,320. They cash rent the 340 acres for $140 per acre and have $40,000 in family living expenses per year.

8 Input Worksheet 5: Loan Information This worksheet collects information for all outstanding loans. Entries in this section estimate interest and principal payments due during the next year. Two methods exist for entering the loan information. Direct entry of principal and interest payments may be entered as a total amount of all loans. OR The worksheet contains four lines for different loans. Inputs for each loan, such as the number of years remaining before the final payment is due, interest rate, and principal balance are entered here. With the inputs, interest and principal payments for the year are calculated. The operating line found at the bottom represents entries for operating credit. Here, enter the average operating credit balance for the year, along with the interest rate, at which time the model will calculate the interest balance for the year. Example (continued) The Cline s total interest expense due on loans this next year is $10,000 and the principal is $11,000. They ve directly entered the principal and interest payment in the worksheet below, instead of entering all of their loans individually.

9 Reports and Graphs The Breakeven Analysis program contains two sections that provide both reports and graphs: 1. Breakeven Prices and 2. Projected Statements. The program produces six reports: 1. Per Bushel Breakeven Prices, 2. Breakeven Prices for Different Yields, 3. Projected Net Farm Income, 4. Projected Statement of Cash Flow, 5. Projected Capital Repayment Capacity, and 6. Summary. The reports may be accessed in two ways. From the main menu, a user can click on the desired section of reports and graphs. Alternatively, a user may click on the tabs located at the bottom of the Excel screen called Break_Prices and Projected. Report 1: Per Bushel Breakeven Prices This report provides a breakdown of all revenues and expenses on a per bushel basis. Yield per acre is copied to this report directly from the entry in Input Worksheet 2. The variable costs, other costs, interest costs, and depreciation are calculated based on the cost entered in the input section, the farmer s share of the expense, as well as the number of acres farmed per crop. Total costs are simply the sum of the variable costs, other costs, interest costs, and depreciation as described above. This represents the total cost per bushel for each crop. Less other farm revenue represents the total cost minus any additional farm revenue received, not including crop revenue. Input Worksheet 2 contains an entry for the amount of FAIR payments received per acre. The FAIR payments represent farm revenue, which offsets expenses. It is subtracted from the total costs because it is revenue. Breakeven to have positive net farm income represents the price that you would need to receive for your crops in order to have a zero or positive net farm income. For the example, the breakeven price for corn and soybeans is $2.09 and $5.15, respectively. Plus family living and tax represents the expenses incurred to support your family and the amount of taxes owed to the government on a per bushel basis. This calculation consists of the entries for family living expenditures and income and SS tax divided by the total number of bushels produced of each crop. It is added to the net farm income because it is an expense and requires additional income to offset it. Less non-farm income represents the income earned away from the farm that can help offset the family living and tax expenses. It is subtracted from the net farm income because it is revenue, which offsets expenses. Breakeven after family living represents the grain price you need to receive for your crops in order to have a zero or positive net farm income after accounting for family living expenses, taxes, and off-farm income. Less depreciation represents the amount of depreciation deducted. This is subtracted from net farm income because it reduces expense. Plus term-debt principal represents the principal expense due on loans outstanding. This is added to the breakeven price because it is an expense.

10 Breakeven for capital replacement and term debt repayment margin represents the price that you would need to receive for your crops in order to have a zero or positive net farm income after accounting for family living expenses, taxes, off-farm income, depreciation, and principal on debt. In the example, the Cline s breakeven prices are $2.30 and $5.81 for corn and soybeans, respectively. In order to make a profit, they must receive more than $2.30 per bushel for their corn and $5.81 per bushel for their soybeans.

11 Report 2: Breakeven Prices for Different Yields The Breakeven Prices section provides a visual and numerical representation of breakeven prices for different corn and soybean yields. Each graph plots 2 lines: total costs and net income. It is preferred to have the net income line below the total costs line. This means that you have some additional farm revenue helping to offset costs ie. FAIR payments. Each table lists the total costs and positive net income on a bushel per acre basis as shown in the graph. For example, a corn price of $2.15 per bushel would be enough to cover The Cline s net farm income (2.05), but not their total costs ($2.24) based on their 157-bushel per acre of corn entry in the input section (referred to the 160 bu. per acre).

12 Report 3: Project Net Farm Income This report projects the farming revenue and expenses, resulting in net farm income. This may be assumed to be the farmer s wages for the year. Crop revenue, other farm revenue, variable costs, and other costs are entries in Input Worksheets 3 & 4. Income before interest expense is total revenue minus total operating costs. Interest costs are entries in Input Worksheet 5. Income before depreciation is the income before interest expense minus the interest costs. Depreciation is an entry in Input Worksheet 4. It is subtracted from income to calculate net farm income. Net farm income is the income before depreciation minus depreciation. The net farm income represents the amount of money received above and beyond all farming expenses. Note, however, that this does not include family living expenses. Consider this to be the farmer s total wages for the year. Note: The projected net farm income statement lists revenue and costs for three categories: total farm, operator acre, and tillable acre. In the example, The Cline s total farm net income is $26,637. This represents a farming return of $32 per acre for the land that they farm for themselves. This reduces to a $20 per acre return for the total farming operation when considering the landlords share of the crops farmed in a share rent agreement.

13 Report 4: Projected Statement of Cash Flows This report considers the events that cause the farming operation to increase and decrease its money supply. For example, non-farm income brings money to the operation and can help offset expenses, while family living expenses, income and social security tax expenses, and capital purchases decrease the money supply. The net cash income from farming is called income before depreciation in Report 3. This is represented by the fact that the actual cash in-hand does not include depreciation. The net change in cash is the amount of money remaining once the farming and personal expenses are paid. This can be referred to as cash in hand. Note: The projected statement of cash flows lists revenue and costs for three categories: total farm, operator acre, and tillable acre. In the example, The Cline s earn a cash supply of $50,957. This is reduced by $40,000 for family living expenses, leaving them with $10,957. This represents only a return of $8 per acre for their entire farming operation. They receive a $13 return for the land they own and cash rent.

14 Report 5: Projected Capital Recovery Capacity The purpose of this report is to project the ability to pay loans after accounting for the farming expenses and everyday living expenses. Farm operating income is called Net farm income in Report 3. Again, this represents the dollar value per acre earned after all farming expenses are paid. The net non-farm income and depreciation are added to the net farm income because they offset expenses. This provides a total of cash on hand, as seen in Report 4. Income and social security tax and family living expenses are subtracted from the net farm income because they reduce cash on hand. The result of the above additions and subtractions provides you with the capital replacement and term debt repayment capacity. This is also called net change in cash in Report 4. This is the amount of cash left after accounting for farming and personal expenses. This report looks at the ability to repay for capital purchases. The principal payment entry in Input Worksheet 5 provides the less: principal payments line in this report. This represents the amount due on all loans. However, is there enough money from the farming operation to make the loan payment? The capital replacement and term debt repayment margin represents the difference between the amount of cash on-hand and the amount owed for capital purchases. A negative number represents the inability to pay the entire principal of the loan, while a positive number represents the ability to pay the entire loan. The number itself represents the difference in the amount of cash on-hand and the amount due for the loan. In the example, the Cline s earn a net farm income of $26,637. After accounting for depreciation and family living, they have $10,957 on hand. They owe $11,000 as principal on a loan. This report shows that they are $43 short of paying the entire principal on the loan.

15 Report 6: Summary The summary provides a quick glance of the financials projected in the Reports 3, 4, and 5. For the Cline s farming operation, a positive net farm income was earned in the current year ($26,637). The net cash income from farming was $50,957, leaving $10,957 cash on-hand. This remaining money falls $43 short of paying the principal payments on loans outstanding.