Financial Management on Catfish Farms

Transcription

1 Financial Management on Catfish Farms

2 OVERVIEW OF INTENSIVE TRAINING MODULE: Financial Management on Catfish Farms to Improve Efficiencies and Profitability Carole R. Engle Aquaculture/Fisheries Center University of Arkansas at Pine Bluff SHORT & LONG-TERM FINANCIAL DECISIONS: Can it generate enough value over time to pay off the debts (solvency)? Balance Sheets Is it profitable in the long run? Is it profitable in the short run? Can it generate enough cash when needed to pay the bills (liquid)? 1

3 Financial Analysis: Key Statements Financial Position Balance Sheet Profitability Budgets Income Statement Cash Flow/Liquidity Cash Flow Statement What are your business goals for 2011? These need to be very specific, Need to be based on thorough financial analysis of business. 2

4 WHATDOESITTAKETO SURVIVE THE LONG RUN? Adequate financial strength: -Is my financial position strong enough? -Do I have too much debt to pull out of this? ADEQUATE FINANCIAL STRENGTH DETERMINED FROM THE BALANCE SHEET ADEQUATE PROFITABILITY Enterprise budgets can be used to evaluate new management strategies to see what the effect on profitability might be. Income Statements measure profits & losses in a specific year. 3

5 WHATDOESITTAKETO SURVIVE THE SHORT RUN? Must be able to sell fish at a price that covers its variable costs, not necessarily all its total costs. Must have adequate liquidity. Enough cash revenue to make payments when due. Must have adequate cash flow. Essential Financial Management Extensive planning. Controlling: implementing actions needed to meet goals. Monthly monitoring of Cash flow statement - Deviations apparent. Corrective actions can be taken more quickly. 4

6 Balance Sheets: a Management Tool to Improve Financial Position of the Business Carole R. Engle Aquaculture/Fisheries Center U. of Arkansas at Pine Bluff Financial Analysis: Key Statements Financial Position Balance Sheet Profitability Budgets Income Statement Cash Flow/Liquidity Cash Flow Statement 5

7 Short & long-term financial decisions: Can it generate enough value over time to pay off the debts (solvency)? Balance Sheets Is it profitable in the long run? Is it profitable in the short run? Can it generate enough cash when needed to pay the bills (liquid)? Balance Sheets: Financial statement that measures Financial Position of the business. 6

8 What is your business worth? Balance Sheet: What is its bottom line? Net Worth!! Same as Owner Equity!! Balance Sheet: Structure Divided into: Assets What is owned Land, buildings Equipment Fish in ponds Liabilities What is owed Debts, loans, bills due at supply store. 7

9 Balance Sheet: How is it organized? Assets divided into: Current Cash Items to be sold this year Non-current Items used in production Equipment Ponds Balance Sheet: Organization Liabilities divided into Current Bills due this year Payments due this year Non-current Payments due after this year, over next several years 8

10 Balance Sheet for 256-acre Catfish Farm, December 31. Assets Current Assets Checking account $15,849 Value of small fish in ponds $266,112 Non-current Assets Equipment $387,570 Total Assets $1,003,890 Not all assets listed here not enough room; Check the other training file for a complete balance sheet! Not all liabilities listed here not enough room; Balance Sheet for 256-acre Catfish Check other Farm, training December files for more! 31. Liabilities Current Liabilities Payment due this year on equipment loan Payment due this year on pond construction loan Non-current Liabilities $72,368 $38,216 Principal remaining on $168,858 equipment loan Total Liabilities $534,214 9

11 Balance Sheet for 256-acre Catfish Farm, December 31. Total Assets $1,285,851 Total Liabilities - $534,214 Net Worth = $751,637 Net worth is positive. Business is solvent. If business were to be sold, are enough assets to pay off claims (liabilities) Over time, Net Worth should grow, wealth grows. Financial Efficiency: Solvency Refers to the value of assets owned by the business compared to the amount of liabilities owed. Indicates whether, if the business were to be sold, if there would be enough capital to pay off the debts. 10

12 Financial Ratios that Measure Solvency Ratio Change in net worth Interpretation Positive change shows business growth Debt/asset ratio Equity/asset ratio Debt/equity ratio Debt structure ratio Compares value of debt to assets. Smaller values better. Less than 1 means solvency. Part of total assets financed by owner s equity. Higher values preferred. Compares proportion of financing by lenders with that from owner. Lower values preferred. Compares amount of debt due this year to total debt. Solvency Measures for the 256-acre Catfish Farm Ratio Value Change in net worth - $245,994 Debt/asset ratio 0.42 Equity/asset ratio 0.58 Debt/equity ratio 0.71 Debt structure ratio

13 Financial Efficiency: Liquidity Liquidity is the ability of a business to meet cash flow obligations. It is important to keep financial transactions of the business running smoothly. Financial Ratios that Measure Liquidity Ratio Current ratio Working capital Interpretation Quick indicator. The higher the value the more liquid. Difference between current assets and current liabilities. In dollar values instead of a ratio. 12

14 Liquidity Measures for the 256-acre Catfish Farm Ratio Value Current ratio 2.55 Working capital $171,377 How Are These Calculated? Spreadsheet Tutorials are Available on this site in another file. 13

15 Tutorials include: Exercise balance sheet, income statement, cash flow budgets Correct versions, the financial ratios, and A brief interpretation of each ratio and how to improve. Carole R. Engle Aquaculture/Fisheries Center University of Arkansas at Pine Bluff 14

16 One use of a balance sheet is to answer the question of: 277,287 Non-current 475,213 Assetscurrent Total 752,500 Liabilitiescurrent 242,168 Non-current 179,079 Total 421,247 Net Worth Year 1 Debt/asset 15

17 Year 1 277,287 Non-current 475,213 Non-current 179,079 Total 421,247 Net Worth 331,253 Debt/asset 0.56 Assetscurrent Total 752,500 Liabilitiescurrent 242,168 Assetscurrent Non-current 475,213 Total 752,500 Liabilitiescurrent 242,168 Non-current 179,079 Total 421,247 Net Worth 331,253 Debt/asset 0.56 Year 1 Year 2 277, ,868 16

18 277, ,868 Non-current 179,079 Total 421,247 Net Worth 331,253 Debt/asset 0.56 Year 1 Year 2 277, ,868 Assetscurrent Non-current 475, ,410 Total 752,500 Liabilitiescurrent 242,168 Assetscurrent Non-current 475, ,410 Total 752, ,278 Liabilitiescurrent 242,168 Non-current 179,079 Total 421,247 Net Worth 331,253 Debt/asset 0.56 Year 1 Year 2 17

19 277, ,868 Non-current 179, ,079 Total 421,247 Net Worth 331,253 Debt/asset 0.56 Year 1 Year 2 277, ,868 Assetscurrent Non-current 475, ,410 Total 752, ,278 Liabilitiescurrent 242, ,686 Assetscurrent Non-current 475, ,410 Total 752, ,278 Liabilitiescurrent 242, ,686 Non-current 179, ,079 Total 421, ,765 Net Worth 331,253 Debt/asset 0.56 Year 1 Year 2 18

20 Year 1 Year 2 277, ,868 Assetscurrent Non-current 475, ,410 Total 752, ,278 Liabilitiescurrent 242, ,686 Non-current 179, ,079 Total 421, ,765 Net Worth 331,253-16,487 Debt/asset Catfish inventory= can affect balance sheet, net worth, and financial ratios. Pond inventory estimation not precise. Depletion method. Feeding response alone does not work well. Very careful monitoring of all stocking, feeding, & harvesting with continuous analysis can get close. 19

21 Experimental Trials: depletion estimates by weight were within 0-8% of actual and from % by number. Commercial Pond Trials (19 ponds): 1-14% by weight and % by number (only 2 ponds estimated number). Evaluation of Trawl for Sampling & Inventory Estimation in Catfish Ponds 20

22 The Trawl 431-acre Catfish Farm Year 1 181,000 Assetscurrent Non-current 1,643,855 Total 1,824,855 Liabilitiescurrent 159,725 Non-current 1,068,506 Total 1,228,231 Net Worth 596,624 21

23 431-acre Catfish Farm Year 1 Current ratio 1.13 Working Capital 21,275 Equity/asset ratio 0.33 Debt/asset ratio 0.67 Debt/equity ratio 2.06 Debt structure acre Merged Catfish Farm Year 1 Year 2 181, ,000 Non-current 1,643,855 3,588,710 Total 1,824,855 3,950,710 Assetscurrent Liabilitiescurrent 159, ,552 Non-current 1,068,506 1,369,506 Total 1,228,231 1,591,058 Net Worth 596, ,652 22

24 862-acre Merged Catfish Farm Current ratio Working Capital Equity/asset ratio Debt/asset ratio Year 1 Year 2 21, , Debt/equity ratio Debt structure

25 Income Statement Carole R. Engle Aquaculture/Fisheries Center U. of Arkansas at Pine Bluff Short & long-term financial decisions: Can it generate enough value over time to pay off the debts (solvency)? Balance Sheets Is it profitable in the long run? Is it profitable in the short run? Can it generate enough cash when needed to pay the bills (liquid)? 24

26 Profitability Measures Profitability = Total revenues - total costs A business that is both solvent and liquid will not necessarily be profitable. Financial Analysis: Key Statements Financial Position Balance Sheet Profitability Budgets Income Statement Cash Flow/Liquidity Cash Flow Statement 25

27 Income Statement (P&L) Profit & Loss Statement Budget units can be a pond P & L for entire farm Bottom line = Net Farm Income Income Statement: How is it structured? Item Value Revenue $806,400 26

28 Income Statement: How is it structured? Item Value Revenue $806,400 Cash expenses $610,322 Income Statement: How is it structured? Item Value Revenue $806,400 Cash expenses $610,322 Depreciation $42,707 27

29 Income Statement: How is it structured? Item Value Revenue $806,400 Cash expenses $610,322 Depreciation $42,707 Total operating $653,029 expenses Income Statement: How is it structured? Item Value Revenue $806,400 Cash expenses $610,322 Depreciation $42,707 Total operating $653,029 expenses Cash interest paid $150,579 28

30 Income Statement: How is it structured? Item Value Revenue $806,400 Cash expenses $610,322 Depreciation $42,707 Total operating $653,029 expenses Cash interest paid $150,579 Total expenses $803,608 Income Statement: How is it structured? Item Value Revenue $806,400 Cash expenses $610,322 Depreciation $42,707 Total operating expenses $653,029 Cash interest paid $150,579 Total expenses $803,608 Net farm income from $2,792 operations 29

31 Profitability Measures Primary measure of farm profitability is : Net Farm Income Net Farm Income is a measure of the return to operator s equity, capital, unpaid labor, and management. Net Farm Income can be distributed among the four principal factors of production: land, labor, capital, and management Gross Revenue Pie Payments to suppliers for feed, seed, etc. Rent to owner for rented land Interest to lenders for borrowed money Employee wages NFI to operator for unpaid labor, equity capital, & management 30

32 Financial Indicators of How Much of Net Farm Income is Earned by Each Factor of Production Ratio Return to labor & management Interpretation Residual return to owner for labor & management input Return to labor Portion of NFI remaining after subtracting out opportunity costs of capital & management Return to management NFI remaining after subtracting costs of capital and labor Financial Indicators of How Much of Net Farm Income is Earned by Each Factor of Production Ratio Interpretation Rate of Return to Assets Rate of Return on Farm Equity Operating Profit Margin Ratio (OPMR) Can be compared to rates of return from other investments. Independent of financing. Measures percent return to owner s net worth or equity. Measures the proportion of gross revenues left after paying expenses 31

33 Financial Indicators from Income Statement for the 256-acre Catfish Farm Ratio Value Return to labor & management $24,786 Return to labor $14,616 Return to management $10,140 ROA 10% ROE -2% OPMR 16% Spreadsheet Tutorials are Available on this site in another file. 32

34 Using Enterprise Budgets and Income Statements to Improve Efficiencies and Profitability of Catfish Farms Carole R. Engle Aquaculture/Fisheries Center University of Arkansas at Pine Bluff Income Statement: Cash-based Accounting Item Value Revenue $403,200 Cash expenses $610,322 Depreciation $42,707 Total operating expenses $653,029 Cash interest paid $150,579 Total expenses $803,608 Net farm income from - $400,408 operations 33

35 Income Statement: Cash-based Accounting Item Revenue $403,200 $1,209,600 Cash expenses $610,322 $610,322 Depreciation $42,707 $42,707 Total operating $653,029 $653,029 expenses Cash interest paid $150,579 $150,579 Total expenses $803,608 $803,608 Net farm income - $400,408 $405,992 Income Statement: Accrual-based Accounting Item Revenue $403,200 $1,209,600 Change in fish inventory $403,200 - $403,200 Total Farm Revenue $806,400 $806,400 Total operating expenses $653,029 $653,029 Cash interest paid $150,579 $150,579 Total expenses $803,608 $803,608 Net farm income $2,792 $2,792 34

36 What does it take to survive the short run? Must be able to sell fish at a price that covers its variable costs, not necessarily all its total costs. Must have adequate liquidity. Enough cash revenue to make payments when due. Must have adequate cash flow. Fish Feed Prices $450 $400 $350 $/ton $300 $250 $200 $150 35

37 Realities of $300/ton Feed UAPB Base Budgets: 431-acre farm ($300/ton feed) Farm Size 131-acre farm 256-acre farm 431-acre farm 1,007-acre farm Cost/ VC Cost/ TC $0.63/lb $0.83/lb $0.64/lb $0.79/lb $0.64/lb $0.78/lb $0.64/lb $0.78/lb Realities of $350/ton Feed UAPB Base Budgets: 431-acre farm ($350/ton feed) Farm Size 131-acre farm 256-acre farm 431-acre farm 1,007-acre farm Cost/ VC Cost/ TC $0.69/lb $0.88/lb $0.70/lb $0.85/lb $0.70/lb $0.84/lb $0.70/lb $0.83/lb 36

38 Breakeven Prices (based on budgets for 256-acre farm; $300/ton) Above total cost $0.79 Above variable cost $0.64 Above cash costs (no debt capital) Above cash costs (100% debt op. capital) Above cash costs (50% debt long-term, no land; 100% debt op. capital) $0.60 $0.65 $0.70 What would happen with different feed and catfish prices? To maximize profits: At low fish prices, feed rates and stocking rates would decrease. At low feed prices, feed and stocking rates would increase. At high feed prices, feed and stocking rates would decrease. 37

39 Effects of Higher Fish Prices & Higher Feed Prices Higher feed prices $$$ Lower stocking & feeding Higher fish prices $$$ Higher stocking & feeding Profit-maximizing stocking densities at different fish & feed prices. fish/acre 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 $0.70/lb $0.75/lb $0.80/lb $/ton 38

40 How low should you go? Model results dropped profitmaximizing stocking rates to 5,000/ac at $0.60/lb. Farmers need to stock at rates that ensure financial payments are met. Fish grow faster at lower densities. 39

41 Higher stocking rates produce higher yields of smaller fish. May June July August Sept. Oct. Densities need to stay within a feasible range. Difficult to get good growth, turnover 7,500/acre 5,500/acre Difficult to make debt payments on ponds 40

42 With High Feed Prices, Essential to get as much gain out of every pound of feed as possible. Feed Prices, Economics, & Profitability: Feed Studies 41

43 Breakeven prices across farm sizes, 2009 feed costs. Farm size 32% protein ($343/ton) 28% protein ($322/ton) BEP/VC BEP/TC BEP/VC BEP/TC 60-acre $0.67 $0.89 $0.65 $ acre $0.68 $0.88 $0.66 $ acre $0.69 $0.84 $0.67 $ acre $0.69 $0.83 $0.67 $0.81 1,007-acre $0.69 $0.83 $0.67 $0.81 Breakeven prices across farm sizes, 2009 feed costs. Farm size 32% protein ($343/ton) 28% protein ($322/ton) BEP/VC BEP/TC BEP/VC BEP/TC 60-acre $0.67 $0.89 $0.65 $ acre $0.68 $0.88 $0.66 $ acre $0.69 $0.84 $0.67 $ acre $0.69 $0.83 $0.67 $0.81 1,007-acre $0.69 $0.83 $0.67 $

44 What About Every Other Day Feeding? UAPB study: Yield of carryover fish was 757 lb/ac less when fed every other day. Feed fed was 4,778 lb/ac less. What About Every Other Day Feeding? Feed cost Net benefit ($0.65/lb) Net benefit ($0.70/lb) Net Benefit ($0.75/lb) $250/ton $106/ac $68/ac $30/ac $275/ton $165/ac $127/ac $89/ac $300/ton $225/ac $187/ac $149/ac $325/ton $285/ac $247/ac $209/ac $350/ton $344/ac $306/ac $268/ac 43

45 What s the Down Side to Every Other Day Feeding? Understocked fish grow very poorly. Every other day feeding better strategy for ponds with fish that are closer to market size. How do I look at my costs? Use the budget spreadsheets included in the training materials. Need to have EXCEL installed on your computer. Substitute your costs in and see the change in the breakeven costs and net returns. 44

46 THERE ARE EXERCISES AVAILABLE ON THIS SITE IF YOU WISH TO PRACTICE WHAT YOU HAVE LEARNED ABOUT INCOME STATEMENTS BEFORE MOVING ON TO THE LAST SEGMENT IN THIS MODULE. Using Cash Flow Budgets to Improve Cash Flow & Liquidity in the Catfish Business Carole R. Engle Aquaculture/Fisheries Center U. of Arkansas at Pine Bluff 45

47 Overview of Structure and Interpretation of Cash Flow Budgets Short & long-term financial decisions: Can it generate enough value over time to pay off the debts (solvency)? Balance Sheets Is it profitable in the long run? Is it profitable in the short run? Can it generate enough cash when needed to pay the bills (liquid)? 46

48 Financial Analysis: Key Statements Financial Position Balance Sheet Profitability Budgets Income Statement Cash Flow/Liquidity Cash Flow Statement Cash Flow Analysis: What Can It Be Used For? Use it to develop a plan for adverse conditions. Plan should consider budgeting enough to be able to feed to obtain adequate yields. Consider looking hard at fixed costs as way to reduce overall costs. 47

49 Cash Flow Analysis: What Can It Be Used For? Whether there is a liquidity problem Whether there is a cash shortfall in particular months. Whether the business can make its payments on time. What the cash position of the business is. If the operating line of credit is adequate or not Cash Flow Analysis: What is the unit of analysis? Entire farm 48

50 Cash Flow Analysis: How Can It Help? Analyze pattern of cash flow Structure operating line of credit Credit & loan applications Decide on best timing for capital purchases (equipment, land, etc.) Look to improve timing of purchases of supplies, inputs Cash Flow Analysis: Structure Item January February Total cash inflow $611,090 $628,406 Total cash outflow $14,940 $50,848 Cash available $596,150 $577,548 New borrowing 0 0 Ending cash balance $596,150 $577,548 49

51 Cash Flow Analysis: Sructure Item January February Beginning cash $578,834 $596,150 Total cash outflow $14,940 $50,848 Cash available $596,150 $577,548 New borrowing 0 0 Ending cash balance $596,150 $577,548 Cash Flow Analysis: Total Cash Inflow Item January February Beginning cash $578,834 $596,150 Receipts from $32,256 $32,256 catfish sold Total cash inflow $611,090 $628,406 50

52 Cash Flow Analysis: Operating cash expenses Item January February Feed $2,783 $5,565 Fingerlings 0 $36, Total operating expenses $14,940 $50,848 Cash Flow Analysis: Debt Servicing Item January February Real estate loan Principal 0 0 Interest 0 0 Equipment Principal 0 0 Interest 0 0 Operating loan Principal 0 0 Interest

53 Cash Flow Analysis: Summary of Debt Outstanding Item January February Real estate 0 0 Equipment 0 0 Operating 0 0 Cash Flow Analysis with 50% of catfish off-flavor and 30% financed. Item July August Total cash inflow $63,387 $50,320 Total cash $80,239 $99,766 outflow Cash available - $16,852 - $49,446 New borrowing $26,852 $59,446 Ending cash balance $10,000 $10,000 52

54 Cash Flow Analysis: Summary of Debt Outstanding Item July August Real estate 0 0 Equipment 0 0 Operating $103,259 $145,340 Payments are made on operating line of credit in each of these months because there is a lien on the fish sold. Ratio Interest Coverage Ratio Cash Flow Coverage Ratio Debtservicing ratio Liquidity Measures for 256-acre Catfish Farm Interpretation Relates interest to firm s ability to service debt. How much of firm s returns to assets available per dollar of interest. Higher ratios more favorable. Extent that excess cash provides cushion for covering debt-servicing. Higher ratios more favorable. Cash required for interest and principal payments. Lower ratios show lower debt burden. 53

55 Measures of Cash Flow Risk for 256-acre Catfish Farm Cash flow risk measure Percent farm revenue can decline and still meet cash flows Percent farm expenses can increase and still meet cash flows Percent interest rates can increase and still meet cash flows Liquidity Measures for 256-acre Catfish Farm Ratio Value Interest Coverage Ratio 0.14 Cash Flow Coverage Ratio 5.63 Debt-servicing ratio

56 Measures of Cash Flow Risk for 256-acre Catfish Farm Cash flow risk measure Percent farm revenue can decline and still meet cash flows Percent farm expenses can increase and still meet cash flows Percent interest rates can increase and still meet cash flows Value How Are These Calculated? The training materials include spreadsheets with: exercise balance sheet, income statement, cash flow budgets The correct versions, the financial ratios, & Includes a brief interpretation of each ratio and how to improve it. 55

57 Using Cash Flow Budgets to Improve Cash Flow and Liquidity in the Catfish Business Carole R. Engle Aquaculture/Fisheries Center U. of Arkansas at Pine Bluff Monthly Cash Flow Budget Item Jan Feb Mar Apr May Jun Jul Aug Sep Oct Beginning Cash 15, , , , , , , , , Receipts from catfish sold 60, , , , Cash Inflow 15, , , , , , , , , , Operating Cash Expenses Fingerlings , Feed 3, , , , , , , , , , Gas, Fuel, and Oil , , , Chemicals Labor 1, , , , , , , , , , Harvesting & Hauling Machine Hire Office Expenses Rent Repairs and Maintenance 1, , , , , , , , , , Utilities , , , , , , , Other Operating Costs Total Operating Expenses 8, , , , , , , , , , Fixed Cash Expenses Taxes and Insurance , Total Fixed cash Expenses , Living Expenses 3, , , , , , , , , , Other Expenses Scheduled Debt Payments Real Estate Principal Interest (10% APR) 2, , , , Equipment Principal Interest (10% APR) - 2, , , Operating Principal - - 1, , , Interest (10% APR) 2, , , , , , , , , , Total Cash Outflow 15, , , , , , , , , , Cash Available , , , , , , , , , New Borrow ing Cash Balance , , , , , , , , ,

58 Cash Flow Scenarios Farm A Farm B Sept. $60,000 Feb. $60,000 Oct. $90,000 April $60,000 Nov. $60,000 July $60,000 Dec. $60,000 Sept. $60,000 Nov. $30,000 Liquidity Measures for Two Scenarios Indicator A B Cash Flow Coverage (0.26) 0.17 Debt-Servicing Cash avail./cash (0.02) 0.01 inflow Cash avail./op. (0.03) 0.02 expenses Cash avail./liabilities (0.01)

59 Adequate Cash Flow: Determined from Cash Flow Budget Cash flow budget must show realistic projections of cash revenue for the year, by month. Any month with a negative cash flow is a cash flow problem that needs to be resolved. Must identify a production/financial plan that generates the revenue when needed. If there is a problem, may need to sell off some stock, reduce densities, allow for better growth = better cash flow. Decisions on stocking and feeding rates should be based on meeting short-term financial obligations. 58

60 What should I look at this winter? Do detailed cash flow budget and know when you need to make payments. Using Fishy, project different harvest dates at different stocking & feeding rates. Choose feeding and stocking rates that allow farmer to make necessary payments. Larger fish at stocking reach harvest in shorter time period. May June July August Sept. Oct. 59

61 Fish grow faster at lower densities. Cash Flow Simulator: Files available in training materials on web site. 60