Developing Your Financial Statements and Measures

Transcription

1 Developing Your Financial Statements and Measures

2 Trade Adjustment Assistance for Farmers Developing Your Financial Statements and Measures Developing Your Financial Statements and Measures Business plan Business description Operations plan Marketing plan Management and organization plan 1

3 Developing Your Financial Statements and Measures Business plan Business description Operations plan Marketing plan Management and organization plan Financial plan Developing Your Your Financial Statements and and Measures Dale Nordquist Associate Director Center for Farm Financial Mgmt University of Minnesota Bob Craven Director Center for Farm Financial Mgmt University of Minnesota 2

4 Gathering the Information Financial toolkit Balance sheet Assets = Liabilities + Net Worth Income statement Cash vs. accrual Cash flow plan Some key ratios and measures Gathering the Information Balance Sheet Getting Started Accounting system generated Copy from a lender FINPACK Lite Balance Sheets provided in the resource section 3

5 Assets Current (< 1 year) Non-current Balance Sheet Liabilities Current Non-Current Total liabilities Net worth Total assets Total Liabs + Net worth Assets Liabilities Current (< 1 year) Non-current Balance Sheet Cash accounts Crop inventories Livestock held for sale Prepaid expenses Supplies Accounts receivable Current Non-Current Total liabilities Net worth Total assets Total Liabs + Net worth 4

6 Assets Balance Sheet Liabilities Current (< 1 year) Accounts payable Accrued expenses Operating Non-current loans Principal due on term debt Current Non-Current Total liabilities Net worth Total assets Total Liabs + Net worth Assets Current (< 1 year) Non-current Total assets Balance Sheet Liabilities Current Breeding livestock Machinery and equipment Farm vehicles Buildings Land Co-op equity Non-Current Total liabilities Net worth Total Liabs + Net worth 5

7 Assets Current (< 1 year) Balance Sheet Liabilities Current Non-current Loans with an original term of greater than 1 year Non-Current Total liabilities Net worth Total assets Total Liabs + Net worth Gathering the Information Entity types Sole proprietor Partnerships Corporations LLCs 6

8 Assets Current (< 1 year) Non-current Personal Balance Sheet Liabilities Current Non-Current Personal Total liabilities Net worth Total assets Total Liabs + Net worth Gathering the Information Entity types Sole proprietor Partnerships Corporations LLCs 7

9 Gathering the Information Characteristics of a good balance sheet Consistency Accuracy Completeness Market Assets valued at a conservative market value adjusted for selling costs Cost or book value Assets valued at original cost minus depreciation Asset Valuation 8

10 Balance Sheet Key figures to track from year to year Net worth Working capital (current assets current liabilities) Income Statement Measures profitability over a period of time Tax schedules Farms Schedule F Partnership or corporate forms 9

11 Income Statement Problems with tax statements Cash based Tax rules that distort income Fast depreciation Cash vs. Accrual Accrual Income Statement Includes all income earned, whether received or not Includes all expenses incurred, whether paid or not 10

12 Schedule F Income Income Statement Gross income (Schedule F, line 11) 246,099 + Cost of feeder livestock sold (line 2) - Crop insurance reported (line 8b) + Crop insurance received (line 8a) - Crop insurance deferred (line 8d) + Cull livestock income Gross cash income 11

13 Schedule F Income Income Statement Gross income (Schedule F, line 11) 246,099 + Cost of feeder livestock sold (line 2) 25,354 - Crop insurance reported (line 8b) + Crop insurance received (line 8a) - Crop insurance deferred (line 8d) + Cull livestock income Gross cash income 12

14 Schedule F Income Income Statement Gross income (Schedule F, line 11) 246,099 + Cost of feeder livestock sold (line 2) 25,354 - Crop insurance reported (line 8b) -0 + Crop insurance received (line 8a) 1,354 - Crop insurance deferred (line 8d) Cull livestock income Gross cash income 13

15 Income Statement Gross income (Schedule F, line 11) 246,099 + Cost of feeder livestock sold (line 2) 25,354 - Crop insurance reported (line 8b) -0 + Crop insurance received (line 8a) 1,354 - Crop insurance deferred (line 8d) Cull livestock income 11,449 Gross cash income 283,306 Ending Current Assets 14

16 Income Statement Gross cash income 283,306 End Inv Beg Inv Crops and feed 40,880 Livestock held for sale 41,025 Accounts receivable 13,650 Hedging accounts - Other inventory 35,987 Gross revenue (accrual) Income Statement Gross cash income 283,306 End Inv Beg Inv Crops and feed 40,880 36,590 Livestock held for sale 41,025 42,158 Accounts receivable 13,650 11,557 Hedging accounts - - Other inventory 35,987 35,255 Gross revenue (accrual) 15

17 Income Statement Gross cash income 283,306 End Inv Beg Inv Crops and feed 40,880 36,590 4,290 Livestock held for sale 41,025 42,158-1,133 Accounts receivable 13,650 11,557 2,093 Hedging accounts Other inventory 35,987 35, Gross revenue (accrual) 289,288 Schedule F Expenses 16

18 Income Statement Total expense (sched F, line 35) 234,446 Purchases of feeder livestock and other items for resale 28,228 Depreciation Account Beg Inv End Inv Prepaid expenses and supplies Growing crops Account End Inv Beg Inv Accounts payable Accrued expenses Total operating expense (accrual) Schedule F Expenses 17

19 Income Statement Total expense (sched F, line 35) 234,446 Purchases of feeder livestock and other items for resale 28,228 Depreciation -38,435 Account Beg Inv End Inv Prepaid expenses and supplies Growing crops Account End Inv Beg Inv Accounts payable Accrued expenses Total operating expense (accrual) Ending Current Assets 18

20 Income Statement Total expense (sched F, line 35) 234,446 Purchases of feeder livestock and other items for resale 28,228 Depreciation -38,435 Account Beg Inv End Inv Prepaid expenses and supplies 22,245 18,720 3,525 Growing crops Account End Inv Beg Inv Accounts payable Accrued expenses Total operating expense (accrual) Ending Current Liabilities 19

21 Income Statement Total expense (sched F, line 35) 234,446 Purchases of feeder livestock and other items for resale 28,228 Depreciation -38,435 Account Beg Inv End Inv Prepaid expenses and supplies 22,245 18,720 3,525 Growing crops Account End Inv Beg Inv Accounts payable 5,998 1,904 4,094 Accrued expenses 2,726 2, Total operating expense (accrual) Income Statement Total expense (sched F, line 35) 234,446 Purchases of feeder livestock and other items for resale 28,228 Depreciation -38,435 Account Beg Inv End Inv Prepaid expenses and supplies 22,245 18,720 3,525 Growing crops Account End Inv Beg Inv Accounts payable 5,998 1,904 4,094 Accrued expenses 2,726 2, Total operating expense (accrual) 231,747 20

22 Ending Capital Assets Income Statement Gross revenue (accrual) 289,288 Total operating expense (accrual) 231,747 Total Value % Depr Machinery depreciation Vehicle depreciation Building deprecation Breeding livestock replacements Total expense (accrual) Net farm income (accrual) 21

23 Income Statement Gross revenue (accrual) 289,288 Total operating expense (accrual) 231,747 Total Value % Depr Machinery depreciation 141,464 10% 14,146 Vehicle depreciation 5,905 15% 886 Building deprecation 122,908 5% 6,145 Breeding livestock replacements Total expense (accrual) Net farm income (accrual) Income Statement Gross revenue (accrual) 289,288 Total operating expense (accrual) 231,747 Total Value % Depr Machinery depreciation 141,464 10% 14,146 Vehicle depreciation 5,905 15% 886 Building deprecation 122,908 5% 6,145 Breeding livestock replacements - Total expense (accrual) Net farm income (accrual) 22

24 Income Statement Gross revenue (accrual) 289,288 Total operating expense (accrual) 231,747 Total Value % Deprc Machinery depreciation 141,464 10% 14,146 Vehicle depreciation 5,905 15% 886 Building deprecation 122,908 5% 6,145 Breeding livestock replacements - Total expense (accrual) 252,925 Net farm income (accrual) 36,363 Income Statement Net income (accrual) Return to unpaid labor and management and equity capital Amount the business earned during the period Amount available for owner withdrawals (family living) and taxes If it exceeds owner withdrawals and taxed, net worth will grow 23

25 Cash Flow Planning A cash flow s a cash flow, so here we go!!! A good plan will help you react to change Base your plan on: Historical production/catch levels Prices based on the best information you have Past expense levels updated for changing conditions Cash Flow Plan Typical year cash flow plan Ignores inventories Sell one year s production/catch Pay one year s bills Will not include impact of unusual inventory situations 24

26 Cash Flow Plan Actual cash flow plan Includes sales from inventory and production Forecast ending inventories and sell the rest Interpret change in inventory as well as cash flow Try to match ending inventories to beginning, if possible Entity issues again Business only? Cash Flow Plan Family living expenses and other personal items? 25

27 Monthly Annual, Monthly, or Something In-Between More complicated More accurate Project short term operating loan needs Forces you to think your plan through Computer program or spreadsheet highly suggested Operating credit Cash Flow Plan Include borrowings and payments, or Operating credit is the residual Cash deficits are assumed borrowed Cash surpluses are assumed paid against any outstanding operating loan 26

28 Cash Flow Plan Cash inflows Normal cash sales Other cash income Capital sales New borrowings Non-business wages and salaries Beginning cash 27

29 Cash outflows Cash Flow Plan Cash business expenses Purchase of resale items (inventory/feeder livestock) Capital purchases Loan payments Family living expenses Beginning cash 28

30 Cash Flow Plan Total annual cash inflow - Total annual cash outflow = Net cash flow Calculating Ratios and Measures Benchmark against yourself Previous years Benchmark against others 29

31 Calculating Ratios and Measures Liquidity Measures ability to withstand short term financial downturns Calculating Ratios and Measures Liquidity measures Current ratio Total current assets 109,201 Total current liabilities 71,978 = Current ratio 1.52 : 1 30

32 Calculating Ratios and Measures Liquidity measures Working capital to gross revenue Total current assets 109,201 - Total current liabilities 71,978 = Working capital 37,223 Gross revenue (accrual) 289,288 Working capital to gross revenue 13 % Calculating Ratios and Measures Solvency Measures relationship between total assets, liabilities, and net worth 31

33 Calculating Ratios and Measures Solvency measures Debt to Equity Ratio Total liabilities 191,587 Net worth (owner s equity) 539,105 = Debt to Equity Ratio 0.36 : 1 Calculating Ratios and Measures Solvency measures Debt to Asset Ratio Total liabilities 191,587 Total assets 730,691 = Debt to Asset Ratio 26 % 32

34 Calculating Ratios and Measures Profitability Measures ability of the business to produce earnings Calculating Ratios and Measures Profitability measures Net income Net Income 36,409 33

35 Calculating Ratios and Measures Profitability measures Rate of return on assets (ROA) Net income 36,409 + Interest expense 14,424 - Value of unpaid labor & management 30,000 Total business assets 680,529 = Rate of Return on Assets 3.1% Calculating Ratios and Measures Profitability measures Rate of return on equity (ROE) Net income 36,409 - Value of unpaid labor & management 30,000 Total business net worth 491,646 = Rate of Return on Equity 1.3% 34

36 Calculating Ratios and Measures Repayment Capacity Measures ability of the business to cover debt payments Calculating Ratios and Measures Repayment capacity measures Term debt coverage ratio Net income 36,409 + Depreciation 21,177 + Interest on term (non-current) debt 8,196 + Personal income 19,942 Family living expense 52,681 = Debt repayment capacity 33,043 Scheduled non-current debt payments 30,672 = Term debt coverage ratio 1.08 : 1 35

37 Calculating Ratios and Measures Efficiency Measures effectiveness of cost control in relation to revenue Calculating Ratios and Measures Efficiency measures Operating expense ratio Total expense (accrual) 252,925 - Interest expense 14,424 - Depreciation expense 21,177 = Total operating expense 217,324 Gross revenue (accrual) 289,288 = Operating expense ratio 75% 36

38 Trade Adjustment Assistance for Farmers Developing Your Financial Statements and Measures Thank You Dale Nordquist Associate Director Center for Farm Financial Mgmt University of Minnesota Bob Craven Director Center for Farm Financial Mgmt University of Minnesota David Hill Center Director and Certified Business Counselor Maine Small Business Development Centers Coastal Enterprises, Inc. Wiscasset, Maine 37

39 Valuation Method Market Value Cost Value Both NAME: CURRENT FARM ASSETS Cash and checking balance (schedule A) Prepaid expenses and supplies (schedule B) Growing crops (schedule C) Accounts receivable (schedule D) Hedging accounts (schedule E) Value FINPACK Balance Sheet DATE: CURRENT FARM LIABILITIES Accrued interest (sum below) Accounts payable and other accrued expenses Amount Other current assets (schedule F) Crops Quantity Value Per Unit Current loans Annual Operating Interest Rate Principal Balance Accrued Interest P & I Payment Month Due Balance Crops Under Government Loan (schedule R) Avg. Value Market Livestock Number Weight PerUnit Government Crop Loans Principal due within 12 months on term loans (sum below) Total Current Farm Liabilities INTERMEDIATE Interest Rate Principal Balance Accrued Interest P & I Payment Month Due Final Year Principal Due Intermediate Balance Total Current Farm Assets INTERMEDIATE FARM ASSETS Value Breeding Lvstk Number Per Head Cost Value Market Value Farm Machinery & Equipment Titled Vehicles Other Intermediate Assets Total Intermediate Farm Liabilities Interest Principal LONG TERM Rate Balance Accrued Interest P & I Payment Month Due Final Year Principal Due Long Term Balance Total Intermediate Farm Assets LONG TERM FARM ASSETS Value Farm Land Acres Per Acre Cost Value Market Value Farm Buildings Other Long Term Assets Total Long Term Assets TOTAL FARM ASSETS NONFARM ASSETS (schedule P) TOTAL ASSETS (a) (b) Total Long Term Farm Liabilities TOTAL FARM LIABILITIES NONFARM LIABILITIES (schedule V) Net Worth Total Farm and Nonfarm Liabilities Deferred Tax Liabilities (c) TOTAL LIABILITIES (d) (e) Cost Retained Earnings / Contributed Capital [a - d] NET WORTH [b - e] I certify that the statements made by me on this balance sheet are true, complete and correct to the best of my knowledge and belief. Market Date Signature(s)

40 Schedule A: Cash and Checking Value Schedule R: Crops Under Government Loan Loan Crop Quantity Rate Interest Month Rate Entered Entered Year Value Per Unit Value Total cash and checking Schedule B: Prepaid Expenses & Supplies Total crops under government loan Schedule P: Nonfarm Assets Savings and checking Stocks and bonds Other current assets Cost Market Total prepaid expenses and supplies Schedule C: Growing Crops Household furnishings and appliances Nonfarm vehicles Cash value of life insurance Retirement accounts and IRA's Other intermediate assets Total growing crops Schedule D: Accounts Receivable Total accounts receivable Schedule E: Hedging Accounts Nonfarm real estate Other long term assets Total nonfarm assets Schedule V: Nonfarm Liabilities Nonfarm accrued interest (sum from below) Accounts payable and other accrued expenses Amount Principal due within 12 months on term loans Loans Current Interest Rate Principal Balance Accrued Interest P & I Payment Month Due Final Year Principal Due Balance Total hedging accounts Schedule F: Other Current Assets Intermediate Long term Total other current assets Total nonfarm liabilities Land - Legal Description Landlord Rental And Lease Information Acres Total Crop Type Of Lease Annual Cash Rent Payment Date(s) Expiration Date Other Items - Description Owner Number of Units Type Of Lease Annual Payment Payment Date(s) Expiration Date

41 Machinery and Equipment Description Model Year VIN/Serial No. Year Purchase Percent Ownership Cost Value Market Value

42 Machinery and Equipment

43 SCHEDULE F (Form 1040) Department of the Treasury Internal Revenue Service (99) Name of proprietor Profit or Loss From Farming OMB No Attachment Sequence No. 14 Attach to Form 1040, Form 1040NR, Form 1041, Form 1065, or Form 1065-B. See Instructions for Schedule F (Form 1040). Social security number (SSN) A Principal product. Describe in one or two words your principal crop or activity for the current tax year. B Enter code from Part IV D Employer ID number (EIN), if any C Accounting method: (1) Cash (2) Accrual E Did you materially participate in the operation of this business during 2010? If No, see instructions for limit on passive losses. Yes No Part I Farm Income Cash Method. Complete Parts I and II (Accrual method. Complete Parts II and III, and Part I, line 11.) Do not include sales of livestock held for draft, breeding, sport, or dairy purposes. Report these sales on Form Sales of livestock and other items you bought for resale Cost or other basis of livestock and other items reported on line Subtract line 2 from line Sales of livestock, produce, grains, and other products you raised a Cooperative distributions (Form(s) 1099-PATR).. 5a 5b Taxable amount 5b 6a Agricultural program payments (see instructions) 6a 6b Taxable amount 6b 7 Commodity Credit Corporation (CCC) loans (see instructions): a CCC loans reported under election a b CCC loans forfeited b 7c Taxable amount 7c 8 Crop insurance proceeds and federal crop disaster payments (see instructions): a Amount received in a 8b Taxable amount 8b c If election to defer to 2011 is attached, check here 8d Amount deferred from d 9 Custom hire (machine work) income Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) Gross income. Add amounts in the right column for lines 3 through 10. If you use the accrual method to figure your income, enter the amount from Part III, line Part II Farm Expenses Cash and Accrual Method. Do not include personal or living expenses such as taxes, insurance, or repairs on your home. 12 Car and truck expenses (see 25 Pension and profit-sharing plans 25 instructions). Also attach Form Rent or lease (see instructions): 13 Chemicals a Vehicles, machinery, and 14 Conservation expenses (see instructions) 14 equipment a 15 Custom hire (machine work). 15 b Other (land, animals, etc.).. 26b 16 Depreciation and section Repairs and maintenance.. 27 expense deduction not claimed 28 Seeds and plants elsewhere (see instructions) Storage and warehousing Employee benefit programs other 30 Supplies than on line Taxes Feed Utilities Fertilizers and lime Veterinary, breeding, and medicine Freight and trucking Other expenses (specify): 21 Gasoline, fuel, and oil a 34a 22 Insurance (other than health) 22 b 34b 23 Interest: c 34c a Mortgage (paid to banks, etc.) 23a d 34d b Other b e 34e 24 Labor hired (less employment credits) 24 f 34f 35 Total expenses. Add lines 12 through 34f. If line 34f is negative, see instructions Net farm profit or (loss). Subtract line 35 from line 11. Partnerships, see instructions. } If a profit, enter the profit on both Form 1040, line 18, and Schedule SE, line 1a; on Form 1040NR, line 19; or on Form 1041, line If a loss, you must go to line If you have a loss, you must check the box that describes your investment in this activity and whether you } received any applicable subsidy (see instructions). 37a All investment is at risk and you did not receive a subsidy. If you checked 37a, enter the loss on both Form 1040, line 18, and Schedule SE, line 1a; on Form 1040NR, line 19; or on Form 1041, line 6. 37b Some investment is not at risk If you checked 37b, your loss may be limited. See instructions. or you received a subsidy. For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No H Schedule F (Form 1040) 2010

44 Schedule F (Form 1040) 2010 Page 2 Part III Farm Income Accrual Method (see instructions). Do not include sales of livestock held for draft, breeding, sport, or dairy purposes. Report these sales on Form 4797 and do not include this livestock on line 46 below. 38 Sales of livestock, produce, grains, and other products a Cooperative distributions (Form(s) 1099-PATR).. 39a 39b Taxable amount 39b 40a Agricultural program payments a 40b Taxable amount 40b 41 Commodity Credit Corporation (CCC) loans: a CCC loans reported under election a b CCC loans forfeited b 41c Taxable amount 41c 42 Crop insurance proceeds Custom hire (machine work) income Other income, including federal and state gasoline or fuel tax credit or refund Add amounts in the right column for lines 38 through Inventory of livestock, produce, grains, and other products at beginning of the year Cost of livestock, produce, grains, and other products purchased during the year Add lines 46 and Inventory of livestock, produce, grains, and other products at end of year Cost of livestock, produce, grains, and other products sold. Subtract line 49 from line 48* Gross income. Subtract line 50 from line 45. Enter the result here and on Part I, line *If you use the unit-livestock-price method or the farm-price method of valuing inventory and the amount on line 49 is larger than the amount on line 48, subtract line 48 from line 49. Enter the result on line 50. Add lines 45 and 50. Enter the total on line 51 and on Part I, line 11. Part IV Principal Agricultural Activity Codes! CAUTION File Schedule C (Form 1040) or Schedule C-EZ (Form 1040) instead of Schedule F if (a) your principal source of income is from providing agricultural services such as soil preparation, veterinary, farm labor, horticultural, or management for a fee or on a contract basis, or (b) you are engaged in the business of breeding, raising, and caring for dogs, cats, or other pet animals. These codes for the Principal Agricultural Activity classify farms by their primary activity to facilitate the administration of the Internal Revenue Code. These six-digit codes are based on the North American Industry Classification System (NAICS). Select the code that best identifies your primary farming activity and enter the six digit number on page 1, line B. Crop Production Oilseed and grain farming Vegetable and melon farming Fruit and tree nut farming Greenhouse, nursery, and floriculture production Other crop farming Animal Production Beef cattle ranching and farming Cattle feedlots Dairy cattle and milk production Hog and pig farming Poultry and egg production Sheep and goat farming Aquaculture Other animal production Forestry and Logging Forestry and logging (including forest nurseries and timber tracts) Schedule F (Form 1040) 2010