1 Farm business analysis can be divided into the following: 1 Enterprise Analysis. Often important to estimate profitability of individual enterprises. 2 Financial. Focuses on capital position of the business. Includes solvency, liquidity, and changes in net worth. 3 Profitability. Analyzed by comparing income and expenses. Short-term profitability measured by net farm income. Long-term profitability measured by return on assets.
2 Efficiency of Production and of Input Use Refers to measures of biological parameters. Measures of the efficiency of input use. These should be used as assumptions in the business plan as a basis for the financial analyses in the plan. Once in business, the farm manager should re-calculate these and review these each year to make comparisons on farm performance from year to year.
3 Biological Parameters Gross yield (kg/ha) Net yield (kg/ha) Survival Growth (g/day) Average size of fish Weight of marketable products
4 Efficiency of Input Use Feed conversion ratio Fish production per worker Fish production per dollar of working capital Fish production per 1,000 fingerlings stocked
5 Profitability Measures Profitability = Total revenues - total costs A business that is both solvent and liquid will not necessarily be profitable. Farm profits are measured from the Income Statement
6 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
7 Gross Revenue Pie Payments to suppliers for feed, seed, fuel, etc. Rent to owner for rented land Interest to lenders for borrowed money Wages to employee NFI to operator for unpaid labor, equity capital, & management
8 Net Farm Income Total revenue Less total costs = Net income from operations Plus or minus the gains/losses from sales of capital assets = Net farm income
9 Return to Labor and Management Some businesses have more assets or borrow more money than others Net income from operations Plus interest expenses = Adjusted net income Minus opportunity cost of capital = return to labor and management
10 Return to Labor Return to labor is that portion of adjusted net farm income remaining after the opportunity costs of both management and capital have been subtracted. Represents the residual return to the owner for the labor input. = Return to labor and management Minus the opportunity cost of management.
11 Return to Management Return to management is that portion of adjusted net farm income remaining after opportunity costs of both labor and capital have been subtracted. Represents the residual return to the owner for the management input. Negative returns to management are not unusual, but positive net returns are the goal.
12 Return to Management = Return to Labor and Management Minus the opportunity cost of labor.
13 Rate of Return on Farm Assets Can be compared to the rates of return on other long-term investments. ROA is independent of the type and amount of financing. ROA can be compared to other similar farms, returns from other investments, opportunity costs of the farm s capital & past ROA s for farm to measure profitability.
14 Rate of Return on Farm Assets = Return to assets X 100 average farm asset value Return to assets = NFI + interest - opportunity cost of labor - opportunity cost of management
15 Rate of Return on Farm Equity More indicative of a farm s financial progress. Measures the percent return to owner s net worth or equity.
16 Rate of Return on Farm Equity = return on equity X 100 average equity Return on equity = Net Farm Income from Operations Minus opportunity cost of unpaid family labor Minus opportunity cost of management
17 Operating Profit Margin Ratio (OPMR) = return to farm assets gross revenue of farm Measures the proportion of gross revenues left after paying expenses
18 Operating Profit Margin Ratio (OPMR) Farms with large investments in fixed assets such as land & few operating expenses will show higher OPMR. Farms with more rented assets will have higher ROA but lower OPMR Only problem if both ROA and OPMR are below average - then problems of profitability are evident.
19 Financial Measures: Designed to measure the solvency and liquidity. To identify weaknesses in structure or mix of types of assets and liabilities. Primary sources of data to calculate financial measures are the balance sheet and income statement.
20 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.
21 Current ratio Liquidity Measures = current farm assets current farm liabilities Quick indicator of a firm s liquidity Current assets will be sold or turned into salable products in the near future & will generate cash to pay debt obligations that come due. The higher the value, the more liquid the business.
22 Liquidity Working Capital Working capital is the difference between current assets and current liabilities. Working capital represents excess dollars available from current assets after current liabilities have been paid.
23 Liquidity - Interest Coverage Ratio Net income after taxes plus interest paid and accrued, divided by interest. Measured from the income statement. Interpretation: The higher the ratio, the less the burden of interest on income.
24 Interest Coverage Ratio Some texts list this as a measure of solvency and financial risk. Relates a firm s financial charges (interest) to the firm s ability to service debt. Indicates how much of the firm s returns to assets are available for every dollar in interest commitment. Covers a period of time, rather than a point in time.
25 Liquidity - Cash Flow Coverage Ratio Excess available cash divided by cash required for interest and principal payments. Calculated from the cash flow budget. Interpretation: The higher the ratio, the more favorable the liquidity.
26 Cash Flow Coverage Ratio Excludes payments on the operating loan balance because they are so flexible. Indicates the extent to which the excess cash generated by the business provides a cushion for or flexibility in covering these debt-servicing requirements.
27 Liquidity: Debt-Servicing Ratio Cash required for interest and principal payments divided by total cash available. Measured from the cash flow statement. Interpretation: The higher the ratio, the greater the burden of debt on cash flow and the lower the liquidity.
28 Cash Flow Risk and Sensitivity Ratios 1 Percent farm revenue can decline and still meet cash flows. (Excess available cash/ total cash available) 2 Percent farm expenses can increase and still meet cash flows. (Excess available cash/cash operating expenses) 3 Percent interest rates can increase and still meet cash flows. (Excess available cash/total liabilities)
29 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 be able to pay off the debts.
30 Solvency Measures The debt/asset ratio is a common measure of business solvency. It is calculated by dividing total farm liabilities by total farm assets using current market values for each. Debt/asset ratio = total farm liabilities total farm assets
31 Solvency Measures Smaller values are preferred to larger ones. Smaller values indicate a better chance of maintaining solvency of business should it be faced with a period of adverse economic conditions. A low debt/asset ratio may also indicate that a manager is reluctant to use debt capital to take advantage of profitable investment opportunities.
32 Measures of Solvency Equity/asset ratio Indicates what part of total assets is financed by the owner s equity capital. Equity/asset ratio = total equity total assets
33 Equity/Asset Ratio Higher values are preferred, but cannot exceed 1. If the equity/asset ratio = 1, then liabilities = 0. An insolvent business would have a negative equity/asset ratio because equity would be negative.
34 Solvency Measures Debt/equity ratio Also called the leverage ratio. Compares the proportion of financing provided by lenders with that provided by business owner. Debt/equity ratio = total liabilities total equity
35 Solvency Measures Smaller values are preferred. Debt/equity ratio will approach zero as liabilities approach zero. Very large values result from very small equity, which means an increasing chance of insolvency. New businesses tend to have low levels of equity which results in higher debt/equity levels.
36 Solvency Measures Change in Net Worth Indicates business growth, additional capital investment, and a greater borrowing capacity. Net Worth = total assets - total liabilities The objective of the business is to increase net worth over time, to accumulate capital.
37 Financial Efficiency Measures Gross Ratio: Total farm expenses divided by gross farm revenue. Interpretation: The lower this value, the more efficient the farm business.
38 Financial Efficiency Measures Turnover Ratio: Gross farm revenue divided by average total farm assets. Interpretation: The higher this value, the more efficient the farm business.
Tilapia Farm Business Management and Economics: A Training Manual Carole R. Engle Ivano Neira Aquaculture/Fisheries Center University of Arkansas at Pine Bluff Pine Bluff, Arkansas Printed December 2005
Measuring Financial Performance: A Critical Key to Managing Risk Dr. Laurence M. Crane Director of Education and Training National Crop Insurance Services, Inc. The essence of managing risk is making good
A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability
Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios
FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose
Learning Objectives FI3300 Corporation Finance Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor of Finance Explain the objectives of financial statement analysis and its benefits for creditors,
What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK
Analyzing Quicken Farm Records with FINPACK FINPACK is a computerized farm financial planning and analysis system. It will help you evaluate your financial situation, explore alternatives, and make informed
For The Year Ended 31 March 2007 Ratios from the Statement of Financial Position Profitability Ratios Return on Sales Ratio (%) This is the difference between what a business takes in and what it spends
Using the Standards with Producers and Lenders to Analyze Operations Todd Doehring Centrec Consulting Group, LLC FFSC 2012 Conference -- 1 Agenda Background Producers Census data Decision support activities
PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance
There was a time when lenders knew the financial pressures and capitalization needs of those involved in agriculture. They knew just about every member of the agricultural community by name and probably
Purdue Extension Knowledge to Go Debt Service Analysis: Can I Repay? Low prices and incomes have made many farmers and their lenders concerned about the farmers ability to fulfill debt obligations. Lenders
Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards
Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood
Creating a Successful Financial Plan Basic Financial Reports Balance Sheet - Estimates the firm s worth on a given date; built on the accounting equation: Assets = Liabilities + Owner s Equity Income Statement
E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating
Understanding Key Financial Ratios and Benchmarks How does my business stack up compared to my neighbors? This question is becoming more and more common as the agricultural industry continues to change
1. Liquidity Ratios 1 Current Ratio Current Assets Current Liabilities This ratio shows short-term financial soundness of the business. Higher ratio means better capacity to meet its current obligation.
Balance Sheet Prepared By: James N. Kurtz, Extension Educator Financial Management Series #1 9/2009 A complete set of financial statements for agriculture include: a Balance Sheet; an Income Statement;
GCSE Business Studies Ratios For first teaching from September 2009 For first award in Summer 2011 Ratios At the end of this unit students should be able to: Interpret and analyse final accounts and balance
Understanding Financial Ratios and Benchmarks Historically, great production drove success in agricultural businesses. To maintain long-term success in today s volatile and highly competitive marketplace,
FIN 3000 Chapter 4 Financial Analysis Liuren Wu Overview 1. Why Do We Analyze Financial Statements 2. Common Size Statements Standardizing Financial Information 3. Using Financial Ratios 4. Selecting a
10 The key tools of farm business analyses This chapter explains the benefits of accurately documenting farm assets and liabilities, as well as farm costs and income, to monitor the business performance
Using s to Interpret Performance ing information is used by stakeholders to judge the performance and efficiency of a business Different stakeholders will look for different things: STAKEHOLDER Shareholders
Your Small Business Scorecard David Oetken, MBA CPM 1 Being a successful entrepreneur takes a unique mix of skills and practices. You need to generate exciting ideas, deliver desirable products or services,
Chapter 9 Solutions to Problems 1. a. Cash and cash equivalents are cash in hand and in banks, plus money market securities with maturities of 90 days or less. Accounts receivable are claims on customers
CHAPTER 4. FINANCIAL STATEMENTS Accounting standards require statements that show the financial position, earnings, cash flows, and investment (distribution) by (to) owners. These measurements are reported,
CHAPTER 11 Creating a Successful Financial Plan The Importance of a Financial Plan Financial planning is essential to running a successful business and is not that difficult! Common mistake among business
ExEx 5054 May 2004 Economics COLLEGE OF AGRICULTURE & BIOLOGICAL SCIENCES / SOUTH DAKOTA STATE UNIVERSITY / USDA Record Keeping in Farm Management Agustin Arzeno Area Management Specialist Introduction
Learning Module 3 Journal Entries The Accounting Equation Balance Sheet Income Statement = + + - Assets Liabilities Owners' Equity Revenue Expenses Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Recording journal
Fundamental analysis 2 June 2016 CERN Finance Club firstname.lastname@example.org Introduction Let s cover the two main types of investment analysis used in traditional investing Today: Fundamental analysis Next time:
CHAPTER 11 Creating a Successful Financial Plan The Importance of a Financial Plan Financial planning is essential to running a successful business and is not that difficult! Common mistake among business
Chapter-3 C FINANCIAL RATIO ANALYSIS BSNL, India For Internal Circulation Only 1 RATIO ANALYSIS FINANCIAL ANALYSIS is the process of identifying the financial strengths and weakness of the firm by properly
21-1 Assets are the total of your cash, the items that you have purchased, and any money that your customers owe you. Liabilities are the total amount of money that you owe to creditors. Owner s equity,
RATIO ANALYSIS-OVERVIEW Ratios: 1. Provide a method of standardization 2. More important - provide a profile of firm s economic characteristics and competitive strategies. C Company Sales $ 100,000 $ 125,000
Glossary of Financial Terms & Ratios for Entrepreneurs TERM DEFINITION Capital Expenditure Accounts Payable Accounts Receivable Accrual Accounting Asset Balance Sheet Break-Even Point Business Plan Capital
CHAPTER 13 Financial Analysis: The Big Picture Discuss the Need for comparative analysis and identify the tools of financial statement analysis Throughout the book we will rely on three types of comparisons
2. Liquidity analysis: Length of cash cycle Operating cycle of a merchandising firm: number of days it takes to sell inventory + number of days until the resulting receivables are converted to cash Acquisition
5-Year County-Level Financial Profile Industry Report Architectural Services (SIC Code: 8712) in Prince George County, Maryland Sales Range: $500,000 - $999,999 Date: 11/07/08 Report Description This 5-Year
CHAPTER 6 Solved Problems P.6.17 The following are the ratios relating to the activities of National Traders Ltd: Debtors velocity (months) 3 Stock velocity (months) 8 Creditors velocity (months) 2 Gross
The BASICS of FINANCIAL STATEMENTS For Agricultural Producers Authors: James McGrann Francisco Abelló Doug Richardson Christy Waggoner Department of Agricultural Economics Texas Cooperative Extension Texas
NOTE In practice, accruals accounts and prepayments accounts are implied rather than drawn up. It is common for expense accounts to show simply a balance c/d and a balance b/d. The accrual or prepayment
Basic Accounting & Budgeting February 4, 2009 The Nature of Accounting Systems Accounting is the process of recording, classifying, summarizing, reporting and interpreting information about the economic
Section 12.1 Financial Ratios Section 12.2 Break-Even Analysis OBJECTIVES Explain what a financial ratio is Describe how income statements are used for financial analysis Compare operating ratios and return-on-sales
ABOUT FINANCIAL RATIO ANALYSIS Over the years, a great many financial analysis techniques have developed. They illustrate the relationship between values drawn from the balance sheet and income statement
Management Accounting 319 Financial Statement Ratio Analysis Financial statements as prepared by the accountant are documents containing much valuable information. Some of the information requires little
Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis By BizMove Management Training Institute Other free books by BizMove that may interest you:
Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The
100 Arbor Drive, Suite 108 Christiansburg, VA 24073 Voice: 540-381-9333 FAX: 540-381-8319 www.becpas.com Providing Professional Business Advisory & Consulting Services Douglas L. Johnston, II email@example.com
Your Farm Ag Decision Maker Income Statement File C3-25 How much did your farm business earn last year? Was it profitabile? There are many ways to answer these questions. A farm income statement (sometimes
The Edge Market - Features v 1 WW 1 Key Features of The Edge Market Dashboard The Dashboard offers data & analytics on all listed companies on the Bursa Malaysia and Singapore Exchange. These include the
Farmer-to-Consumer Marketing #6 Financial Management Scope of Financial Management Managing the financial affairs of a direct marketing operation includes: Raising capital Identifying financial objectives
Preparing Agricultural Financial Statements Thoroughly understanding your business financial performance is critical for success in today s increasingly competitive agricultural, forestry and fisheries
Accounting Balance Sheet Entity Balance Sheet is any organization for which financial statements are prepared. Reports of the amounts of assets, liabilities and equity as of one point in time. Left side
Benchmarks for Quilt Shops: Key Financial Ratios By Laurie Harsh Laurie Harsh is the founder and president of The Fabric Shop Network, Inc. Since 1997, this growing trade organization has worked to support
Borrowing Money for Your Business After you have developed a cash flow analysis and determined when your business will make profit, you may decide you need additional funding. Borrowing money is one of
HEWLETT- PACKARD Management Acceleration Program BUILDING BUSINESS ACUMEN Terminology CASH DEFINITIONS: 1. Cash is the total amount of all cash and near-cash on hand at any given point in time, such as
Industry Financial Report release date: June 216 ALL US  Plumbing, Heating, and Air-Conditioning Contractors Sector: Construction Sales Class: $5m - $9.99m Contents Income-Expense statement - dollar-based
Chapter Four Financial analysis and Planning, Control and Analysis The CONCEPT : So why divide? Dividends (Return) Company A: $15.00 Company B: $21,000.38 Company C: $73,400.00 The CONCEPT : Why divide?
Bennett S. LeBow College of Business Financial Accounting Professor Jane Kaplan Professor Notes Chapter 3 Adjusting the Accounts Measuring Revenues and Expenses o Accrual accounting is a form of accounting
Ratio Analysis CBDC, NB February, 2008 Presented by ACSBE Financial Analysis What is Financial Analysis? What Can Financial Ratios Tell? 7 Categories of Financial Ratios Significance of Using Ratios Industry
Your Net Worth Ag Decision Maker Statement File C3-20 Would you like to know more about the current financial situation of your farming operation? A simple listing of the property you own and the debts
UNDERSTANDING FINANCIAL STATEMENTS ITEM 8 It is important that the directors of any business, cooperative or otherwise, understand the financial statements of the business. Without a basic understanding
Solutions to Problems P2-1. P2-2. LG 1: Reviewing basic financial statements Income statement: In this one-year summary of the firm s operations, Technica, Inc. showed a net profit for 2009 and the ability
9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no