7Habits for Effective Farmers Webinar Series · business will have a healthy operating profit...
Transcript of 7Habits for Effective Farmers Webinar Series · business will have a healthy operating profit...
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Habits for Effective Farmers Webinar Series:
Evaluating Financial Health
Iris CuiExtension Farm Management SpecialistUniversity of Tennessee
July 3, 2019
This series is supported by USDA/NIFA under Award Number 2018-70027-28585.
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https://www.linkedin.com/pulse/why-only-few-super-successful-people-naveen-raju/
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Habit 3: Evaluating Financial Health
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Business Planning Recordkeeping
Budgeting
Financial Health
Financial Risk
Human Risk
Marketing
Succession Planning
Production Skills
IRIS'S PIE OF FARM SUCCESS
Management Skills
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Overview
• What do I need to evaluate the financial health of farm business?
• How do I evaluate? • What are some financial criteria I need to look at?
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First, Records can tell you a LOT
• Profit and Loss / Income Statement• Cash Flow by Enterprise• Budget by Enterprise
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Examples by Recordkeeping method
• Excel• Quicken
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Excel Farm Sales Record Example
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Cash Flow by Enterprise
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Quicken Example
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Cash Flow by Enterprise
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Center for Profitable Agriculture Upcoming Workshop: ’Got Farm Records, Now What?’• Face to Face, whole day. • Farmers will learn using Excel spreadsheets & other tools to evaluate
performance.• Tennessee and Kentucky workshops to be conducted September 2019
through April 2020.
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1 year data doesn’t tell you as much as years of data
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Financial Criteria
• Profitability• Liquidity• Solvency• Financial Efficiency
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Financial records to prepare
Balance Sheets (Net Worth Statements)• All Assets minus All Debts• Typically – Beginning / End of Year• Track / Measure financial progress
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Why do I need to construct a balance sheet?
• Tracks all farm and nonfarm assets, debt payments, and loan receipts (monthly or annual basis)
• Evaluate debt repayment ability and planning credit• Succession planning
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Balance Sheet
AssetsShort term: Checking, Cash,
Credit CardMid-term: Machinery,
Breeding livestockLong term: Land, Buildings
LiabilitiesCredit cards, operating loans
Machinery loans
Farm loans
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Financial Criteria
√ Profitability• Liquidity• Solvency• Financial Efficiency
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Profitability Measures• Rate of return on farm assets- can be thought of as the averageinterest rate being earned on all (yours and creditors’) investments in the farm.• Operating profit margin- shows the operating efficiency of thebusiness. If expenses are low relative to the value of farm production, thebusiness will have a healthy operating profit margin. A low profit margincan be caused by low product prices, high operating expenses, or inefficientproduction.
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University of Minnesota Comparisons
ROAHigh 20%
ROALow 20%
OPMRHigh 20%
OPMRLow 20%
2013 8.3 -5.4 21.4 -17.0
2014 11.0 -5.1 27.0 -16.5
2015 5.5 -5.3 15.8 -18.9
2016 6.8 -4.1 19.1 -14.2
2017 6.6 -3.7 19.1 -12.2
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Financial Criteria
• Profitability√ Liquidity• Solvency• Financial Efficiency
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Liquidity Ratios
• Current ratio- measures the extent to which current farm assets, if sold tomorrow, would pay off current farm liabilities.
• Working capital- tells us the operating capital available in the short term from within the business.
• Working capital to gross revenues - measures operating capital available against the size of the business.
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University of Minnesota Comparisons
Current RatioHigh 20%
Current RatioLow 20%
Working Capital to GRHigh 20%
Working Capital to GRLow 20%
2013 2.8 1.5 46.1 24.0
2014 2.4 1.3 35.0 18.5
2015 2.2 1.3 38.7 14.0
2016 2.1 1.2 43.1 10.7
2017 2.2 1.1 40.0 8.0
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Financial Criteria
• Profitability• Liquidity√ Solvency• Financial Efficiency
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Solvency Ratios
• Farm debt-to-asset ratio - is the bank’s share of the business. It compares total farm debt to total farm assets. A higher ratio is an indicator of greater financial risk and lower borrowing capacity.
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University of Minnesota Comparisons
D/AHigh 20%
D/ALow 20%
2013 30.0 44.0
2014 33.0 45.0
2015 34.0 46.0
2016 35.0 51.0
2017 36.0 49.0
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Financial Criteria
• Profitability• Liquidity• Solvency√ Financial Efficiency
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Financial Efficiency
• Asset turnover ratio- measures efficiency in using capital. You could think of it as capital productivity. Generating a high level of production with a low level of capital investment will give a high asset-turnover rate.
• Revenue/full-time labor ratio – measures labor efficiency
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http://southcentral.edu/images/departments/foundation_nm/ag_symp_2016/Ag%20Symp%20-%20Farm%20Finance%20Scorecard.pdf
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After Financial Evaluation…
What you do next or different is the key to improve your financial health!
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What if I Hate Math or Numbers?
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The MANAGE Program
https://ag.tennessee.edu/arec/Pages/manage.aspx
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Management for a Lifetime
• Programs offered• Whole-farm planning• Record Keeping• Budgeting• Risk Management• Goal Setting
easuring,
nalyzing,
avigating, and
chieving
oals
ffectively
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Area Farm Management Specialist Map 2019
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Contact Information
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Objective of MANAGE
Work with farm families to help them evaluate their financial situation and make
better informed decisions
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How Do We Do This?
One-on-One farm visits• Financial analysis of the current farm operation• Changing the operation and analyzing the outcomes• Fine tuning the various scenarios for comparisons
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Your Input
• Provide production information• Provide financial information• Describe alternatives• Set family and financial goals
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Go Crazy with All the Analysis
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All financial and personal information remains
CONFIDENTIAL
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Iris Cui(931) [email protected]
Please complete the session evaluation at https://tiny.utk.edu/7HabitsEval