Managing for Today and Tomorrow
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Transcript of Managing for Today and Tomorrow
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Business Planning Part One
The Balance Sheet
Managing for Today and Tomorrow
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Agenda
• Financial Terminology• Balance Sheet (net worth statement)• Balance Sheet Activity• Income Statement• Cash Flow• Trend Analysis
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Balance Sheet #1 Cash Flow
Financial Snapshot Financial Snapshot
Meeting financial obligationsGood old-fashioned
recordkeeping
Balance Sheet #2
Working CapitalDebt/Asset Ratio
Net Worth
Working CapitalDebt/Asset Ratio
Net Worth Income Statement(Profitability)
Statement of cash flow (Sources and
uses of money)
Commit This Diagram to Memory
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Financial Terms• Liquidity - working capital, current ratio and look to
cash flow statement• Solvency - what is left over after paying all debts; look
to balance sheet• Profitability - difference between expenses and income• Repayment Capacity - generate cash to pay int. & prin.• Financial Efficiency - percent of expenses to pay for
interest, operating costs, depreciation, etc.
Vocabulary Handout & Benchmark Handout
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Balance Sheet as of [a single date] Consolidated Personal Business
Current Assets Current Liabilities
Non Current Assets Non Current Liabilities
Net Worth or Owner Equity
Cur rent
Non Current
Net Worth = Assets - Liabilities
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Traditional Format Balance Sheet
Current Assets Grain, market hogs
Current Liabilities Operating loan, Int. & L.T.
principal payments
Intermediate AssetsCows, sows, plows Intermediate Liabilities
Long Term LiabilitiesLong Term Assets
Buildings, Land
Net Worth = Assets - Liabilities
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Balance Sheet Basics
• Done annually on the same date (kids’ school pictures)
• Some balance sheets are “Cost Basis”• Some balance sheets are “Market Basis”• Some are both• Most don’t include “Deferred Tax Liabilities”• Note changes from adjustments in asset values
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Key Ratios from the Balance Sheet
• Working Capital• Current Ratio• Debt/Asset Ratio• Net Worth
Benchmark Ratios
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Current Ratio• A ratio that measures the ability of the business to pay
off current farm debts if current farm assets were sold
• Current Farm Assets / Current Farm Liabilities$1,197,000 / $111,021 = $10.78For every $1.00 of current debt there is $10.78 to pay itIf less than 1 you have problems!
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Working Capital (WC)• The amount of operating capital available to the
business in the short run to pay bills and support family living. Might think in terms of $/ crop acre or $/ cow.
Current Farm Assets – Current Farm Liabilities = WC
$1,197,000 - $111,021 = $1,085,979
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Measures of Solvency
• Debt to Asset Ratio• Equity to Asset Ratio• Debt to Equity Ratio
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Farm Debt to Asset Ratio
The percentage of total assets financed by debt
Total Farm Liabilities / Total Farm Assets X 100$111,021 / $1,197,000 = .12 or 12% of assets are financed
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Profitability• Net Farm Income (from the Income Statement)• Operating Profit Margin (Revenue less cash
expenses)
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Net Farm Income
Net farm income, as calculated by the accrual or inventory method, represents the economic return to your contributions to the farm business: labor, management, and net worth in land and other farm assets.
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Uses of Net Farm Income
• Family Living withdrawal• Pay Social Security and Income Taxes• Pay principle payments or invest• Return to farm management
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Net Income Farm Revenue (income) - Farm Expenses (costs)+/- Inventory Adjustments = Net Farm Income + Non-farm Income = Total Net Income (before taxes) - Taxes Paid and Accrued = Net Income
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Efficiency
• Operating Expense Ratio– How much of revenue is used in
production costs excluding principle and interest?
• Net Farm Income Ratio– How much of revenue is left for you?
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Cash Flow (Timing of Money)
• A cash flow statement is a listing of cash flows that occurred during the past accounting period.
• A projection of future flows of cash is called a cash flow budget.
• Think of it as a “check book registry”.
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Homework:Look up five years of data.
Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women
Homework• Look at your most current Balance Sheet and
calculate working capital, current ratio, debt to asset ratio and net worth
• Try to fill in a five year trend summary from past Balance Sheets
• If you can’t find Balance Sheets try to find five years worth of income statements; if not, five years of income tax returns.