Oklahoma State University Department of Agricultural Economics Oklahoma State University.
-
Upload
aileen-douglas -
Category
Documents
-
view
225 -
download
5
Transcript of Oklahoma State University Department of Agricultural Economics Oklahoma State University.
Agricultural Economics for High School Ag Classrooms
Oklahoma State UniversityDepartment of Agricultural Economics
Oklahoma State University
Increase the instruction of agricultural economics in Oklahoma high schools
Extend the skill set of high school ag teachers
Increase high school students (future ag producers and business leaders) knowledge of agricultural economics◦ By extension, reach their parents
Increase interest in agricultural economics degrees and courses
Objectives
Oklahoma State University
This is the first of a series of continuing education opportunities for high school ag educators
Over next two years, we are committed to offering curricula and training to at least 250 high school ag teachers◦ Obligated under two federal grants
We will be delivering annual, on-campus in-services each summer◦ Series of modules to be used in high schools
Agricultural Economics Faculty:Our commitment
Oklahoma State University
Budgeting!◦ If a business plan does not work on paper, it will
NOT work in practice Tools
◦ Enterprise budgeting (covered here)◦ Cashflow budgeting (covered here)◦ Partial budgeting◦ Whole farm budgeting◦ Capital budgeting◦ Projected financial statements
Balance sheets (covered here)
Farm business planning: overview
Oklahoma State University
A budget is a forecast◦ It is forward looking
A statement is a historical document◦ Looks back in time◦ Or, is a snapshot of the current situation
This module will look at BUDGETING◦ The basis of farm business planning
Also introduce the basics of Ag. Law◦ What does every farmer/rancher need to know?
Budgets versus Statements
Oklahoma State University
All documents are provided on CD◦ Includes the case study and problem sets + keys
This PowerPoint is on the CD◦ Cut-n-paste as needed!
OSU Cooperative Extension Service (CES) Factsheets with more information◦ OK Beginning Farmer Loan Program◦ Budgeting and balance sheets
Information on our degrees and careers in agricultural economics
Materials provided
Oklahoma State University
All lessons are based on a common case study
High school freshman with a show heifer Wants to expand her “herd”
◦ Buy a bred cow◦ Needs beginning farm loan, line of credit◦ Must supply business plan to bank
Students will be taught the tools and then use them to analyze the case study
Case study
Oklahoma State University
Owns◦ Show heifer, current value $1000◦ Blower, current value $300◦ $500 cash
Purchase a bred cow for $750 in January◦ Calve in February◦ Wean in October, Sell in December after
preconditioning
Case study “facts”
Oklahoma State University
Annual planning process Develop alternative production, marketing
and financing plans Compare alternatives using budgeting tools
◦ Partial, Enterprise, Whole farm, Cash flow & Capital budgeting
Implement plan + revise as situation warrants
Observe results—Financial Statements Assess successes/failures—Analysis Repeat annually
Farm business planning:Enterprise budgets
Oklahoma State University
Concerned with the economic ADVISABILITY of a production alternative◦ Corn, soybeans, hogs, cattle,…
Projects returns to Unpaid factors of production and management
Unpaid factors◦ Family labor◦ Owner’s equity◦ Some fixed inputs if can’t allocate expenses
Enterprise budgeting
Oklahoma State University
Compare alternate enterprises◦ RoundUp Ready vs. Conventional canola◦ Canola vs. Wheat◦ Grass stockers vs. Hay production/sale
Compute breakeven price and production◦ What sales price do returns = 0?◦ What output level do returns = 0?
How to use enterprise budgets
Oklahoma State University
Historical costs and production—if you have historical production!
Published data◦ Experiment Station data◦ OK CES◦ Online budgets
OSU Budget generator—Need access? Call us! (http://agecon.okstate.edu/extension)
National Budget library (www.cffm.umn.edu)
Generating enterprise budgets
Oklahoma State University
Revenues◦ Cash
Sales Services
◦ Non-cash Increase in the value of raised breeding livestock
Expenses◦ Cash◦ Non-cash
DEPRECIATION Returns to unpaid labor, management and
capital = Revenues - Expenses
Enterprise budget format
Oklahoma State University
Cash sales◦ Quantity sold × price◦ Examples:
100 bushels of corn × $3.40 = $340 260 pound hog × $0.75 = $195 4 tons of hay × $40 = $160
Cash received for services◦ Example: custom work
Government program payments◦ Subsidies◦ Crop insurance proceeds
Cash revenue
Oklahoma State University
Raised and gifted breeding stock can increase in value
For example, value increases ◦ Heifer to Bred heifer ◦ Bred heifer to 1st calf heifer◦ 1st calf heifer to 3-year old
Use additional production expenses at each step to adjust value (non-cash revenue)
Non-cash revenue
Oklahoma State University
Feed, fuel, veterinary, utilities, insurance, property taxes, hired labor, seed, fertilizer, rent,…
Interest on operating expenses◦ Paid on percent of operating expenses that are
financed with debt◦ Note, “interest on percent financed with equity is
a non-cash expense (Opportunity cost) NOT AN EXPENSE—Principal payments!
Cash expenses
Oklahoma State University
How to estimate operating interest Sum cash operating expenses/2 Multiply by the interest rate/12 Multiply by the number of months $s are
borrowed Multiply by the percent debt financed Cash operation/2 × Interest/12 × months ×
percent financed = operating interest expense
Cash expenses: Operating interest
Oklahoma State University
$500 cash expenses, 50% debt financed 8 months in growing season 7% interest rate Calculation
◦ $500/2 × 0.07/12 × 8 × 0.5 = $5.83average Monthly # % financedinvestment interest months
rate
Operating interest example
Oklahoma State University
Durable (long-lived assets) decrease in value over time due to wear and obsolescence◦ Exception—NO DEPRECIATION FOR LAND
Use STRAIGHT LINE depreciation method for class purposes◦ Other methods for TAXES
Depreciation
Annual depreciation expense = (Purchase price – salvage value)/useful life Example:
◦ Purchase tractor for $100,000◦ Sell after 6 years for $40,000◦ Annual depreciation =◦ ($100,000 – $40,000)/6 years =◦ $60,000/6 years= $10,000/year
Straight line depreciation
Oklahoma State University
Breakeven sale price◦ Sale price where revenue = expense◦ Computed as Total expense/output◦ Example: Hog production cost $130 per head and
each hog weighs 260 pounds at sale BE Price = $130/260 pounds = $0.50 per pound
Breakeven output (production) level◦ Output level where revenue = expense◦ Computed as Total expense/sale price◦ Example: Hog sale price = $0.65 per pound◦ BE output = $130/$0.65 per pound = 200 pounds
Breakeven analysis
Oklahoma State University
To get beginning farm loan needs an enterprise budget
Revenue◦ Sell calf in December for $693◦ Increase in value of heifer = production costs for
the year Feed = $172.80, Vaccinations = $4, Parasite control
= $4 Total = $180.80
Case study: Enterprise budget
Oklahoma State University
Expenses◦ Heifer feed $172.80◦ Cow feed $88.20◦ Calf feed $21.60◦ Parasite control $10◦ Vaccinations $16◦ Ear tag $1◦ Depreciation
Blower Purchase cow
Case study: Enterprise budget
Oklahoma State University
Depreciation—blower◦ Purchase price = $300◦ Salvage value =$200◦ Useful life = 5 years◦ Annual depreciation = ($300-$200)/5 = $20/year
Cow depreciation◦ Purchase price = $750◦ Salvage value = $470◦ Useful life = 7 years◦ Annual depreciation = ($750-$470)/7 = $40/year
Case study: Enterprise budget
Oklahoma State University
Interest on operating◦ 100% financed◦ Cash operating expenses = $309.60◦ 5% Interest rate◦ 12 months financing
Calculation◦ Operating interest = 309.60/2 × 0.05/12 × 12 =
$7.74 Interest on long-term debt
◦ $250 × 0.05 = $12.50
Case study: Enterprise budget
Oklahoma State University
Oklahoma State University
Revenue
Calf sales $693.00
Increase in value of raised
breeding livestock $180.80
Total revenue
$873.80
Expenses
Feed purchases $282.60
Grazing expenses
Veterinary expenses $ 26.00
Other cash expenses (ear tag) $ 1.00
Depreciation $ 60.00
Operating interest $ 7.74
Interest on long-term debt $ 12.50
Total Expenses $389.84Returns to Unpaid Labor, Management and Equity Capital $483.96
BE Price = $390/630 pounds= $0.62/ pound
BE Output = $390/$1.10 per pound = 355 pounds
Case study: Breakeven analysis
Oklahoma State University
Cash flow budgeting is concerned with FEASIBILITY of an enterprise◦ Is sufficient cash generated to meet obligations
generated by the project? Long-term investments often have a
negative cash flow, e.g., land purchases, until debt retired◦ Subsidize cash flow with other enterprises, e.g.,
off-farm income
Cash flow budgeting
Oklahoma State University
Focus is on CASH Include ALL sources of cash and ALL uses of
cash Sources of cash:
◦ Full sale price of land, buildings, machinery, breeding stock, feeder livestock, crops
◦ Government program payments, crop insurance◦ Starting cash balance◦ Off-farm income◦ Gifts & inheritances◦ Proceeds from planned borrowing
Cash flow budgeting
Oklahoma State University
Uses of cash◦ Cash expenses◦ Full purchase price of land, buildings, equipment,
breeding stock◦ Principal payments◦ Interest payments◦ Family living expenses
Cash flow budgeting
Oklahoma State University
Can a project cash flow but not be profitable?◦ Yes!◦ Depreciation is NOT a cash flow but is an expense◦ So profit can be negative even though project
cash flows! Can a project be profitable but not cash
flow?◦ Yes!◦ Principal payments are NOT an expense but are a
cash demand◦ So cash flow can be negative while profit > 0!
Cash flow budgeting
Oklahoma State University
Megan’s banker wants to see a cash flow budget
Starting point: Enterprise budget◦ What are the sources of cash?◦ What are the uses of cash?
Case study: Cash flow budget
Oklahoma State University
Any additional sources of cash?◦ Planned loan proceeds
Cow note Operating note
Any additional uses of cash?◦ Principal payments
Cow note Operating note
Case study: Cash flow budget
Oklahoma State University
Oklahoma State University
Sources of cash
Beginning cash balance $ 500.00
Livestock sales $ 693.00
Proceeds-cow note $ 250.00
Proceeds-operating note $ 309.60
Total sources of cash $1752.60
Uses of cash
Cash expenses $ 309.60
Breeding stock purchases $ 750.00
Principal payments $ 79.00
Interest payment long-term $ 12.50
Operating note repayment $ 309.60
Interest on operating note $ 7.74
Total uses of cash
$1468.44
Net cash surplus or deficit
$ 284.16
A balance sheet is a systematic listing of everything◦ Owned (assets)◦ Owed to others (liabilities)◦ Owner’s equity (net worth)◦ Basic identity: Assets = Liabilities + Owner equity◦ Or, Assets – Liabilities = Owner equity
A “snapshot” of the business’ financial health◦ Several years’ balance sheets measure long-term
success of business Current and Non-current assets and
liabilities
Balance Sheet
Oklahoma State University
Current assets--“liquid” assets◦ Assets that can be sold without affecting long-
term profit-generating capacity◦ Cash and near cash assets
Bank account balance, certificates of deposit◦ Owned and sold within one year
Feeder livestock, crops, assets held for sale◦ Assets to be used up in production process in less
than one year Inventories of fuel, chemicals, feed, parts,…
◦ Other Cash invested in growing crops and feeder livestock
Current assets
Oklahoma State University
Cannot be sold (liquidated) without harming long-term profit-generation capacity◦ Land, breeding stock, machinery, buildings◦ Stock in agricultural cooperatives
Difficult to sell quickly and realize full market value◦ How low would you need to price your house to
sell it TODAY?
Non-current assets
Oklahoma State University
Financial obligations that are payable (due) within 12 months◦ Charge account balances (feed store, chemical
dealer)◦ Operating note balance◦ Accrued property taxes◦ Accrued interest on long-term debt◦ Loan payments due in next 12 months
Current portion of long-term debt
Current liabilities
Oklahoma State University
Portion of long-term debt due in 12+ months
Note, need to calculate◦ Principal balance (i.e., total amount owed) –
amount owed in next 12 months (current portion) Example: $100,000 note
◦ Payment required in next 12 months = $8,000◦ Current liability = $8,000◦ Non-current liability = $92,000
Non-current liabilities
Oklahoma State University
Computed as◦ Owner’s equity = Total assets – Total liability
Sources of Owner’s equity◦ Contributed capital
$s invested from outside the business◦ Retained earnings
Profit that has not been taken out of the business by the owner(s)
◦ Change in market value of assets Land value trends up over time
Owner’s equity or Net worth
Oklahoma State University
Cost-basis balance sheet◦ Non-current assets valued at
Cost – accumulated depreciation◦ All other assets at market value◦ Used to measure businesses performance over
time Market-basis balance sheet
◦ All assets valued at market value◦ Used to measure liquidation value of the business◦ Use for class assignments
Two types of balance sheets
Oklahoma State University
Oklahoma State University
Current assets Current liabilitiesCash, near-cash, supplies, accounts receivable, crops held for sale, livestock held for sale, cash invested in growing crops
$ Accounts payable, accrued taxes (property), operating note balance, accrued interest, current portion of long-term debt
$
Non-current assets Non-current liabilitiesMachinery, equipment, breeding livestock, fencing, land
$ Non-current portion of machinery and equipment notes, non-current portion of breeding stock notes, non-current portion of mortgages
$
Total assets $ Total liabilities $Owner’s equity $Total liabilities + Owner’s equity
$
Balance sheet format
Oklahoma State University
Solvency measures Solvency measures the business’ ability to
payoff all financial obligations Debt-to-asset ratio (D/A) = portion of assets
“owed” to creditors Equity-to-asset ratio (E/A)= portion of
assets “owned” by the business owners Debt-to-equity ratio (D/E)= relative portion
of debt financing to equity financing◦ Also call “leverage ratio”
Oklahoma State University
Solvency measures Want D/A to be small
Want E/A to be big◦ Can never be over 1.0
Want D/E to be small◦ Can never be less than 0
Oklahoma State University
Liquidity measure Working capital = current assets – current
liabilities◦ Want > 0
Current ratio = Current assets / current liabilities
◦ Want > 1◦ Businesses with lots of sales will have a high
current ratio
At the beginning of the year Megan owns◦ Heifer $1000◦ Blower $300◦ Cash $500
Has no debt
Case study: Balance sheet
Oklahoma State University
Current assets Current liabilities
Cash $500 Total current liabilities
$0
Total current assets $500 Non-current liabilities
Non-current assets Total non-current liabilities
$0
Blower $300 Total liabilities $0
Heifer $1000 Owner’s equity $1800
Total non-current assets
$1300
Total Assets $1800 Liabilities + Owner’s equity
$1800
Beginning of year balance sheet
Oklahoma State University
Assets◦ Cash balance $??? (Where do you get this?)◦ Heifer $1200◦ Bred cow $800◦ Blower $250
Liabilities◦ Operating note balance $???◦ Cow note balance $???
Current portion & Non-current portion Then compute Owner’s equity
Projected end of year balance sheet
Oklahoma State University
Cash balance $287 (see cash flow budget) Operating note balance $0 (paid off in Dec.) Total on cow note:
◦ Borrowed $250◦ Paid $79 in December◦ Owes $171
Current portion $83 Non-current portion $88
Projected end of year balance sheet
Oklahoma State University
Oklahoma State University
Projected of end of year balance sheet
Current assets Current liabilities
Cash $284 Operating note $0
Cow note payment $83
Total current assets $284 Interest on cow note $9
Non-current assets Total current liabilities $92
Blower $250 Non-current liabilities
Show heifer $1,200 Cow note $88
Cow $800 Total non-current liabilities $88
Total non-current assets $2,250 Total liabilities $180
Total assets $2,534 Owner’s equity $2,354Total liabilities + Owner’s equity $2,534
Oklahoma State University
Case study: Solvency and liquity End-of-year solvency measures
◦ D/A= $180/$2534 = 0.07◦ E/A = $2354/$2534 = 0.93◦ D/E = $180/$2354 = 0.08
End-of-year liquidity measures◦ Working capital = $284 - $92 = $192◦ Current ratio = $284/$92 = 3.09
The manuscript contains links to online resources
The binder contains OSU Extension factsheets with more examples
Call! We’ll be glad to help you out!
Need more information?
Oklahoma State University
Next up Shannon Ferrell:Intro to Ag Law