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Farm Finance and Analysis: Part 2

Learn about financial analysis in the farming industry, including assessing business position and making proactive decisions based on information.

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Farm Finance and Analysis: Part 2

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  1. Farm Finance and Analysis: Part 2National Farm Viability ConferenceAlbany, NY May 22nd -24th Mark Cannella Mark.Cannella@uvm.edu Web: www.blog.uvm.edu/farmvia

  2. Ag Business Programs blog.uvm.edu/farmvia/ • Management Education • Forest Business • Business Planning • Transfer Planning • Applied Research

  3. Financial Analysis Financial Analysis compares trends in • revenues and expense • projected to actual cash flow • Changes in ratios related to solvency, liquidity, profitability and efficiency.

  4. Analysis Goals • Assess the business position • Promote proactive decisions… based on information.

  5. Analysis Options • 1st Step: Production Based Income Statement • Horizontal and Vertical Analysis • Ratio Analysis • Savvy 7 • Enterprise • Break-even

  6. Production-based Income S. Interest Only: principal payments not included Accrual Adjustments: • Beginning vs. Ending Inventories • Accounts Receivable and Accounts Payable Depreciation: annual “non-cash” cost of wear and tear on assets Opportunity Cost of Owners: $40,000 +

  7. Cash Flow

  8. Income Statement

  9. Adjustments

  10. Depreciation Straight-line depreciation alvage Value

  11. Income Statement NOT CASH BASIS ANYMORE MULTI-YEAR LENS

  12. Horizontal and Vertical

  13. Horizontal and Vertical

  14. Ratio Analysis • Established farm financial standards • See the Scorecard • Requires multiple years of records Liquidity: ability to meet financial obligations as they come due Solvency: ability to pay all debts if the business sold tomorrow Profitability: difference between the value of goods produced and the costs (plus resources) to produce them Efficiency: how effectively the business uses assets to generate income

  15. Savvy - 7 Ratio Analysis

  16. Savvy - 7 Ratio Analysis Efficiency Measures can be easily adapted to a key management area

  17. Sample

  18. Enterprise Analysis The Goal: Isolating the income and expense from a single enterprise to evaluate financial performance. • Isolate Income: The easy part • Isolate Expenses: pick a strategy

  19. Enterprise Analysis 2 Strategies to Allocate Costs (Often Fixed Costs) • Track Variable Expenses: Categorize expense by “income categories • “percent of resources used” method • “percent of total sales” method • “number of enterprises” method

  20. Break Even Quantity

  21. Break Even Quantity 2 Steps: • Collect historical records from previous year (expenses, units produced and sold, capital log) 2. Divide expenses by units produced to get variable expenses per unit. 3. Contribution Margin = Selling Price per unit - Variable Expenses per unit 4. Break Even Units = (Total Fixed Costs + Profit Goal )/ Contribution Margin

  22. Break-Even Dollars

  23. Partial Budget

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