Financial Statements

1. Financial Statements Damona Doye OSU Extension Economist

4. Financial statements? • What? • Where? • When? • Why? • How? • Who?

5. Can You Answer These Questions? • Is the business headed in the right direction? • Does it provide enough income to: • Show a profit? • Cover your loan payments? • Pay family living expenses? • What are your production costs? • What price do you need to receive for your product to break even?

6. Measuring Financial Position and Performance • Liquidity • Ability to pay bills as they come due and cover unanticipated events • Solvency • Ability to cover all debts if the business were sold • Profitability • Returns to labor and management generated by the operation • Financial efficiency • Efficiency with which assets generate income • Repayment capacity • Ability to repay term debt in a timely fashion

7. Financial statements Historical Projected Multi-year Spending plan (budget) Enterprise analysis Cow/calf Crop Custom work Partner shares Break-even analysis Marketing plan Investment analysis Risk assessment Business Analysis

8. Financial statements Cash flow statement • Cash income • Cash expenses Balance sheet • Assets • Liabilities • Net worth (owner equity) Income statement • Cash income • Cash expenses • Changes in assets • Changes in liabilities • Net farm income, accrual adjusted (profit) AGEC- 751 AGEC- 753 AGEC-791 792 752 http://pods.dasnr.okstate.edu/docushare/

9. Balance Sheet • Summary sheet of items owned and owed. • Assets • Current • Non-current • Liabilities • Current • Non-current • Net Worth = Assets - Liabilities • Done at the beginning and end of each fiscal time period.

10. North Central Oklahoma http://agecon.okstate.edu/oklandvalues/

11. Which Method to Use? • Market Value • Typically used by most lending institutions • Easiest to determine • Easiest to over or under estimate • Due to rapidly changing markets, could overstate or understate net worth. • Cost Basis • Must have good records • Must know depreciation of assets • Gives a truer picture of the value of the business

12. Current Assets Current assets are assets that will be used up or sold during the next twelve months. Examples include: • Cash, checking accounts, savings • Investments • Accounts receivable • Prepaid expenses • Cash investments in growing crops • Inventories • Market livestock, stored crops, purchased feed, supplies

13. Non-Current Assets Non-current assets are assets that have a useful life of more than 1 year. Examples include: • Breeding livestock • Machinery, equipment • Vehicles • Investments in capital leases • Land • Buildings and improvements

14. Current Liabilities • Accounts payable • Notes payable • Current portion of term debt • Accrued interest • Taxes payable • Deferred taxes

15. Non-current Liabilities • Notes payable, non-real estate • Notes payable, real estate • Deferred taxes

16. Net Worth • Net worth of the business is the difference between the total value of the assets and the total value of the liabilities. Current Assets + Non-current Assets – Current Liabilities - Non-current Liabilities = Net Worth

17. Balance Sheet Exercise

18. Cash Inflows Operating receipts Crop and livestock sales, government payments, other farm income Capital sales Contributed capital Cash Outflows Operating expenses (feed, fertilizer, etc.) Capital purchases Family living and other withdrawals Cash Flow Statement

19. Uses of a Cash Flow Statement • Establishes target levels for income and expenses which can be used in monitoring progress towards goals • Points out potential problems in meeting financial obligations • Indicates when cash is available for new investments

20. Cash Flow Exercise

21. The Accrual Adjusted Income Statement • Net Farm Income, Accrual Adjusted = Gross Farm Revenues - Total Operating Expenses - Total Interest Expense +/- Gain/Loss on Sale of Farm Capital Assets

22. The Accrual Adjusted Income Statement • Revenues • Livestock and crop sales • Government payments & other farm income • Plus….

23. Changes in Inventories • Market livestock • Raised crops/feed inventories

24. Accrual Adjustments (Assets) Change in: • Accounts receivable • Prepaid expenses • Cash investment in growing crops • Supplies • Contracts and notes receivable • Investment in cooperatives

25. Gains/Losses on Sale of Farm Capital Assets • Difference between the value for which the items is sold and the adjusted basis (cost minus depreciation taken)

26. Gains/Losses on Sale of Culled Breeding Livestock • Purchased breeding stock: subtract cost basis from the sale proceeds • Raised breeding stock: subtract base value from the sale proceeds

27. Change in Value Due to Change in Raised Breeding Livestock Numbers • Number of head transferring from one classification to another, e.g., replacement heifers to cows • Differences in base values of the two classifications

28. The Accrual Adjusted Income Statement • Expenses • Purchased market livestock • Cash operating expenses • Accrual adjustments • Purchased feed inventories • Accounts payable • Ad valorem taxes • Employee payroll withholdings • Accrued expenses • Accrued interest

29. Depreciation Different methods of depreciation • Tax • Farmer’s Tax Guide at http://www.irs.gov/publications/p225/index.html • Methods Modified Accelerated Cost Recovery System (MACRS) • General Depreciation System (GDS) • Alternative Depreciation System (ADS) • Which one depends type of property • Economic • Straight Line Depreciation: Cost – Salvage Value Years of Life

30. Difference Between Cash Flow and Income Statement Cash flow statement does not include: • Depreciation • Changes in inventory, other accrual adjustments • Gains/losses on capital asset sales Income statement does not include: • Capital sales and contributed capital • Principal payments • Family living expenses

31. Income Statement Exercise

33. Financial statements Cash flow statement • Cash income • Cash expenses Balance sheet • Assets • Liabilities • Net worth (owner equity) Income statement • Cash income • Cash expenses • Changes in assets • Changes in liabilities • Net farm income, accrual adjusted (profit) AGEC- 751 AGEC- 753 AGEC-791 792 752 http://pods.dasnr.okstate.edu/docushare/

34. Measuring Financial Position and Performance • Liquidity • Ability to pay bills as they come due and cover unanticipated events • Solvency • Ability to cover all debts if the business were sold • Profitability • Returns to labor and management generated by the operation • Financial efficiency • Efficiency with which assets generate income • Repayment capacity • Ability to repay term debt in a timely fashion

35. What does business analysis offer? • Cold, hard facts • Ability to compare to benchmarks • Insights into strengths/weaknesses, problem identification • Direction for maximizing the returns to owned resources • Documentation to obtain/maintain credit

36. Communication • Business partners • Lenders • Landlords • Heirs • Family

37. IFMAPS • A free, confidential service assisting Oklahoma farmers and ranchers with financial planning since 1985 • Trained financial specialists work with families one-on-one to develop financial statements and evaluate alternative plans • Contact the local Extension office, an area Agricultural Economics specialist, or call the IFMAPS office in Stillwater at 1-800-522-3755

38. Damona’s 30 + 1 plan • Spend 30 minutes each week maintaining and using records • Take one step each month to improve your record-keeping system and financial summaries

39. Just do it! References: • OSU Ag Econ Department, http://agecon.okstate.edu/websites.asp • OSU Extension publications, www.osuextra.com • National Ag Risk Management Library, http://www.agrisk.umn.edu/ • Annie’s Project, http://www.extension.iastate.edu/feci/annie/ • Business Planning Guidebook, Minnesota Institute for Sustainable Agriculture, http://www.misa.umn.edu/vd/bizplan.html