Know Your Numbers, Know Your Options Financial Literacy for Low Revenue Times

1. Know Your Numbers, Know Your OptionsFinancial Literacy for Low Revenue Times Two Hands on the Wheel Photo by Bethany Johnston

2. Introductions and Icebreaker • Favorite farm smell

3. Opening Video Video

4. Questions or Comments…

5. Session 1Basics of Balance Sheet Construction and Analysis

6. Objectives • Construct a basic balance sheet and interpret selected ratios • Working Capital • Debt to Asset Ratio and/or Equity to Asset Ratio • Net Worth • Introduce modern techniques for keeping farm/ranch financial records

7. Handouts • Financial Vocabulary • Key Ratio Summary

8. Balance Sheet #1 Balance Sheet #2 Cash Flow Meeting Financial Obligations Financial Snapshot Financial Snapshot Working Capital Debt/Asset Ratio Net Worth Working Capital Debt/Asset Ratio Net Worth Income Statement Profitability Statement of cash flow Fund sources and uses Statement of Owner Equity Reconciles changes between Balance Sheet #1 and #2

9. Uses for a Balance Sheet • To know assets (+) and liabilities (-) and your net worth on a regular basis • Required when applying for a loan • Helps guide considering a major change • Risk assessment

10. Balance Sheet as of [a single date]Consolidated/Personal/Business Same day every year Personal, business or “consolidated” + Current – Current Liabilities Current Assets Non-Current Liabilities Non-Current Assets Net Worth or Owner Equity Non Current Net Worth = Assets - Liabilities

11. Handout: AGRIBUSINESS BALANCE SHEET

12. Building a Balance Sheet • Take inventory assets and resources • Determine asset values • Record liabilities

13. Taking an Inventory • Land • Buildings • Breeding livestock • Machinery, equipment, implements, and tools • Operating inputs purchased not yet used up • Harvested crops in storage • Market livestock • Financial assets

14. Asset Valuation Methods • Cost • Net selling price • Purchase cost less depreciation • Replacement cost less depreciation • Replacement cost for equivalent function,minus depreciation • Income capitalization • Market value

15. Balance Sheet • Two pairs of columns due to two methods of asset valuation: • Cost basis (actual cash plus investment expenses less depreciation) • Examples: • New boundary fence cost basis = materials plus labor to build fence • New equipment purchase + delivery and set up costs • Market value (what a willing buyer would pay you)

16. HANDOUT: Agribusiness Balance Sheet

17. Question: • Do you put personal assets on a balance sheet? • Yes, if it is a CONSOLIDATED balance sheet • Sole proprietors mostly file consolidated balance sheets • No, if you are constructing a balance sheet for a corporation or LLC where personal assets are outside of an entity

18. HANDOUT: Personal Net Worth

19. Liability Information • Loan information • Current portions of principal and interest payments • Accounts payable • Unpaid, accrued interest • Delinquent principal and interest payments • Credit and debit card account information • Personal liabilities (if using consolidated balance sheet)

20. Balance Sheet SpreadsheetDemonstration and Exercise • Open Excel spreadsheet: • AGRIBUSINESS BALANCE SHEET.xlsx • HANDOUTS: • Balance Sheet Exercise • Balance Sheet Exercise Key

21. Interpreting a Balance Sheet – Key Ratios • Working Capital • Debt/Asset Ratio • Net Worth • HANDOUTS: • Balance Sheet Exercise Key • Key Ratio Summary • Farm Finance Scorecard

22. Key Ratios From the Balance Sheet • Working Capital • Debt/Asset Ratio • Net Worth

23. What the Ratios Tell You – Risk Management Techniques • Trend directions • Lines of credit to cover cash flow shortfalls • Restructuring debt • Communicating goals and plans • Bankruptcy

24. Bankruptcy – A Financial Tool • Debt Relief outside of bankruptcy creates an income for which income tax must be paid. • Debt forgiven in bankruptcy wipes the slate clean, however it impacts credit worthiness and takes a while to earn back. • Chapter 7 is a dissolution plan. • Chapters 11, 12 and 13 are plans to reorganize and work out debt under court supervision.

25. Quicken • Quicken is a popular commercial recordkeeping package that is: • User friendly • Easy for people unfamiliar with accounting terms to use • Good place to start when changing from a hand-kept cash accounting system

26. Quicken…cont’d. • Inexpensive and readily available • Flexible • Allows recordkeeping for a wide variety of agricultural and non-ag business enterprises • Recordkeeping for family living expenses • Widely used • Users can compare notes with neighbors on its application and use.

27. Quicken for Agriculture • Dr. Damona Doye of Oklahoma State University developed a program to allow farmers and ranchers to buy Quicken software and then have a method to adapt it to agriculture. • More details including a downloadable manual (v. 2016, 2017 and 2018), samples files, videos and instructions and available at http://agecon.okstate.edu/quicken/

28. Quicken vs QuickBooks Quicken QuickBooks Depending on version purchased, will run between $200-350 at retail stores More difficult to learn Ready-to-use • Depending on version purchased, will run between $45-90 at retail stores • Easy to learn • Requires adaptation to agriculture

29. Software Demonstration

30. Complete feedback cards “What I Learned – What I Need to Learn” Assignment Find your most recent balance sheet and examine it for the three items discussed in class.

31. Session 2Cash Flow – Keeping Farm/Ranch Financial Records Video

32. Discussion • Sharing the impacts from the first class: • Is the video making more sense? • Are we more comfortable with the terminology? • What did you do with the information from the first session? • Did everyone find/finish/redo their own balance sheet? • Was there anything difficult about doing this?

33. Objectives • Understand that cash flow makes your business go! No cash flow, no business. • Why keep track of cash flow: • Meet obligations • Paying bills • Depositing Income • Taxes • Loans • Investing

34. Introduction to Cash Flow Basics • Cash flow terminology • Cash flow warm-up • “What needs do I have for these records?”

35. Tips for Recordkeeping • Keep categories simple • Use asset classes (QuickBooks) • Work on records every day (even for a few minutes) • Run reports to catch errors • Share reports with key decision makers • Let the software do the work • Manage the paper trail as fits your needs

36. Cash Flow Budget • Spending plan for whole farm financial planning • Usually created from past experience with minor adjustments • If major events have happened (lost leases, changed major enterprises, etc.) then reconstruct a new plan • Handout: • CASHFLOW BUDGET AND STATEMENT

37. Statement of Cash Flow • Divides uses of cash by: • Operating activities • Investing activities • Financing activities • Historical document looking back on how cash moved through an operation • Ties into the Income Statement

38. How the Pieces Fit Together Handout: HOW THE PIECES FIT TOGETHER

39. Ratio Calculations and Interpretations • From the Balance Sheet: Beginning Ending • Working capital ________ _________ • Debt to Asset Ratio ________ _________ • Net Worth ________ _________ • From the Income Statement: • Operating ratio: ________ • Depreciation ratio ________ • Interest expense ratio ________ • Net farm income ratio ________ • Handouts: • HOW THE PIECES FIT TOGETHER • KEY RATIO SUMMARY

40. QuickBooks Demonstration • Handouts: • KEYBOARD SHORTCUTS • QUICKBOOKS VS QUICKEN • RECORDKEEPING ITEMS

41. Complete feedback cards “What I Learned – What I Need to Learn” Assignment Review recordkeeping for your farm/ranch and think about what you can do to improve what you are doing.

42. Session 3Income StatementsMeasuring Profitability Video

43. Discussion • Review impacts from the second class: • Is the video making more sense? • Any thoughts about your recordkeeping system? • Any changes you are thinking about? • Was there anything difficult about doing this?

44. Objectives • Introduce components of an income statement • Understand difference between cash and accrual accounting • Understand profitability • Calculate financial efficiencies from the income statement • Demonstrate how an income statement is the bridge between balance sheets

45. Structure of the Income Statement • Revenues from operation • Less operating expenses • Cash expenses • Less depreciation expenses (non-cash) • Less financing expenses • Plus or minus inventory changes • Equals Net Farm Income • Handouts: • INCOME STATEMENT ITEMS • KEY RATIO SUMMARY

46. Use of Net Farm Income • Pay income taxes • Family living withdrawals • Source of investment dollars • Pay principle portion of debt • Values management

47. Ratios from the Income Statement • Financial Efficiencies • Operating Expense Ratio • Depreciation Expense Ratio • Interest Expense Ratio • Net Farm Income Ratio • Handouts: • INCOME STATEMENT ITEMS • KEY RATIO SUMMARY • FARM FINANCE SCORECARD

48. Accrual Accounting vs. Cash • Accounts for changes in inventory • More accurately measures income generated within one year • Is better for evaluating business results and plans • Cash is used for filing income taxes

49. Statement of Owner Equity • Allocates how wealth was accumulated on balance sheet • Sources of wealth • Earn it from production • Investments • Government/policy • Assets appreciating • Inheritance • Off farm income (cash infusion)

50. Statement of Owner Equity cont’d… • Change due to • Retained earning (the business) • Market asset values • Policy changes • Personal net worth