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Farm Finances: Part 1 National Farm Viability Conference Albany, NY May 22 nd -24 th

Farm Finances: Part 1 National Farm Viability Conference Albany, NY May 22 nd -24 th. Mark Cannella Mark.Cannella@uvm.edu Web: www.blog.uvm.edu/farmvia. Ag Business Programs. blog.uvm.edu/farmvia/. Management Education Forest Business Business Planning Transfer Planning

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Farm Finances: Part 1 National Farm Viability Conference Albany, NY May 22 nd -24 th

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  1. Farm Finances: Part 1National 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 Goals: Business • Cash flow and owner draws • Increased Equity and Net Worth • Profitability: Covering all costs and generating a positive return on capital investments.

  4. Financials: The Adviser • Translation of real life to numbers #’s • Accurate and Complete • Building a case for information based decisions.

  5. Financial Statements • Balance Sheet • Cash Flow Statement • Income Statement or Profit and Loss

  6. Balance Sheet A snapshot of the farm worth at a single point in time. • Inventories and their value • Assets: Items with a useful life over 1 year • Liabilities: Obligations owed by the business • Net Worth or Equity

  7. Equity Looks Like

  8. Equity or Net Worth • Assets – Liabilities = Net Worth • Generating wealth over time through ownership of assets • Can be liquidated (converted to cash)

  9. Valuation Technique Historical Cost: the initial cost of asset, plus improvement, less accumulated depreciation Market Value (FMV) Estimated value using current prices (less selling costs?)

  10. C and C • Consistent • Conservative • Don’t let market shifts distort analysis of the farming operation

  11. Depreciation Straight-Line • Annual Depreciation = (Purchase Price less Salvage Value) ÷ Lifespan • ($50,000 - $10,000) ÷ 10 years = $4,000 per year • Equipment Lifespan: 5 or 10 years • Improvements Lifespan: 15 or 20 years

  12. Key Points • Inventory gets discounted! • Real estate may trump improvements • Collateral – Taxes - Analysis – Sale

  13. Sample Balance Sheet • The next skills: • Solvency Measures • Term Structure • Ag Lending • Exit Planning

  14. Cash Flow Having sufficient cash on hand to pay bills as they come due. • Will you need to borrow, when? • How much can you draw for salary? • Unplanned opportunities or problems

  15. Cash Flow Statements The focus is on transactions Cash Flow Statement: summarizes all cash in-flows and cash out-flows over a specific period of time Cash Flow Budget/Projection: Forecasts cash activity for a future time period.

  16. Expense Categories Variable Expenses: Expenses that go up or down in relation to changes in production level.

  17. Expense Categories Fixed Expenses: Expenses that hold steady even if the business produces more or less goods

  18. Expense Categories • Capital Expenses: A special category for the purchase of items or improvements that have a useful life more than one year. (not $100 pruning sheers)

  19. Capital Activity - Capital Expenses - Purchase of Equipment and Real Estate Loan Payments Cash Draw to Owners + Capital Sales or Contributions + • Sale of Farm Assets • Contributions from Savings • New Loans/Borrowing

  20. Clues to Improved Management • Find the major expenses • Identify where the income comes from • Measure how much the business supports the livelihood of owners • What else can you find?

  21. Profitability • Next time…..

  22. Valuation Extras 1 • Land: • $2,500 per A if more than 30 acres. • $6,000 per A if less than 30 acres • Farmstead: • ~$200,000 depending on residence and infrastructure

  23. Valuation Extras 400 lb stockers: $600 each Breeding Stock: $1,000 - $1,500 What if they die before they are harvested?

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