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Managing Capital /Financial Risk

Managing Capital /Financial Risk. Craig Binkowski Southern Michigan Bank & Trust Coldwater . Topics in Financial Section. Financial Balance Sheet (What’s at risk?) Cost of Production / Revenue Requirements: Total Economic costs Cover Direct Cost To Maintain Equity

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Managing Capital /Financial Risk

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  1. Managing Capital/Financial Risk Craig Binkowski Southern Michigan Bank & Trust Coldwater

  2. Topics in Financial Section • Financial Balance Sheet (What’s at risk?) • Cost of Production / Revenue Requirements: • Total Economic costs • Cover Direct Cost • To Maintain Equity • Meet Cash Flow Demands • “Cost of Production” Worksheet • Incorporating Financial Information into Risk Management / Control Decisions

  3. Financial Risk Management • Increase Equity through Farm Profit • Net Worth increase without inflation in asset values • Meet Cash Flow Demands • Monitor cost & availability of Debt Capital • Interest Rate Risk • Sources of Capital • Financial Information for measurement and monitoring is available and used

  4. 3 Basic Financial Statements 1. BALANCE SHEET: Assets, liabilities, and net worth Annual Change in Net Worth 2. INCOME STATEMENT: Inventory Adjusted (Accrual) 3. Projected CASH FLOW: After Scheduled Term Debt Principal & Interest Payments, Family Living, Income Taxes

  5. Example Farms for the Game:Designed to Simulate Today’sMarket Environment • Green = Low Debt Farm (Sorry) • Yellow = Moderate Debt Farm • Red = High Debt Farm

  6. Balance Sheet • Current balance sheet tells you: • Financial position of your business/Self • Your capacity to withstand risk “Take a Hit” and remain solvent • Three-five years of balance sheets tell you: • Trends in equity of your business • Need Both Cost Basis (Book Value) • And Market Value • Dual Column Balance Sheet

  7. Balance Sheet Debt Levels Page 4 FINLRB output

  8. Income Statement: • History: • Did your business make or lose money last year? • How much? • Was your neighbor’s experience similar? • What has been the past performance of your business? Relative to your neighbors? • Projections (pro-forma): • What will be different from the past? Why? • Do you “expect” the business to make a profit? • How much can revenue fall due to price and/or yield shortfalls before there is a loss?

  9. Income Statement Page 2 of FINLRB output

  10. Liquidity - Cash Flow Statement • Ability of your business to meet its cash flow obligations • Accounts for all sources and uses of cash including debt and capital activity • Helps you assess how much room there is for “stuff going wrong” -- RISK! • Helps you assess if adjustments need to be made in the financial structure of your business. • Does NOT tell you if your business made a profit!

  11. Liquidity- Cash Flow Statement Page 3 of FINLRB output

  12. Change In Net Worth: • Did Your Net Worth Increase last year? Or Decrease? Trend? Why? • From Retained Earnings out of Farm Profit? • From Asset Inflation? Machinery? Land? • From Contributed Capital? (Outside sources) • Do you expect your net worth to increase next year? Or, decrease? • How much room do you have for “stuff to go wrong” RISK!

  13. Change in Net Worth Hand calculate the % Change in Equity Page 4 of FINLRB output

  14. Understand the Numbers for Your Farm Business! • Critical in today’s environment • Understand what the numbers mean and signal • Monitor Business EVERY year … routinely • Use professional assistance if needed

  15. Cost of Production Roger Betz District Extension Farm Management Agent SW Michigan

  16. Cost of Production Worksheet • Allocates Overhead cost to each acre and combines with Direct Cost to determine “Cost of Productions” for various crops • “Cost of Productions”? • Economic • Direct Cost • Maintain Net Worth • Meet Cash Flow Demands • Useful in Marketing and Crop Insurance Decisions

  17. Cost of Production Worksheet - page 2

  18. Cost of Production - Overhead Cost of Production Page 2- Medium Debt

  19. Economic Cost of Production Cost of Production Worksheet Page 2 - Medium Debt Farm

  20. Total Direct Cost Cost of Production Worksheet Page 2 Medium Debt Farm

  21. Revenues to Maintain Net Worth Cost of Production Worksheet Page 2 Medium Debt Farm

  22. Revenues to Meet Cash Flow Cost of Production Worksheet Page 2 Medium Debt Farm

  23. Break Even Income & Prices “Cost of Production”

  24. Break Even Incomes & Prices“Cost of Production”

  25. What Percent of Equity are You Willing to Risk?

  26. Can I use Risk Management Tools to Minimize Equity Loss? Lines 49 and 50 Cost of Prod. Worksheet

  27. Key Questions for Your Farm Business : 1. Appropriate Financial Information Available? Historical, Current, and Future 2. Adequate Understanding of Financial Conditions and Risk Positions? 3. Realistic Plans & Underlying Assumptions? 4. What level of Equity Protection can Risk tools provide? 5. Should you utilize Financial Risk Management Strategies?

  28. STOP! • What is the key financial information for your farm? • What are the revenues required to: • Meet Economic Cost • Cover Direct Cost • Maintain Net Worth • Meet Cash Flow Demands • Start to think through your crop insurance and marketing plans

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