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Financial Analysis

Learn how to create a net worth statement, analyze balance sheets, and use financial ratios for farm success. Discover the importance of liquidity, solvency, and profitability in managing agricultural finances effectively.

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Financial Analysis

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  1. Financial Analysis Chapter #3

  2. Net Worth Statement • (Balance Sheet) • Net Worth = Assets - Liabilities • Net Worth (Owner's equity)

  3. Current Assets • can be converted to cash in less than one year • checking/savings • money owed you • inventory for sale • stocks, bonds, life insurance

  4. Intermediate Assets • resources or production items with a life 1 to 10 years • equipment • machinery • breeding livestock • generally depreciable

  5. Fixed Assets • (long term) permanent items : • real estate • improvements on buildings

  6. Current Liabilities • debts due within one year • bank notes • accounts payable • rent, taxes, interest

  7. Intermediate Liabilities • non real estate debt of 1 to 10 years

  8. Long-Term Liabilities • Mortgages and land contracts on real estate minus principal due within 12 months

  9. Financial Tools • Comparative Analysis - compare statements from one year to another • Projected Analysis - compare statements to expected statements • Ratio Analysis - compare statements to another farm

  10. Financial Terms • Liquidity - ability to generate cash • Current Ratio = Current Assets / Current Liabilities • Intermediate Ratio = (CA + IA) / (CL + IL) • Solvency - if assets exceed liability • Net Capital Ratio • Debt-Equity Ratio

  11. Ratios • Net Capital Ratio = Total Assets / Total Liabilities • Debt-Equity Ratio = Total Liabilities / Owners Equity

  12. Terms • Income Statement (Profit / Loss Statement) • list receipts and expenses • Receipts - money received from sales during year • all incomes • Expenses - money paid to operate a business

  13. More Terms • Net Cash Income = Gross Receipts - Expenses • Adjustments to Income: • Expenses Payable • Prepaid Expenses • Adjustments in Inventories • Products grown & used at home • Net Farm Income = Net cash income + Noncash adjustments

  14. Ratios • Operating Ratio = Total Operating Expenses / Gross Income • relates amount of gross income spent on operating expenses • Fixed Ratio = Fixed Expenses / Gross Income • relates amount of gross income spent on fixed expenses • Gross Ratio = Total Expenses / Gross Income • relates amount of gross income spent on all expenses

  15. Even More Terms • Capitol Turnover = (Unadjusted Gross Income + Noncash Adjustment)/ Average Capitol Investment or (Total Assets) • higher rates mean a greater chance of profit or a quicker turnover of money invested • 20% per year is good

  16. Terms • Return to Equity Capital = Net Farm Income - Operator Labor Allowance • amount of income for your labor

  17. Return to Equity Capital • Return On Total Capital = Net Farm Income+ Interest Paid- Operator Allowance--------------------------------- Return to Total Capital • Return on Equity Capital = Return to Equity Capital / Avg Net Worth

  18. Return to Equity Capital • Compare this rate to the cost of borrowing money • if interest rate is lower, it may be profitable to borrow money • if interest rate is higher, do NOTborrow money

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