Financial Performance Analysis
Charles Brown
Field Specialist - Farm Management
crbrown@iastate.edu
641-673-5841
The Concept of Performance Analysis
1. Where did the money come from?
2. How was the money used?
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The Concept of Performance Analysis
• Two step process:
– Evaluates the operations area of the business for profits/efficiency/consistency
– Capital performance evaluated – areas of equity, liabilities, and assets
• Components of this evaluation:
– Operating efficiency
– Use of operating profit
9
Analyzing Cash Flow from Operations
• Profit for the needs of the areas of assets, liabilities,
equity and family living?
• Operating efficiency of the business?
• Is operating efficiency consistent? (Trends)
10
Operating Profit
Operating profit measures how much capacity is available from operations.
Operating Profit Formula
Total Revenue or Gross Profit (Value of Farm Production) – whichever is less
Minus all expenses except interest, depreciation, and amortization
Equals Operating Profit
- Think of your Schedule F from your tax return
- Take your net profit and add back in interest expense, depreciation and possibly amortization
Other adjustments to consider
- Breeding livestock sales
- Wages paid to spouse and Section 105 Plans for spouse
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Operating Efficiency
Operating efficiency measures how well the business produces capacity (cash).
Operating Efficiency Formula
Operating Profit
Divided by Total Revenues, *Gross Profits or VFP (whichever is less)
Equals Operating Efficiency Percentage
The higher the percentage, the better the efficiency.
- Again think of your Schedule F
- Take your Net Profit(addback, interest, depreciation and feed cost if livestock operation)/ Gross Revenues(minus feed
costs if livestock operation)
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Effects of OP Efficiency on Business
% Operating Efficiency
45%
35%
25%
15%
Total Revenue or Gross Profit(VFP) $1,000,000 $1,000,000 $1,000,000 $1,000,000
Production Expenses $550,000 $650,000 $750,000 $850,000
Operating Profit $450,000 $350,000 $250,000 $150,000
Operational Summary
• Is there a reasonable amount of operating profit?
• Is the operating efficiency acceptable?
• Is the operating efficiency consistent?
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How is Operating Profit Used?
•
The use of capital is divided into four areas, which are:
1. Interest
2. Owner withdrawals, usually family and taxes for sole proprietors,
dividends for corporations and draws for partnerships
3. Debt-Principal Repayment
4. Assets – Growth/Replacement and Risk
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Rules of Thumb
Interest
Living & Taxes
Debt Service
Growth & Risks
% of Operating Profits
25%
60%
25%
25%
40%
25%
Asset Turnover Ratio
Total Revenue or VFP divided by Average Farm Assets
Example
- Total Revenue = $1,000,000
- Average Farm Assets = $3,000,000
ATO = $1,000,000/$3,000,000 = .33
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Asset Turnover Ratio
• What is a good ATO?
Asset Utilization
ATO
LOW
.29 or less
AVE
.30 to .59
HI
.60 or greater
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ATO Effects on $ Available
Asset Value
Asset Turnover
Annual Revenue
Operating Efficiency
Amount Available for:
Interest
Owner Demands & Taxes
Debt Principal
Assets/Growth
$1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000
1
0.75
0.5
0.25
0.15
$150,000 $250,000 $500,000 $750,000 $1,000,000
35.0%
35.0%
35.0%
35.0%
35.0%
$87,500 $175,000 $262,500 $350,000
$52,500
$87,500
$65,625
$43,750
$21,875
$13,125
$87,500
$65,625
$43,750
$21,875
$13,125
$87,500
$65,625
$43,750
$21,875
$13,125
$87,500
$65,625
$43,750
$21,875
$13,125
$300,000
REVENUE
40% = $120,000
PROFITS
D/A = .30
Debt = $300,000
ATO = .30
$1,000,000
ASSETS
DEBT
LIVING
EQUITY
INTEREST
$20,000
&
$55,000
$30,000
&
$15,000
$100,000
REVENUE
40% = $40,000
PROFITS
D/A = .30
Debt = $300,000
ATO = .10
$1,000,000
ASSETS
DEBT
LIVING
EQUITY
INTEREST
$20,000
&
-$5,000
$10,000
&
$15,000
Operating Efficiency
A-B =
C=
D=
D/(A-B) =
$463.63 =
($220.00) =
$243.63 =
52.55% =
VFP(GP)
Expenses
Operating Profit
Efficiency
ATO
Assets
Cow
Machinery
Land
Total
$2,000.00
$250.00
$0.00
$2,250.00
0.206 =ATO(VFP/Total Assets)
Assets
ATO
Revenue
Efficiency
Operating Profit
25% Rule
$500,000
0.206
$103,028
52.55%
$54,139
0.25
$13,534.81
Loan Amount
Term
Interest Rate
% of OP used
Supported Debt
Debt Supported Based On One Cow Unit
Term
5
Interest Rate
5.00%
% of OP used
50.00%
Supported Debt
($527)
5
5.00%
75.00%
($175,796)
a
Corn
Revenue
$
Assets
Equipment/ac $
Land/ac $
Corn
Soybeans
720.00 $
528.00
500.00 $
8,000.00 $ 8,000.00
ATO (Revenue/Assets)
0.08
Operating expenses
$
Rent
$
Operating profit (OP)
$
Efficiency (OP/Revenue)
400.90 $
$
319.10 $
44.32%
25% rule $
Interest rate
Term-years
% of OP used
Amout of debt supported/ac
500.00
79.78 $
5.00%
20
50.00%
($1,988)
0.06
201.19
326.81
61.90%
81.70
5.00%
20
50.00%
($2,036)
Assets
ATO
Revenue
Efficiency
$1,680,000
0.08
$142,306
44.32%
Operating Profit
$63,069
Interest rate
Term-years
% of OP used
Amount of totaldebt supported
5.00%
20
50.00%
% down paymentneeded
($392,991)
76.61%
FINANCIAL PERFORMANCE ANALYSIS
FI NANCI AL PER FOR MANCE ANALYSI S
Financial Performance
Thank You!