Financial Planning with
FAST Tools
By Paul N. Ellinger
Gary Schnitkey
Travis Farley
1
FAST Tools
• farmdoc companion project initiated in 1999
• Development of 42 spreadsheet-based tools to aid decisions for
producers, lenders, consultants and investors
• Facilitate use, access, distribution of tools and resources
through CD and internet distribution
– Quarterly subscription
– farmdoc download
– via workshops
• Approximately, 30,000 CDs produced and another 35,000
downloads
• Increased demand for education and training
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Women in Agriculture: April 2006
Current Resources and Activities
• 45 laptop computer lab
• FAST educator / coordinator
• CD duplication
– internal and cooperate w/other extension programs
• 50+ annual meetings in Illinois / integrated FAST
– 80% were supported w/RMA
• Teaching modules for each program
– Case studies and examples
Theme & Focus
Teach Decision Making
Integrate and utilize FAST
Not just computer training
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Women in Agriculture: April 2006
Educational Efforts
3 Dimensions
Host(s)
Content/
Meeting Type
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Women in Agriculture: April 2006
Content: Modules
• Financial planning
• Crop insurance
• Grain inventory pricing and
management
• Machinery management
• Land investment and lease analysis
• Enterprise analysis
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Women in Agriculture: April 2006
Audiences
• Farmers
Targeted and General
– General and women via Annie’s project
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•
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Lenders
FSA
Farm bureau managers
College and High School Students
Educators (train the trainer programs)
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College and Jr College instructors
Vo-Ag Teachers
Extension Educators
State record fieldstaff (Iowa, KY, Illinois and Alabama)
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Women in Agriculture: April 2006
Hosts
“Getting the right people at the table”
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Typical Extension Channels
Farm Bureau
Farm Credit System
Commercial Banks
Growmark
State Record Keeping Associations
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Women in Agriculture: April 2006
FAST Tools - Overview
Computerized
Decision Aids
Financial
Analysis
Investment
Analysis
Loan
Analysis
Farm
Management
farmdoc
materials
AgMas
Crop Insurance
Proceedings:
Farm
Management
Financial
Management
Grain Marketing &
Management
Grain Marketing
Risk
Management
Policy
Yield and Land
Database Utilities
Law and Taxation
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Women in Agriculture: April 2006
Financial Analysis
Assist in preparing and interpreting financial
information and
measuring financial health
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Appraisal of current financial position
Balance sheet
Ratio calculator
Cash flow planning
Cash to accrual income approximation
Estimates of deferred taxes
Repayment capacity analysis
Personal financial planning
Longer-term planning – in development
Net worth allocation
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Women in Agriculture: April 2006
Investment Analysis
Assist in measuring the economic returns and
performance
of alternative types of investments.
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Capital budgeting
Grain bin analysis
Land purchase analysis
Lease versus purchase
Machinery financing
MACRS calculator
Savings calculator
Time value of money calculator
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Women in Agriculture: April 2006
Loan Analysis
Assist in calculating loan payments and schedules;
comparing alternative loans; and measuring the
sensitivity of payments to changes in loan parameters
 Loan amortization
 Loan comparison
 Revolving loan calculator
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Women in Agriculture: April 2006
Farm Management
Assist in developing enterprise budgets and
breakeven levels; estimating costs of machinery
operations; and comparing crop insurance and
farmland leasing alternatives
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Break even analysis
Crop budgeting tool
Crop insurance calculator
Enterprise allocation and analysis
Farmland lease analysis
Machinery lease analysis
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Women in Agriculture: April 2006
Grain Marketing and Management
Assist in tracking grain inventory and
estimating the costs and returns of grain
storage and delivery
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Crop storage analysis
Grain delivery model
Grain pricing model
Grain inventory management
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Women in Agriculture: April 2006
Risk Management
Assist in evaluating the impact of farmland lease types
as well as marketing and crop insurance strategies on
revenue and income distributions.
 Crop insurance historical evaluator
 Farm rent evaluator
 Marketing and crop insurance risk model
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Women in Agriculture: April 2006
Yield and Land Database Utilities
Assist in analyzing county-level historical crop
yields and land prices and assist with common
computations related to soil productivity
measures and yield predictions
 Illinois, Indiana, Iowa crop yield database
 Illinois farmland sales database
 Illinois soil productivity index utilities
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Women in Agriculture: April 2006
Financial Planning Modules
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Day Program
• Repayment analysis
• Ratio analysis
• Financial Planning
– Annual and multi-year
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Women in Agriculture: April 2006
Repayment Capacity
• Critical for determining and understanding
the income needs from the farming operation
• Good discussions regarding family living
budgets
– Resources:
• Illinois record keeping data
• Consumer expenditure studies
www.bls.gov/cex/
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Women in Agriculture: April 2006
Repayment Capacity, cont.
Name
Joe and Elise Farmall
Family living withdrawals
$
44,000
Net non-farm income
$
35,000
Income and social security taxes
$
12,000
Capital expenditures: farm business
$
26,000
Capital expenditures: nonfarm business and family
$
-
Desired annual savings for education
$
-
Desired annual retirement savings/contributions
$
6,000
Excess carryover operating debt
$
-
Other cash needs
$
-
Tillable acres
1,400
Number of term loans and capital leases
2
Typical ratio of farm operating income to
gross revenue
15%
Total depreciation
$
26,500
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Women in Agriculture: April 2006
Stage 1: Repayment Analysis
Required Earnings Analysis
Joe and Elise Farmall
Stage 1
Debt and capital lease obligations:
Term interest
Scheduled term principal payments
Family living expenses
Income and SS taxes
Excess carryover operating debt
Net non-farm income
Required net earnings before interest, taxes and depreciation (EBITDA)
Sensitivity
Range
$
$
21,750
30,318
44,000
12,000
35,000
100% $
110% $
125% $
73,068
80,374
91,334
-
Per acre
15.54
21.66
31.43
8.57
0.00
25.00
$
$
$
52.19
57.41
65.24
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Women in Agriculture: April 2006
Stage 2: Repayment Analysis
Required Earnings Analysis
Joe and Elise Farmall
Stage 2
Desired Investment flows:
Capital expenditures for the farm business
Capital expenditures for non-farm and family
Desired annual savings for education
Desired annual retirement savings/contributions
EBITDA required to meet all investment flows, interest, taxes and deprec.
Sensitivity
$
Per acre
$
26,000
6,000
$
18.57
4.29
100% $
110% $
125% $
105,068
115,574
131,334
$
$
$
75.05
82.55
93.81
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Women in Agriculture: April 2006
For Illinois: Risk Analysis
• Enter Budget and Crop Insurance Data
• Based on 31 years of county level production
and price data
• Assess the likelihood of achieving income
levels needed
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Women in Agriculture: April 2006
Repayment Capacity & Income Needs Risk
Analysis
1
1
1
Owned
Land
Share
Rent
50-50
Fixed
Cash
Rent
Operator's
Farm
Total Acres
200
600
600
1,400
Percent
14%
43%
43%
100%
$133
$49
$28
$52
Historical average 3
$142
$53
$37
$59
High (1 in 33 years)4
$216
$91
$111
$118
Low (1 in 33 years)4
-$21
-$28
-$126
-$69
REVENUE LESS CASH NONINTEREST COSTS (per acre)
Budgeted average1
Variability analysis2
Chance of revenue below:4
Stage 1
$52
3%
33%
67%
43%
Required net earnings before
interest, taxes and depreciation
(EBITDA).
$57
3%
61%
70%
56%
$65
6%
73%
79%
66%
Stage 2
$75
6%
88%
85%
75%
EBITDA required to meet all
investment flows, interest, taxes
and deprecation.
$83
9%
91%
88%
78%
$94
12%
100%
91%
84%
Ratio Calculator
• Designed to assess financial health through ratio and
trend analysis
• Minimum set of data needed to complete the “sweet
16” ratios
• Calculate “scaled” health and trend index for each
ratio.
• Store multiple years
• Professional version for multiple customers
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Women in Agriculture: April 2006
Educational Programs
• Case study
• Drawbacks and cautions of financial ratios
• Evaluate the strong and weak areas (liquidity,
profitability, leverage, repayment capacity)
• Assess strategies to improve the various
areas
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Women in Agriculture: April 2006
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Women in Agriculture: April 2006
Why Budget?
• Decision analysis benchmarks
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Cost control
Marketing
Identify opportunities
Contingency planning
Meet financial goals – discipline
Managing cash surplus/deficits profitably
Organization
Communication
Monitor performance
And … my lender wanted one
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Women in Agriculture: April 2006
Desired Components of a
Financial Plan
• Focus on projected profitability of a plan – not just cash flow
– What do we need to break even?
– What cushion do we have to meet debt payments?
• Sensitivity analysis (stress testing)
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Prices
Production
Costs
Interest rates
• Basis of comparison and validation
– Benchmarks
– Previous year comparison
– Comparison to actual
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Women in Agriculture: April 2006
Getting Organized
•
Synchronize cash, loan, and inventory balances
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Total cash expenses for 2005
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Current inventories
•
Status of government payments
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Balance and payment schedules for loans
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Items prepaid for 2006 crop and payable for 2005 crop at the end of
the year
– Units and price
– Due from 2005 crop
– Interest owed at end of year
– Scheduled payments
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Women in Agriculture: April 2006
Getting Organized, continued
• Enterprise cropping plan
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acres
share of acres
lease type and share
expected production
government payments
costs per acre
• Crop insurance protection
– Level of yield or revenue protection
• Livestock plan
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Expected production
Expected sales and purchase price
Feed costs
Other livestock expenses
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Women in Agriculture: April 2006
Getting Organized, continued
• Planned capital purchases
– Expected level and cost of financing
• Nonfarm sources and uses of cash
– Wages
– Business income/expenses
– Family withdrawals
• Before visiting lender
– Check if lender is using suggested commodity prices
– View Consumer Credit Report: See handout
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Women in Agriculture: April 2006
Financial Analysis
• Case Study
• Enter complete set of cash flow information
• Customize budget entries per site location
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Women in Agriculture: April 2006
Financial Planning Attributes
• Built-in risk parameters
• Quarterly projections
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Cash flow
Income statements
Commodity sensitivity and break even
Previous year comparison
Scenario analysis
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Women in Agriculture: April 2006
Financial Planning
Demos
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Comments and Questions
• Complimentary CDs
• Looking for reviewers, partners and ideas
• Cooperate in CD production
• Facilitate your programs
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Women in Agriculture: April 2006