Recommendations on Using
Financial Information
Dr. Barbara M. Wheeling
Montana State University Billings
Financial Benchmarking
Process of comparing the performance of an enterprise
against the performance of other similar enterprises
through the use of comparable and reliable data
Trends
Farm benchmarks on the production side are common
• Yields, weaning weights, pounds of milk, etc.
Increasing use of financial data in farm benchmarking
• Benchmarking databases
• Articles, webinars, worksheets
• Consultant services, surveys
U. S. databases (examples)
• CFFM, Purdue Extension, Illinois FBFM, Farm Credit Services
• NPPC, NCBA, DHIA
International databases (examples)
• UK, New Zealand, Canada, Australia, South Africa, France
Comparability
Comparability requires
• Reliable accounting information
• Similar inputs
• Similar systems of classifying income, expenses, assets and liabilities
• Similar procedures for constructing financial statements
• Similar procedures for calculating financial ratios and measures
Benchmarks
Previous year’s data
• Comparative Analysis: Year-to-year comparisons for a farm over time
• Common-size statements can also be compared from year to year
Base year’s data
• Trends over multiple years may be more meaningful than current year compared to past year
Data from farm-to-farm comparisons
• “How is my neighbor doing?”
• Comparisons with averages of similar farms
Ratios
Financial ratios “level the playing field”:
Example: Farm “A”
Accrual Adjusted Net Income = $50,000, Total Assets = $400,000
Return on Assets = 12.5%
Example: Farm “B”
Accrual Adjusted Net Income = $100,000, Total Assets = $1,000,000
Return on Assets = 10.0%
Issues to Consider
Comparability from an Accounting Perspective
• SFAC #2: Common accounting methods are central to comparison of financial
information
• Compromised by
• incomplete or inaccurate information
• inconsistency in accounting methods
Example:
• Debt/Asset ratio
Balance sheet that includes deferred taxes
Debt = $555,339
Assets = $1,107,764
Debt/Asset = 50.1%
Balance sheet that excludes deferred taxes
Debt = $338,596
Assets = $1,107,764
(Data from Appendix A, Financial Guidelines for Agricultural Producers, 2011.)
Debt/Asset = 30.6%
Accounting factors affecting comparability (a partial list)
• Farm organization, entity mix
• Cash vs accrual or accrual-adjusted accounting
• Valuation methods
• Treatments for owner withdrawals, investments, wages, income taxes
• Financial statement dates
• Non-farm activities
Example of cash-basis vs accrual-adjusted accounting:
• Net Farm Income From Operations Ratio
Cash-basis: $26,000 ÷ 175,000 = 14.86%
Accrual-adjusted: $70,000 ÷ 200,000 = 35%
(Data from Appendix E, Financial Guidelines for Agricultural Producers, 2011.)
Comparability from a Business Perspective
• Variability in farm characteristics is ultimately reflected in financial statements
• Benchmarking against similar farms can help identify and explain how producer’s
decisions are affecting financial performance
Farm characteristics affecting comparability (a partial list)
• Farm size
• Farm type
• Farm location
• Ownership of land
• Management and financing decisions
• Group exercise (Handout)
Further Analysis
• Comparisons are the beginning of more in-depth analysis.
• Explanations of the differences between a farm’s data and the benchmarks
are necessary to truly understand what can be controlled by the farm
manager.
• Variance analysis becomes a useful tool.
• Examine the components of the ratios.
Example:
Years Ended December 31,
'X8
Gross Revenues
Net Income from Operations
Total Assets
'X7
$304,699
$304,699
54,306
57,205
$ 753,147
$ 748,509
• Question to ask: Gross Revenues maintained at the same level in ‘X8 as in
‘X7. Is that a good result? Answer: It depends!
• If Gross Revenues did not change, what caused the decline in Net Farm
Income from Operations?
• Total Assets increased—why? Buildup of inventory? Purchase of new
machinery or other assets? Was this a good business decision?
• What does it mean if Total Assets decrease?