Strategic Business Planning for Commercial Producers
Assessing Financial Performance:
How Am I Doing?
Strategic Business Planning for Commercial Producers
Topics
• Data required
• Calculation worksheet
• Interpretation
Financial assessment
worksheets
Strategic Business Planning for Commercial Producers
Data required
• Balance sheets
– Beginning of the accounting period
– Ending of the accounting period
• Schedule F and Form 4797 from federal
tax return
• Miscellaneous information
Strategic Business Planning for Commercial Producers
Worksheet 1- Schedule F Data
Schedule F Data
Cost of livestock sold (Schedule F, line 2)
Gross income (Schedule F, line 11)
Depreciation (Schedule F, line 16)
Mortgage interest (Schedule F, line 23a)
Other interest paid (Schedule F, line 23b)
Total expenses (Schedule F, line 35)
Taxable Year:
a
b
c
d
e
f
Balance Sheet
Balance sheet date
Cash
Total current farm assets
Total current farm liabilities
Accrued Interest
Farm accounts payable and accrued exp.
Total farm assets
Total farm liabilities
Owner's equity
Miscellaneous Data
Breeding stock sales (Form 4797)
Number of operators and employees (annual full-time equiv.)
Family living expenses (all families supported by the farm) 1
1
Beginning
g
h
I
j
k
Ending
l
m
n
o
p
q
r
s
t
u
v
This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicates
that 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member
families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the
business and those wages are already include in the value on line f.
Strategic Business Planning for Commercial Producers
Worksheet 1- Balance Sheet Data
Schedule F Data
Cost of livestock sold (Schedule F, line 2)
Gross income (Schedule F, line 11)
Depreciation (Schedule F, line 16)
Mortgage interest (Schedule F, line 23a)
Other interest paid (Schedule F, line 23b)
Total expenses (Schedule F, line 35)
Taxable Year:
a
b
c
d
e
f
Balance Sheet
Balance sheet date
Cash
Total current farm assets
Total current farm liabilities
Accrued Interest
Farm accounts payable and accrued exp.
Total farm assets
Total farm liabilities
Owner's equity
Miscellaneous Data
Breeding stock sales (Form 4797)
Number of operators and employees (annual full-time equiv.)
Family living expenses (all families supported by the farm) 1
1
Beginning
g
h
I
j
k
Ending
l
m
n
o
p
q
r
s
t
u
v
This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicates
that 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member
families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the
business and those wages are already include in the value on line f.
Strategic Business Planning for Commercial Producers
Worksheet 1- Miscellaneous Data
Schedule F Data
Cost of livestock sold (Schedule F, line 2)
Gross income (Schedule F, line 11)
Depreciation (Schedule F, line 16)
Mortgage interest (Schedule F, line 23a)
Other interest paid (Schedule F, line 23b)
Total expenses (Schedule F, line 35)
Taxable Year:
a
b
c
d
e
f
Balance Sheet
Balance sheet date
Cash
Total current farm assets
Total current farm liabilities
Accrued Interest
Farm accounts payable and accrued exp.
Total farm assets
Total farm liabilities
Owner's equity
Miscellaneous Data
Breeding stock sales (Form 4797)
Number of operators and employees (annual full-time equiv.)
Family living expenses (all families supported by the farm) 1
1
Beginning
g
h
I
j
k
Ending
l
m
n
o
p
q
r
s
t
u
v
This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicates
that 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member
families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the
business and those wages are already include in the value on line f.
Strategic Business Planning for Commercial Producers
Worksheet 1- Miscellaneous Data
Schedule F Data
Cost of livestock sold (Schedule F, line 2)
Gross income (Schedule F, line 11)
Depreciation (Schedule F, line 16)
Mortgage interest (Schedule F, line 23a)
Other interest paid (Schedule F, line 23b)
Total expenses (Schedule F, line 35)
Taxable Year:
a
b
c
d
e
f
Balance Sheet
Balance sheet date
Cash
Total current farm assets
Total current farm liabilities
Accrued Interest
Farm accounts payable and accrued exp.
Total farm assets
Total farm liabilities
Owner's equity
Miscellaneous Data
Breeding stock sales (Form 4797)
Number of operators and employees (annual full-time equiv.)
Family living expenses (all families supported by the farm) 1
1
Beginning
g
h
I
j
k
Ending
l
m
n
o
p
q
r
s
t
u
v
This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicates
that 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member
families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the
business and those wages are already include in the value on line f.
Strategic Business Planning for Commercial Producers
Worksheet 1- Case Problem Data
Schedule F Data
Taxable Year:
1
Cost of livestock sold (Schedule F, line 2 )
Gross revenue (Schedule F, line 112)
Depreciation (Schedule F, line 16 or "use cost" number from income
statement)
Mortgage interest (Schedule F, line 23a)
Other interest paid (Schedule F, line 23b)
Total expenses (Schedule F, line 35 or B of income statement +
depreciation or "use cost" number)
X4
A $
B $
C
$
D $
E $
F
$
Balance Sheet
Balance sheet date
Cash
Total current farm assets
Total current farm liabilities
Accrued Interest
Farm accounts payable and accrued exp.
Total farm assets (remove all nonfarm real estate)
Total farm liabilities (remove all nonfarm liabilities)
Owner's equity
Miscellaneous Data
Breeding stock sales (Form 4797)
Number of operators and employees (annual full-time equiv.)
Family living expenses3 (all families supported by the farm)
1,432,549
136,922
89,808
11,788
1,517,050
Beginning
12/31/X5
G
H
I
J
K
$
$
$
$
$
157,689
337,747
252,136
16,968
4,169
T $
U
V $
63,800
9
150,000
Ending
12/31/X5
L
M
N
O
P
Q
R
S
$
$
$
$
$
$
$
$
5,016
485,376
321,867
14,088
6,131
4,655,476
1,121,439
3,534,037
Strategic Business Planning for Commercial Producers
Worksheet 1 - Net Farm Income
Calculations
Net Farm Income
Gross revenues [A+B+T+(M-L)-(H-G)]
Interest expense [D+E+(O-J)]
Other expenses [A+F-(D+E)+(P-K)]
Net farm income [W-X-Y]
W
X
Y
Z
Strategic Business Planning for Commercial Producers
Net Farm Income Calculations
for Case Problem
Net Farm Income
Gross revenues [A+B+T+(M-L)-(H-G)]
Interest expense [D+E+(O-J)]
Other expenses [A+F-(D+E)+(P-K)]
Net farm income [W-X-Y]
W
X
Y
Z
$
$
$
$
1,796,651
98,716
1,417,416
280,519
Strategic Business Planning for Commercial Producers
Worksheet 2
Profitability
Return on Assets [(z+x-v)/q]*100
Return on Equity [(z-v)/s]*100
Operating Profit Margin [(z+x-v)/w]*100
Liquidity
Current Ratio [m/n]
Solvency
Debt-to-Asset Ratio [r/q]*100
Financial Efficiency
Asset Turnover Ratio [w/q]*100
Revenue per Full Time Laborer [w/u]
Operating Expense Ratio [ (y-c)/w]*100
Depreciation Expense Ratio [ c/w]*100
Interest Expense Ratio [ x/w]*100
Net Farm Income Ratio [ z/w]*100
Your Farm
Benchmark
Strong/Weak
Strategic Business Planning for Commercial Producers
Worksheet 2 - Case Problem
Profitability
Return on Assets [(Z+X-V)/Q]*100
Return on Equity [(Z-V)/S]*100
Operating Profit Margin [(Z+X-V)/W]*100
Your Farm
4.9%
3.7%
12.8%
Liquidity
Current Ratio [M/N]
1.51
Solvency
Debt-to-Asset Ratio [R/Q]*100
Financial Efficiency
Asset Turnover Ratio [W/Q]*100
Revenue per Full Time Laborer [W/U]
Operating Expense Ratio [ (Y-C)/W]*100
Depreciation Expense Ratio [ C/W]*100
Interest Expense Ratio [ X/W]*100
Net Farm Income Ratio [ Z/W]*100
24.1%
$
38.6%
199,628
71.3%
7.6%
5.5%
15.6%
Benchmark*
5.8%
5.7%
13.5%
3.62
14.5%
43.0%
$
251,998
55.2%
7.2%
3.3%
34.3%
Strategic Business Planning for Commercial Producers
Diagnosis
• Assessment in four areas
–
–
–
–
Profitability
Liquidity
Solvency
Financial efficiency
Strategic Business Planning for Commercial Producers
Indicators of Financial Strength
• Values larger than benchmark
–
–
–
–
–
–
ROA
ROE
Operating profit margin
Asset turnover ratio
Revenue per full-time worker
Net farm income ratio
Strategic Business Planning for Commercial Producers
Indicators of Financial Strength
• Values smaller than benchmark
–
–
–
–
Debt-to-asset ratio
Operating expense ratio
Depreciation expense ratio
Interest expense ratio
Strategic Business Planning for Commercial Producers
Worksheet 2 - Assessing
Financial Performance
Profitability
Return on Assets [(Z+X-V)/Q]*100
Return on Equity [(Z-V)/S]*100
Operating Profit Margin [(Z+X-V)/W]*100
Your Farm
4.9%
3.7%
12.8%
Liquidity
Current Ratio [M/N]
1.51
Solvency
Debt-to-Asset Ratio [R/Q]*100
Financial Efficiency
Asset Turnover Ratio [W/Q]*100
Revenue per Full Time Laborer [W/U]
Operating Expense Ratio [ (Y-C)/W]*100
Depreciation Expense Ratio [ C/W]*100
Interest Expense Ratio [ X/W]*100
Net Farm Income Ratio [ Z/W]*100
24.1%
$
38.6%
199,628
71.3%
7.6%
5.5%
15.6%
Benchmark* Strong/Weak
5.8%
weak
5.7%
weak
13.5%
weak
3.62
weak
14.5%
strong
43.0%
$
251,998
55.2%
7.2%
3.3%
34.3%
weak
weak
weak
weak
weak
weak
Strategic Business Planning for Commercial Producers
Source of problems
•
•
•
•
Scale
Employment
Efficiency
Debt structure
Strategic Business Planning for Commercial Producers
Diagnostic tree
…………. Diagnostic factors ………….
Efficiency
Scale
Debt structure
Courses of action
OK
OK
Not OK
OK
OK
Not OK
Not OK
OK
Not OK
OK
Not OK
Not OK
OK
Not OK
Source:Financial Troubleshooting
Strategic Business Planning for Commercial Producers
Courses of action to improve
efficiency
•
•
•
•
•
Increase analysis of production records
looking for clues that will lead to
improved efficiency
Use advisory services to help focus on
productivity and thruput
Work at improving production skills
Improve marketing skill and
performance
Devote more time to management
Strategic Business Planning for Commercial Producers
Courses of action to improve
scale
• Examine whether management ability is
sufficient to handle business of the current
size or an expansion
• Use fixed resources fully by adding
enterprises and/or custom work
• Expand existing enterprises with lowcapital requirements
• Merge with another farming unit
Strategic Business Planning for Commercial Producers
Courses of action to improve
employment
• Increase off-farm employment
• Eliminate hired family employees
• Add labor intensive enterprises with low
capital requirements (increase the scale)
• Reduce family withdrawals to a level that
is consistent with efficiency or part-time
employment
Strategic Business Planning for Commercial Producers
Courses of action to improve
debt structure
•
•
•
•
Restructure debt
Sell unproductive assets to reduce debt
Reduce debt through write-off
Scale back farm to allow significant increases
in off-farm employment
• Don’t own what you can control through leases
• Evaluate the rate of return expected from
capital investments and compare to interest
rate
Strategic Business Planning for Commercial Producers
Summary
• Utilize existing data
• Identify appropriate benchmarks
• Assess efficiency, scale, employment, and
debt structure to identify actions that will
improve performance
Strategic Business Planning for Commercial Producers
Strategic Business Planning for
Commercial Producers