Strategic Business Planning for Commercial Producers
Financial Documentation Basics:
How Do I get Started?
Strategic Business Planning for Commercial Producers
Objectives
• Understand the basics of accurately measuring
financial performance (profitability)
• Explore issues that affect the completeness and
accuracy of financial statement information
• Examine the impact of these issues on financial
performance measures
Strategic Business Planning for Commercial Producers
Strategic Business Planning for Commercial Producers
Basic Financial Statements
 Balance Sheet (beginning and
ending)
Assets, liabilities & equity
 Income Statement
Revenue, expenses and profit
 Statement of Owner Equity
Sources of change in equity
 Statement of Cash Flows
Sources of change in cash
End of Year
Beginning of Year
BALANCE SHEET
BALANCE SHEET
Assets
Assets
Liabilities
Liabilities
Equity
Equity
PLUS
INCOME
STATEMENT
STATEMENT OF
OWNER EQUITY
Revenues and
gains minus
expenses and
losses
Change in equity
Owner contributions,
retained earnings, &
valuation
EQUALS
STATEMENT OF CASH FLOWS
PLUS
Inflows of cash minus outflows of cash (change in each
balance sheet account from the beginning to the end of the
accounting period to determine how those changes affected
the cash account)
EQUALS
Strategic Business Planning for Commercial Producers
What Entity?
• Entity Concept: business accounts are
kept for business entities rather than the
persons who own and operate them.
• Personal financial information can be reported in
a personal financial statement called a Statement
of Financial Condition.
• Personal financial information
must be separated from
business information.
Strategic Business Planning for Commercial Producers
Entities
Farm Business
Owners
Strategic Business Planning for Commercial Producers
Measuring Net Income - Accrual
Versus Cash
Accrual financial reporting: recognizing income
on the income statement in the period it is
earned and expenses in the period in which
they are incurred.
versus
Cash accounting: accounting for cash receipts
when received and cash expenditures when
paid.
Beginning of Year
End of Year
BALANCE SHEET
BALANCE SHEET
Assets
Current
Noncurrent
Assets
Current
Noncurrent
Liabilities
Current
Term
Equity
$337,747
$4,091,600
$252,136
$891,220
$3,285,991
Liabilities
Current
Term
Equity
$485,376
$4,170,100
$321,867
$799,572
$3,534,037
Precise classification of assets and
liabilities is important!
Strategic Business Planning for Commercial Producers
Types of Accrual Adjustments
• Current assets excluding cash
Examples: accounts receivable,
grain/feed inventories, market
livestock, supplies & prepaid
expenses, investments in growing
crops
• Farm accounts payable
• Accrued interest
• Other accrued expenses
Strategic Business Planning for Commercial Producers
Accrual Adjustments Noncurrent Assets
• Depreciation expense is an accrual adjustment typically
associated with noncurrent section of the balance sheet.
• Gains or losses on noncurrent assets that are an ordinary
and necessary part of production activities (sales of cull
cows/sows) are included in net income from operations.
• Gains or losses on noncurrent assets that are
nonrecurring are included in net income but not net
income from operations.
End of Year
Beginning of Year
BALANCE SHEET
BALANCE SHEET
Assets
Assets
Liabilities
Liabilities
Equity
STATEMENT OF CASH FLOWS
BEGINNING CASH
Operating activities
Net cash income
- Cash withdrawals
Investing activities
Capital sales
- Capital purchases
$157,689
$52,421
$150,000
-$97,579
$63,800
$97,895
-$34,095
Financing activities
New borrowing
$150,000
- Principal payments $170,999
-$20,999
ENDING CASH
$5,016
Equity
MBC Farms Income Statement
Revenue
Cash sales & govt.
Payments
$1,432,549
Breeding Stock
$63,800
Change in:
Inventory
$38,015
Accounts receivable
$77,140
Prepaid expenses
$185,147
Gross revenue
$1,796,651
Expenses
Cash
$1,517,050
Change in:
Accounts payable
$1,962
Accrued interest
-$2,880
Operating Expense
Net Farm Income from Operations
$1,516,132
$280,519
Strategic Business Planning for Commercial Producers
Cost or Market Values?
How should farm business assets be
valued on the farm balance sheet?
A. Market
B. Cost
C. Both
Strategic Business Planning for Commercial Producers
General Advantages
•
•
•
•
•
Market Values
Easy to derive
More comparable
across farms
Benchmark data
readily available
Better measure of
opportunity cost
Required by lenders
Cost Values
• More accurate
measure of actual
performance of
invested capital
• Better measure of
financial progress
over time
• Critical for
determining the
sources of equity
change in the business
Strategic Business Planning for Commercial Producers
Ratio Comparison
MBC Farms at:
Market
Cost
Operating Profit Margin
12.8%
12.8%
Asset Turnover
38.6%
74.6%
Return on Assets
4.9%
9.5%
Return on Equity
3.7%
10.1%
Debt to Asset Ratio
24.1%
46.6%
Current Ratio
$1.51:1
$1.51:1
Strategic Business Planning for Commercial Producers
What are the sources of equity?
• Paid-in capital/Contributed capital
– Contributions of equity from owners
• Retained earnings
– Business generated net income less withdrawals
from the business
• Valuation equity
– Excess of the market values of noncurrent assets
over their cost values (investment less depreciation)
– Valuation equity is unearned and may never be
realized
Beginning of Year
End of Year
BALANCE SHEET
BALANCE SHEET
Assets
Current
Noncurrent
Assets
Current
Noncurrent
Liabilities
Current
Term
Equity
$337,747
$4,091,600
$252,136
$891,220
$3,285,991
$485,376
$4,170,100
Liabilities
Current
Term
$321,867
$799,572
Equity
$3,534,037
MBC Farms – Market Value Balance Sheets
Ending owner’s equity
Minus beginning owner’s equity
Equals increase in owner’s equity
$3,534,037
$3,285,991
$ 248,046
The source may be as important as the amount!
Strategic Business Planning for Commercial Producers
Valuation Equity: MBC Farms
Beginning Balance Sheet
Noncurrent
Assets
Ending Balance Sheet
Cost
Market
Valuation
Equity
Cost
Market
Valuation
Equity
Breeding
Livestock
0
175,000
175,000
0
181,250
181,250
Machinery
155,326
376,850
221,524
155,564
339,165
183,601
1,551,330
3,108,503
1,557,173
1,551,330
3,240,000
1,688,670
255,793
431,247
175,454
216,529
409,685
193,156
1,962,449
4,091,600
2,129,151
1,923,423
4,170,100
2,246,677
Land
Buildings
Totals
Increase in valuation equity = (2,246,677– 2,129,151) = $117,526
Beginning of Year
BALANCE SHEET
End of Year
BALANCE SHEET
Assets
$4,429,347
Assets
$ 4,655,476
Liabilities
$1,143,356
Liabilities
$ 1,121,439
Equity
Contributed Cap
Retained Earnings
Valuation Equity
Total Owner’s Equity
$
0
$1,298,359
$2,246,677
$3,534,036
Equity
Contributed Cap $
0
Retained Earnings $1,156,840
Valuation Equity $2,129,151
Total Owner’s Equity$3,285,991
Statement of Changes in Owner’s Equity
Increase in contributed capital
Increase in retained earnings
Increase in valuation equity
Total change in equity
$
0
$ 130,519
$ 117,526
$ 248,045
Strategic Business Planning for Commercial Producers
Key Points?
1. Make accrual adjustments to
accurately measure profitability and
financial position
2. Cost and market value based
measures are each useful in their
own ways:
 market for benchmarking,
creditworthiness
 cost for trend analysis, performance of
invested capital, and evaluating leverage
Strategic Business Planning for Commercial Producers
Strategic Business Planning for
Commercial Producers