Managing Risks With
Financial Analysis
What's
Your
Plan?
What's Your Plan?
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Production
Financial
Marketing
Human Resource
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Are You a Risk Taker?????
Production
Financial
Marketing
Human Resource
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Do You Take Unnecessary Risks????
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Objectives For This Session
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Gain an understanding of:
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Business’s financial position & performance
analysis
Interaction among financial statements
Financial interaction/impact the family has on the
business
Different types of risk affecting the business.
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Key Producer Items/Concerns
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Adequate funds for family living (All Families)
Alternative enterprises, enterprise mix
Debt Load and Structure
Expansion plans/capabilities
Dependences
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Government payments
Off Farm Inflows
Managing cost of production, financial info,
marketing, labor (family)
Tight profit margins
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Financial Trends in Agriculture
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Suggest several slides reviewing Ag financial
health
Trends in
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Farm Net Income
Debt Load and Structure
Number of farms
Sources of Ag Household income
Use these as background information
Three examples follow
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Net Farm Income
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Net Cash Farm Income
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Total Production Expenses
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Complete Financials Required
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Beginning and Ending Balance Sheets
Cash Flow Statement
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New form = Statement of Cash Flows
Accrual Adjusted Income Statement
Statement of Owner Equity
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Terminology Causes Us Problems
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All cash inflows are not income
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All cash outflows are not expenses
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Principal payments to lenders
Expense versus Expenditure
You can have non-cash expenses
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Loan proceeds from lenders
Depreciation most common
Also through accrual adjustments
You can have non-cash income
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Accrual adjustments
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Just Like Balancing a Check Book
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+
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-
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=
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Beginning Cash Balance
Inflows
These are
Linked
Outflows
Ending Cash Balance
Your business performance is measured
the same way using a complete set of
financial statements
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Statement of Owner Equity
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Beginning Owner Equity
+ Net Income
Balancing a Checkbook
- Withdrawals
Beginning Equity
+ Contributions
+/- Activity
= Ending Equity
- Distributions
+/- Change in Valuation
= Ending Owner Equity
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Some Topics for Examination
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Withdrawals
Non-business income
Government Payments
Cost of Production
Debt Load (asset and liability structure)
Asset revaluation
Capital asset purchase
Risk Protection Tools (Insurance)
Non-cash income
Non-cash expense (not depreciation)
Contributed capital
Distributed capital
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Withdrawals
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Note the:
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Net worth (equity) on the balance sheet and the change
in equity from beginning to end of year
Note net income (Accrual Adjusted Income Statement)
The relationship between cash flow and the balance
sheet, follow the red arrows.
Change family withdrawals to zero
What is relationship of Net Income and change in
equity
What does this tell us about how equity growth in
the business MUST occur
Change family withdrawals back to $30,000
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Continuation of Owner Withdrawals
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With a positive Cash Flow
No operating loan carryover
May be a negative net worth change
If so, the system tells how much owner draw
is impacting net worth
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Also indicates the amount of money from nonbusiness sources that must be brought into the
operation
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Continuation of Owner Withdrawals
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With a negative Cash Flow
Will have an operating loan carryover
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Carryover amount indicates the dollar adjustment
necessary from:
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Off farm earnings
Income and/or expense adjustements
Combination of all the above
If from Off-Farm, enter as a nonbusiness
cash inflow.
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May still be a negative equity change
Correct with more non-business inflow
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Family Living & Form of Ownership
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Sole Proprietor versus Corporation
Change family living withdrawal to a business
expense
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Zero out Owner Withdrawals and enter total dollars of
“family living” on the “Other Cash Business Expense” line
of the Cash Flow
Illustrates the effects of a corporate form of ownership
Review effects on
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Income Statement,
Cash Flow,
Balance Sheets,
Relationship between Net Income and Net Worth Change
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Non Business Income
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Income not generated by business assets
Types of non business income
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Off farm wages
Non farm earnings (interest, dividends, etc)
Interest earned on a farm business checking
account would be considered business
income.
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Government Payments
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Note current profit levels and cash flow
position
Reduce/eliminate government payments on
crops
Effects on cash flow, net income, equity
Implications for profit
 Profit  Net Cash Flow  Taxable Income
Implications for the size of the business
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Where is the risk?
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Cost of Production
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Implications for this operation
Do you know your cost of
production??????
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Enterprise record keeping system
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Quicken or QuickBooks
Spreadsheets that allow you to allocate income
and expenses to enterprises
If you can not measure it, you can
not manage it
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Debt Load and Structure
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Example starts with approximately
16.5% debt load
What is the debt load that can be
carried by an operation this size?
What about debt structure?
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Short vs long term debt
How does family living withdrawal effect
debt carrying capacity?
Crop vs Livestock operations
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Asset Revaluation
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Assets are occasionally revalued to reflect
inflationary pressures
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Machinery, land, buildings, improvements,
breeding livestock
Necessary to accurately reflect the market
value of these assets
Do not misinterpret this increase in equity
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Is not due to business performance
Can be very misleading and can mask serious
business performance issues
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Capital Asset Purchase
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Question: Will purchasing a new capital asset
increase your net worth?
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What is affected
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Pickup, new bull, combine, center pivot, etc.
Ending asset balance, ending liabilities, cash inflows and
cash outflows, net income
Bottom line, You CAN NOT buy equity
Equity or growth in equity must be earned
The only way to do this is make the new asset earn
additional revenue and/or reduce costs
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Increase net income
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Risk Protection Tools (Insurance)
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Example used here is limited to the Basic
Unit coverage provided by MPCI
Only three Basic Units are allowed in this
example
Enter “example” levels of MPCI coverage for
up to three Basic Units.
Set initial yields and prices at low levels to
simulate bad year.
Turn MPCI section on/off to show affects of
using MPCI insurance.
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Non-Cash Income
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Non-cash income adjustments are made on
the Accrual Adjusted Income Statement to
reflect changes in Current Asset values on
the beginning and ending balance sheet.
Include changes in:
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Crops Held for Sale
Market Livestock
Other Current Assets
Cash Invested in Growing Crops
See the AccrualAdj tab for complete details
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Non-Cash Expense (Not Depreciation)
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Non-cash expense adjustments are
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Made on the Accrual Adjusted Income Statement
Reflect changes in Current Asset and Current
Liabilities section of the beginning and ending
Balance Sheet.
See the AccrualAdj tab of the spreadsheet for
a detailed review of these adjustments
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Three Types of Contributed/Distributed Assets
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Cash or Near Cash
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Listed on the Current Assets portion of the Balance Sheet
Capital assets, which include:
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Long term depreciable assets
Breeding livestock
Machinery and equipment
Buildings and improvements
Land
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What is Contributed Capital
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Capital not generated by the operation but
given to the operation to support our farming
habit
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Will have affects on:
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Off farm income (wages/salary)
Nonbusiness income (dividends, etc.)
Gifts, inheritances, etc.
Equity, Profits, Cash Flow
Earned versus Unearned
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What is Distributed Capital
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What is distributed capital?
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Capital taken out of the operation
Will have different affects on:
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Equity - Short term vs long term
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Profits - Short term vs long term
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Immediate reduction in asset value
Reduction in ability to produce income in the future
Cash flow - Short term vs long term
Swapping assets within a family structure run
as one business?
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Income Taxes
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The RDFinancial spreadsheet is distributed
with the Income and S.S. tax estimator
turned off.
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It can be turned on in cell W8 on the Statements
tab
Users can enter additional cash business
expenses in cell I22 of the Statements tab to
show the affects on the financials
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Net Worth, Net Income, Cash Flow
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Summary
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You MUST measure your Financial Business
Positions and Performance
Must be efficient
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Maximize output per unit of input
Often we try to maximize just output
Low cost producer
The right size producer (size matters)
Family structure matters
Manage marketing, production, family risk
Financial analysis measures the impact of
these
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Business Position & Performance
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What is key to your ability to survive?
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Managing all forms of risk
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Production, Human, Marketing, Financial, Legal
With respect to the financial end
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Profits are critical
Profits  Net Cash Flow  Taxable Income
 Earned positive Cash Flow also helps a great deal
If you can’t measure it, you can’t manage it!!
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Business Must Produce Net Worth Internally
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Every dollar of income goes towards
increasing net worth
Every dollar of expense goes towards
decreasing net worth
If growth in Net Worth comes only from
external sources, your on shaky ground
You must be profitable enough to pay for:
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Family Living , Debt Principal, Savings,
Reinvestment, Retirement
Positive Cash Flow is good but……
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Accrual Adjusted Financials:
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Catch problems with:
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Inventory sell down to manage cash needs
Selling capital asset base, your manufacturing
plant (livestock, machinery, land, etc.)
Capital distributions
Unearned equity increases
Allows accurate business performance
evaluation for each time period
Shows strengths and weaknesses
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Will not be easy the first time through
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Must Do Your Own Detailed Analysis
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http://www.montana.edu/extensionecon/soft
waredownloads.html
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“RDFinancial” = Readers Digest Version
“WFBudgets” = Intermediate version
“Financial Statements” = Very detailed
“Machines” = Enterprise budgeting for crops
“CCFS” = Cow-Calf, Feeder, Stocker
enterprise budgeting
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How To Get There
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What is your business plan?
Do you have a management team to help
with:
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Production decisions
Marketing decisions
Financial analysis
Human resources
Are communications good among team
members?
Are team members missing that are critical to
the overall success of the business?
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Parting Comment
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Do not risk the
future of your
operation (family
and business) with
frustration over
preparing detailed
financial
statements.
Just do it!
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