Farm Finance for
Women 101
Kelvin Leibold
Farm Management Field Specialist
Phone 641-648-4850
E-mail kleibold@iastate.edu
Financial Terms
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Liquidity
Solvency
Profitability
Repayment Capacity
Financial Efficiency
http://www.extension.iastate.edu/Publications/FM1791.pdf
Net Worth Statement or
Balance Sheet
Assets
Liabilities
Short Term < 1 year
Short Term
Intermediate ? 1-7
Intermediate?
Long Term 7 or longer
Long term
Total Assets
Total Liabilities
Net Worth = T.A. – T. L.
Net Worth Chart
$800,000
Assets
$700,000
$600,000
Net Worth
$500,000
Series1
$400,000
Series2
$300,000
Series3
Liabilities
$200,000
$100,000
$0
1
2
3
4
year
5
6
Measuring Liquidity
• Working Capital
• Current Ratio
This information comes from the balance sheet
Current Ratio
• A ratio that measures the ability of the business
to pay off current farm debts if current farm
assets were sold
• Current Assets / Current Liabilities
$140,000 / $100,000 = 1.4
if less than 1 you have problems!
Working Capital
• The amount of operating capital available to the
business in the short run to pay bills and
support family living
• Current Assets – Current Liabilities = WC
• $140,000 - $100,000 = $40,000
Solvency
• The ability of the farm business to pay all of its
debts if it were sold.
• Look to “net worth statement”
• Look for “contingent liabilities”, probably not listed –
that is why we call them “contingent”
Measures of Solvency
• Debt to asset ratio
• Equity to asset ratio
• Debt to equity ratio
• All give the same information only in a different
index
• All come from “net worth statement”
Farm Debt to Asset Ratio
• The percentage of total assets financed by debt
Total Farm Debt / Total Farm Assets X 100
$400,000 / $1,000,000 X 100 = 40%
Farm Debt to Equity
• How much of the business do the creditors own
compared to how much you own
Total Debt / Net Worth X 100 = D/E
$400,000 / $600,000 X 100 = 67%
Liquidity
• The ability of the farm or business to meet
financial obligations as they come due with
assets or income from the business including
family living expenses.
• Look to “cash flow” and current ratio on “net
worth statement”
http://www.extension.iastate.edu/Publications/FM1792.pdf
Cash Flow
Farm Equity to Assets
• Your share of the business
Farm Net Worth / Total Farm Assets X 100
$600,000 / $1,000,000 X 100 = 60%
Return on Farm Equity
• Average interest rate earned by the money you
have invested in the business
Change in Net worth / Ave. Net Worth X 100 =
$50,000 / [($600,000 + $650,000) / 2] X 100 = 8%
Profitability
• The difference between the cost of resources used
and the value of the goods sold.
• Look to “income statement” and
• Look at inventory change.
http://www.extension.iastate.edu/Publications/FM1816.pdf
Repayment Capacity
• Your ability to repay intermediate and long term
debts on time
• Look at “current ratio” and “cash flow”
Financial Efficiency
• How well your business is able to use assets to
generate income.
• Look to “income statement”
Rate of Return on Farm Assets
• Average interest rate being earned by the money
invested in the business.
• Net Farm Income + interest expense – owner
withdrawals / average assets X 100 = ROA
• Needs to be higher than the cost of borrowing
money or “you got troubles”.
Repayment Capacity
• Profit available to repay term debt and replace
capital assets
Measures of Financial Efficiency
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Asset Turnover Ratio
Operating Expense Ratio
Depreciation Ratio
Interest Expense Ratio
Net Farm Income from Operations Ratio
Asset Turnover Ratio
• How quickly does the business turn over the
revenue or capital it requires.
Operating Expense Ratio
• The proportion of farm income that is used to pay
operating expense excluding principal and interest
Depreciation Expense Ratio
• How fast the depreciable assets wear out and
need to be replaced
• May be inversely correlated with repairs
Interest Expense Ratio
• Indicates how much of the farm income is used
to pay for borrowing capital
Net Farm Income Ratio
• Shows the net farm income from the whole
operation compared to the gross revenue of the
farm operation not including unpaid labor or
charge for management
Variable rate note
Real Estate Mortgage
Legal Description
Take my home clause
Release of Mortgage
EWG.ORG
http://www.sos.state.ia.us/UCC_Search/
UCC RA9 Search
Financing Statement
Financing Statement
Estate Tax Planning
If the “pie” is a small pie ( $1.5 million
in 2004) look at impact of inflation and
legal costs
Don’t worry about Federal Estate Tax,
focus on income tax issues, possible
Iowa inheritance tax
Estate Planning
• If total “pie” for husband and wife is
between $1,500,000 and $3,000,000
consider dividing equally and using life
estate or trust.
Estate Tax Planning
• If you have a “Big Pie” seek specialized
help and wait a few years to die.
• Look at special tools to reduce valuation,
consider a gifting program, charitable
donations, Special Use, minority discounts
and other tools estate planners would
suggest.
Social Security
Social Security
Social Security
Social Security
What is the impact of dollars contributed today?
• Step 5:
• Multiply the first $606 in Step 4 by 90%
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$___________
• Multiply the amount in Step 4 over $606 and less
than or equal to $3,653 by 32%
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$___________
• Multiply the amount in Step 4 over $3,653 by 15%
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$___________
Assume $7,075 / month of
SE earnings
• $606 times 90% = $545 of AIME
• $3,653 times 32% = $1169 of AIME
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so $4,259 / mo. Equals $1,714 of AIME
• $2,816 times 15% = $422 of AIME
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so $7,075 / mo equals $2,136 of AIME
Normal Retirement Age
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1937 and prior 65
1938
65 and 2 months
1939
65 and 4 months
1940
65 and 6 months
1941
65 and 8 months
1942
65 and 10 months
1943-54
66
1955
66 and 2 months
1956
66 and 4 months
1957
66 and 6 months
1958
66 and 8 months
1959
66 and 10 months
1960 and later 67
Note: Persons born on January 1 use the NRA for the previous year
Spousal Benefit
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If your full retirement age is 67, the reduction for starting your:
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Retirement benefit at 62 is about 30 percent. The reduction for starting benefits at age
63 is about 25 percent
64 is about 20 percent
65 is about 13.3 percent and
66 is about 6.7 percent
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Benefits as a spouse at 62 is about 67.5 percent of the benefit your spouse would receive if
his or her benefits started at full retirement age. The reduction for starting benefits as a
spouse at age
63 is 65 percent
64 is 62.5 percent
65 is about 58.3 percent
66 is about 51.5 percent
67 is about 50 percent
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http://www.extension.iastate.edu/Publications/PM1167E.pdf
Estimated Costs of Living
Retirement Income
Social Security
Farm property – rent or sale
Other Retirement Income
Other sources?
How Much Retirement Income?
Three phases of retirement
a) Go Go Years – travel, entertainment
b) Slow down years – housing,
c) Health Issue years – insurance, drugs, nursing
home
Kelvin’s Rule - plan for 100 % of current spending
because of tax issues.
Questions???