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Farm Balance Sheet Analysis AAE 320 Paul D. Mitchell

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Farm Balance Sheet Analysis. AAE 320 Paul D. Mitchell. Goal. Overview accounting balance sheet as it pertains to agricultural operations How to read a balance sheet Methods used to prepare a balance sheet Depreciation methods How to use a balance sheet (financial ratios). - PowerPoint PPT Presentation

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Page 1: Farm Balance Sheet Analysis

Farm Balance Sheet Analysis

AAE 320Paul D. Mitchell

Page 2: Farm Balance Sheet Analysis

Goal

• Overview accounting balance sheet as it pertains to agricultural operations

• How to read a balance sheet• Methods used to prepare a balance sheet

Depreciation methods• How to use a balance sheet (financial ratios)

Page 3: Farm Balance Sheet Analysis

Balance Sheet

• Systematic listing of everything owned and owed by a business/individual

• Gives statement of owner equity at a point in time

• Typically for end of accounting period, such as end of year for taxes

• Interim balance sheets often used/needed for loan applications

Page 4: Farm Balance Sheet Analysis

Balance Sheet

• Balance sheet: Everything must balance• Asset: anything owned• Liability: debt or financial obligation owed• The Basic Accounting Identity must hold

Assets = Liabilities + Owner EquityAdjust Owner Equity to make it balance

• Equity is what’s left, the residual

Page 5: Farm Balance Sheet Analysis

Uses of Balance Sheet

• Measures financial position of firm, focusing on long and short run measures

• Solvency: measures relative relationships among assets, liabilities and equity to assess “health” of firm (financial ratios)

• Liquidity: measures ability to meet current financial obligations as they come due without disrupting normal business—ability to generate cash on short-term

Page 6: Farm Balance Sheet Analysis

Balance Sheet Format

Assets Liabilities

Current Assets $100

Current Liabilities $50

Non-Current Assets

$150

Non-Current Liabilities

$100

Owner Equity $100

Total Assets $250

Total Liability and Equity

$250

Page 7: Farm Balance Sheet Analysis

Assets

• Anything the firm owns that has value because can sell it and/or use it to produce sellable goods

• Liquid assets: easy to sell, ready market for them (grain, feeder livestock)

• Illiquid assets: hard to sell quickly at full value (machinery, land, breeding livestock)

Page 8: Farm Balance Sheet Analysis

Assets on Balance Sheet

• Current Assets Cash, bank accounts, marketable funds, accounts

receivable (money owed to you), inventories of liquid assets: grain, feed, supplies, feeder livestock

• Non-Current Assets Everything else: machinery, equipment, breeding

livestock, buildings, land

Page 9: Farm Balance Sheet Analysis

Liabilities on Balance Sheet• Obligations or debts owed; any outside claims

against one or more of your assets• Current Liabilities

Financial obligations due within 1 year Accounts at suppliers, farm store, etc. Interest & principle on operating and long-term loans Accrued expenses: property and income taxes

• Non-Current Liabilities Everything else not due in the next year Remaining balance on long-term debts after deducting the

current year’s payments

Page 10: Farm Balance Sheet Analysis

Alternative Balance Sheet Formats

• Traditional farm balance sheets used other categories, but use decreasing

• Intermediate Asset: less liquid with life 1 to 10 years (machinery, equipment, perennial crops, breeding livestock)

• Fixed Asset: > 10 year life: land, buildings• Intermediate Liability: 1 – 10 year loans• Long-term Liabilities: > 10 year loans

Page 11: Farm Balance Sheet Analysis

Owner Equity = Net Worth

• Value left after assets are used to cover all liabilities, what you “own” in the farm

• Your current investment in the farm• Equity changes for many reasons

Profits/losses from production activities Sell assets for different values than on sheet Add/withdraw capital from the farm Asset value changes if use market prices for asset

valuation, e.g., land value increases

Page 12: Farm Balance Sheet Analysis

Owner Equity = Net Worth• Business transactions only change the mix of

assets/liabilities, not owner equity• Buying a $10,000 piece of machinery does not

change your equity If cash purchase, current assets drop $10,000 and

non-current assets increase $10,000 If borrow $10,000, liability increases $10,000 and

non-current assets increase $10,000• Equity only changes due to business

profit/loss, if you put money in/pull it out, and/or (in some cases) if asset values change

Page 13: Farm Balance Sheet Analysis

Think Break #12

• Fill in the empty entries in the balance sheet• How would the balance sheet change if you bought

$100,000 of land by taking $40,000 from your savings and borrowing $60,000 from a bank

Assets LiabilitiesCurrent Assets $400,000 Current Liabilities $150,000Non-Current Assets

? Non-Current Liabilities

$350,000

Owner Equity ?Total Assets $1,000,00

0Total Liability & Equity

$1,000,000

Page 14: Farm Balance Sheet Analysis

Asset Valuation Problem

• How do you value assets when developing a balance sheet, Cost or Market Basis

• Basic accounting says use cost basis, but not always right in agriculture

• Cost Basis: value = purchase cost minus depreciation, or = farm production cost

• Market Basis: value = current market value minus selling costs

Page 15: Farm Balance Sheet Analysis

Market Basis

• Assets valued at current market value minus selling costs

• Asset value (and so your equity) responds to inflation and price changes, so often gives higher values (and so higher equity)

• Asset price changes can hide management problems because equity increasing

• Main Advantage: more accurate measure of current financial health and collateral available for loans, so often used by lenders

• Lenders’ needs influence farm balance sheets

Page 16: Farm Balance Sheet Analysis

Cost Basis

• Asset value = purchase cost minus depreciation, or cost to produce the asset

• More conservative, following accepted accounting practices in other businesses

• Equity changes only from retained earnings, not from asset price changes

• Can misrepresent true value of business

Page 17: Farm Balance Sheet Analysis

Farm Financial Standard Committee

Recommends using both methods1) Market basis balance sheet with cost basis

asset values in attached schedules or in footnotes

2) Double Column balance sheet for assets, with market basis and cost basis

Measure true value market of your business and identify possible management problems

Page 18: Farm Balance Sheet Analysis

Both Methods use Both MethodsAsset Cost Basis Market BasisRaised grain and feeder livestock

Market Market

Purchased grain and feeder livestock

Min of Cost & Market

Market

Accounts Receivable Cost CostPrepaid Expenses Cost CostInvestment in crops growing in the field

Cost Cost

Purchased breeding livestock

Cost Market

Raised breeding livestock

Cost or Base Value Market

Machinery, equipment, buildings, land

Cost Market

Page 19: Farm Balance Sheet Analysis

Both Methods use Both MethodsAsset Cost Basis Market BasisRaised grain and feeder livestock

Market Market

Purchased grain and feeder livestock

Min of Cost & Market

Market

Accounts Receivable Cost CostPrepaid Expenses Cost CostInvestment in crops growing in the field

Cost Cost

Purchased breeding livestock

Cost Market

Raised breeding livestock

Cost or Base Value Market

Machinery, equipment, buildings, land

Cost Market

Page 20: Farm Balance Sheet Analysis

Grain/Livestock Inventories and Crops in the Fields

• Grain in the bin, animals on the lot ready to go, use market basis Exception: Purchased grain/livestock that has gone

up in value, use cost if on a cost basis• Crops still growing in the field, use cost, since

still subject to production risks “Don’t count your chickens before the eggs hatch”

Page 21: Farm Balance Sheet Analysis

Raised Breeding Livestock

• Cost Basis: supposed to accumulate all costs to get the animal from birth to productive age (and not include these in the income statement), then depreciate this total cost over its useful lifetime just as though purchased it at this price

• Alternative: a fixed base value for each age/type of animal to approximate this cost and its depreciation, won’t change with asset market prices

Page 22: Farm Balance Sheet Analysis

Depreciation

• Annual loss in value of a working asset due to use, wear, aging, and technical obsolescence

• What assets due you depreciate? Useful life > 1 year Useful life can be determined (not unlimited)

• Machinery, equipment, buildings, fences, breeding livestock, perennial crops, irrigation wells, land improvements (wells, drainage)

• Land not depreciated, as has unlimited life

Page 23: Farm Balance Sheet Analysis

Depreciation: Why Matters

• Farmers track depreciation in asset value for three main reasons

• 1) Taxes: deduct depreciation as a cost of business, subtract from annual income

• 2) Asset “true” value or farm book value: tax depreciation not equal true losses, so track assets for accurate market basis balance sheet

• 3) Insurance: some companies depreciate assets for insurance values, do you want to insure value or replacement cost?

Page 24: Farm Balance Sheet Analysis

Depreciation Definitions

• Cost: All costs paid for the asset, including price, taxes, delivery and installation fees, expenses to get the asset into use

• Useful Life: Number of years you expect to use the asset in your business

• Salvage Value: Expected market value at end of useful you assigned; zero if you will use it until worn out and has no scrap or junk value at end

Page 25: Farm Balance Sheet Analysis

Depreciation Intuition

• Want to allocate the initial cost of long term asset across the useful life you give it

• Cost – Salvage Value is asset’s total depreciation over its Useful Life—How much do you assign to each year?

• Several formulas make assumptions and estimate annual depreciation, none is correct for all assets in all situations

Page 26: Farm Balance Sheet Analysis

Graphics of Depreciation

Time (Years)

Valu

e ($

)

Initial Cost

Salvage Value

Useful Life

Total Depreciation to Allocate

Page 27: Farm Balance Sheet Analysis

Graphics of Depreciation

Time (Years)

Valu

e ($

)

B

A

Use a mathematical formula to describe how to get from Point A to Point BSlope of the line between any two years is the annual depreciation during that year

Depreciation = DValue/Dt

One Year

Dt = 1

DV

Page 28: Farm Balance Sheet Analysis

Straight Line Depreciation

• Draws a straight line between beginning and ending values, constant depreciation each year

• Annual Depreciation = (Cost – Salvage Value)/Useful Life

• Alternative: Express as a depreciation rate• Annual Depreciation

= (Cost – Salvage Value) x RSL RSL = 1/Useful Life = Depreciation RateExample: RSL = 1/10 = 0.10 = 10%10% annual depreciation rate

Page 29: Farm Balance Sheet Analysis

Straight Line Depreciation Example 1

• $100,000 machine, use for 6 years and expected salvage value of $40,000

• Annual Depreciation = ($100,000 – $40,000)/6 = $10,000

• RSL = 1/6 = 0.167 = 16.7%• Annual Depreciation =

($100,000 – $40,000) x 16.7% = $10,020

Page 30: Farm Balance Sheet Analysis

Straight Line Depreciation Example 1

Year

Value AtYear StartBeginning

BasisDepreciati

on

Value AtYear EndEnding Basis

1 100,000 10,000 90,0002 90,000 10,000 80,0003 80,000 10,000 70,0004 70,000 10,000 60,0005 60,000 10,000 50,0006 50,000 10,000 40,000

Page 31: Farm Balance Sheet Analysis

0

20,000

40,000

60,000

80,000

100,000

120,000

0 1 2 3 4 5 6

Year

Valu

e at

Yea

r St

art

Page 32: Farm Balance Sheet Analysis

Straight Line Depreciation Example 2

• $100,000 machine, use for 5 years and completely depreciate ($0 salvage value)

• Annual Depreciation = ($100,000 – $0)/5 = $20,000

• RSL = 1/5 = 0.20 = 20%• Annual Depreciation = $100,000 x 20% =

$20,000 or simply purchase price x 20%

Page 33: Farm Balance Sheet Analysis

Straight Line Depreciation Example 2

Year

Value AtYear StartBeginning

BasisDepreciati

on

Value AtYear EndEnding Basis

1 100,000 20,000 80,0002 80,000 20,000 60,0003 60,000 20,000 40,0004 40,000 20,000 20,0005 20,000 20,000 0

Page 34: Farm Balance Sheet Analysis

Think Break #13

• You buy a piece of equipment for $70,000 with a useful life of 3 years and expected salvage value of $10,000

• What is the Straight Line depreciation for the second year?

Page 35: Farm Balance Sheet Analysis

Declining Balance

• Depreciation = constant percentage of the asset’s current basis Not (cost – salvage value)

• Depreciation = Current Basis x RDB

• RDB = Declining Balance Depreciation Rate• Declining Balance: $ value of depreciation

decreases each year, though constant annual % depreciation rate

Page 36: Farm Balance Sheet Analysis

Declining Balance

• Declining Balance Depreciation Rate RDB usually a multiple of the Straight Line Depreciation Rate RSL = 1/Useful Life

• RDB = 2 x RSL, is Double Declining Balance or 200% Declining Balance

• Also see 1.75/175%, 1.50/150% and 1.25/125% declining balance

• Depreciation for taxes uses declining balance

Page 37: Farm Balance Sheet Analysis

Double Declining Balance Example

• $100,000 machine, use for 6 years and expected salvage value of $40,000

• Double Declining Balance depreciation rate RSL = 1/6 = 16.67% RDB = 2 x RSL = 2/6 = 2 x 16.67% = 33.3% Asset loses 33% of it initial value during year

• 1st Year DDB Depreciation is$100,000 x 1/3 = $33,333

Page 38: Farm Balance Sheet Analysis

Double Declining Balance Example

Year

Current(Beginning

)Basis

Calculation Depreciation

Ending

Basis1 100,000 100,000 x

33%33,333 66,66

72 66,667 66,667 x 33% 22,222 44,44

43 44,444 44,444 x 33% 14,815 29,63

04 29,630 29,630 x 33% 9,877 19,75

35 19,753 19,753 x 33% 6,584 13,16

96 13,169 13,169 x 33% 4,390 8,779

Page 39: Farm Balance Sheet Analysis

Double Declining Balance Example

Year

Current (Beginning)

BasisDepreciation Ending

Basis1 100,000 33,333 66,6672 66,667 22,222 44,4443 44,444 14,815 29,6304 29,630 9,877 19,7535 19,753 6,584 13,1696 13,169 4,390 8,779

Problem: Basis can fall below salvage value

Page 40: Farm Balance Sheet Analysis

Potential Problems with Double Declining Balance

• Assets with positive salvage value, basis can fall below salvage value Fix: Stop depreciation at salvage value

• Assets with zero salvage value, basis never reaches zero Fix: Switch to straight line after a set time Fix: Take remaining value in last year

Page 41: Farm Balance Sheet Analysis

Double Declining Balance Example(Salvage value = $40,000)

Year

Beginning Basis

Depreciation

Ending Basis

1 100,000 33,333 66,6672 66,667 22,222 44,4443 44,444 4,444 40,0004 40,000 0 40,0005 40,000 0 40,0006 40,000 0 40,000

Page 42: Farm Balance Sheet Analysis

0

20,000

40,000

60,000

80,000

100,000

120,000

0 1 2 3 4 5 6

Year

Valu

e at

Yea

r St

art

Page 43: Farm Balance Sheet Analysis

Compare the Two

• Straight Line Depreciation Slowest depreciation; Finishes at the salvage value

without any adjustments• Declining Balance

Faster depreciation than straight line, but has to be adjusted to finish at the salvage value

Page 44: Farm Balance Sheet Analysis

0

7,000

14,000

21,000

28,000

35,000

0 1 2 3 4 5 6

Year

Dep

reci

atio

n ($

)

SLDDB

Depreciation Graphics

Page 45: Farm Balance Sheet Analysis

0

20,000

40,000

60,000

80,000

100,000

120,000

0 1 2 3 4 5 6

Year

Ass

et V

alue

SLDDB

Asset Value Graphics

Page 46: Farm Balance Sheet Analysis

Think Break #14

Machine costs $7000 with a useful life of 3 years and salvage value of $1000

1) What is the double declining balance depreciation for the 1st year?

2) What is machine’s ending basis in 1st year?3) What is the double declining balance

depreciation for the 2nd year?4) What is machine’s ending basis in 2nd year?

Page 47: Farm Balance Sheet Analysis

Depreciation and Taxes

• US tax code has rules and options for depreciating business assets, including those used by farmers

• MACRS: Modified Accelerated Cost Recovery System

• Three methods used: 200% DB, 150% DB, and Straight Line Depends on asset type Sometimes you get to choose DB: Switches to SL to fully depreciate asset

Page 48: Farm Balance Sheet Analysis

Depreciation and Taxes

• Determine asset’s basis (called tax basis) Basis adjusted for several reasons, such as

improvements made, damage, etc. • Calculate depreciation as a % of tax basis, which

usually equals initial purchase price % taken from a table Tax tables assume zero salvage value

• Deduct depreciation from your taxable income (so you pay lower taxes!)

• Tax basis ≠ true value or your book value

Page 49: Farm Balance Sheet Analysis

Tax Depreciation Example

• IRS Publication 946: “How to Depreciate Property” Rules apply as to how many years you can

depreciate certain types of property• Breeding cattle: 5 years• Agricultural machinery & equipment: 7 years• Buildings and tree/vine: 10 years• Land improvements: 15 years

Page 50: Farm Balance Sheet Analysis

Tax Depreciation Example

• Half-year or mid-quarter convention Depending on when purchased during year, can

only take part of annual depreciation in first year and again in last year

Example of Half-Year Convention: Say have 5 year asset, take half of year’s depreciation in year 1, full year depreciation in years 2, 3, 4 and 5 and another half year depreciation in year 6

Page 51: Farm Balance Sheet Analysis

Three-Year Example for a $10,000 Asset, Using Tax Table A-1

Year

Depreciation Rate from Tax

TableDepreciati

on

Remaining Tax Basis

1 33.33% $3,333 $6,6672 44.45% $4,445 $2,2223 14.81% $1,481 $7414 7.41% $741 $0Depreciation each year is the Purchase Price

times the Rate from the tax table. Notice rates add to 100%, which implies take full value over “tax life” of the asset.

Page 52: Farm Balance Sheet Analysis

Depreciation and Taxes

• Section 179: Allows taking a large amount of depreciation in year purchase asset Way to really reduce income (and so taxes) Buy equipment/building and write full cost off as a

cost of business in that year The ending basis of asset can be zero in first year

• Many farmers do this in years they make more money than usual

Page 53: Farm Balance Sheet Analysis

Depreciation and TaxesDepreciation Recapture: Form 4797

• Depreciation Recapture: When sell an asset, if the sales price differs from the tax basis, file Form 4797

• If sale price > tax basis: claim extra as ordinary income and pay income taxes

• If sale price < tax basis: claim extra depreciation and reduce ordinary income and income taxes

• Eventually the government gets its taxes if you “over depreciate” an asset via Section 179

Page 54: Farm Balance Sheet Analysis

Depreciation and Taxes

• Main Point: Tax depreciation not the same as “real” depreciation Section 179 depreciation really throws it off

• Businesses & farms: some keep separate records Tax depreciation and tax basis records Book value for farm balance sheet for farm’s “real”

value for loan applications Records of asset values for insurance purposes Can create complicated farm records

Page 55: Farm Balance Sheet Analysis

Summary Thus Far

• Explained concept of a balance sheet Current and Non-current Assets Current and Non-current Liabilities Equity: what balances the sheet

• How value Assets: Cost or Market basis• How depreciate assets

Straight Line or Declining Balance methods Taxes and depreciation

• What do you do with a balance sheet??????

Page 56: Farm Balance Sheet Analysis

What use is a Balance Sheet?

• Can see where assets and liabilities are and their relative sizes

• Can look at changes if have balance sheets from previous years—see if you’re gaining

• Typically focus on ratios to look at Liquidity and Solvency of the business

• Ratios control for differences in business size

Page 57: Farm Balance Sheet Analysis

Current Ratio and Liquidity

• Measures ability to meet current financial obligations as they come due without disrupting normal business Ability to generate cash on short-term

• Current Ratio = Current Assets/Current Liabilities

• Example: 1.4 or 40%

Page 58: Farm Balance Sheet Analysis

Current Ratio

• Too low: cash flow problems, if asset prices change or costs suddenly arise (repairs), can have trouble meeting current liabilities Don’t want to sell 1 acre to put new roof on barn

• Too high: holding too much cash, current assets typically have lower return than if put capital into other longer term assets or market Income lost by keeping cash “under the mattress” Parable of the talents: buried gold in ground

Page 59: Farm Balance Sheet Analysis

What are typical current ratios?

• IL Farm Business Farm Management Program of 2,166 IL farms in 1996

• Fairly typical by farm types• Farm Type Median Current Ratio

Hogs 2.03Grain 1.81Beef 1.57Dairy 1.33

Page 60: Farm Balance Sheet Analysis

What’s a good Current Ratio?

• Iowa State University Extension: Typically farms with adequate liquidity have

current ratios > 2.0 Farms with continuous sales (dairy) often have

current ratio as low as 1.5 Beef feeding farms have low current ratios Farms with concentrated sales (cash grain) need

current ratio as high as 3.0 early in year• Ohio State University Extension: Measures of Dairy

Farm Competitiveness: 1.3 is competitive

Page 61: Farm Balance Sheet Analysis

Working Capital vs Current Ratio• “Working Capital” older term used by some • Working Capital =

Current Assets – Current Liabilities• Measures the margin of safety in dollars (not ratio or

%) to meet short-term liabilities• Must relate it to size of business, that’s why we use

current ratio! $10,000 not much for a 5000 acre farm, but may

be more than enough for a 20 cow dairy• This why most use current ratio

Page 62: Farm Balance Sheet Analysis

Solvency• Measures relative relationships among assets,

liabilities, and equity to assess “health” of firm• Could the farm debt be paid off if foreclosed?

Requires Assets > Liabilities• Measured by three ratios

Debt to Asset Ratio Equity to Asset Ratio Debt to Equity Ratio

• Given any one ratio, you can derive the others, so each is a different way to look at Solvency

Page 63: Farm Balance Sheet Analysis

Debt to Asset Ratio

• Debt/Asset = Total Liabilities/Total Assets• Proportion (or %) of business assets owed to

lenders (i.e. % the bank owns)• 0.70 means you owe 70% of farm assets to

lenders (bank owns 70%)• 1.0 means debts = assets

Means owner equity is zero, bank owns 100%• > 1.0 means business is insolvent

Page 64: Farm Balance Sheet Analysis

Equity to Asset Ratio

• Equity/Asset = Total Equity/Total Assets• Proportion (or %) of assets owned• 0.45 means you own 45% of farm• 1.0 means equity = assets so owner has no

liabilities (he/she owns all equity) Own 100% of the farm

• < 0 means business is insolvent—has no or negative equity

Page 65: Farm Balance Sheet Analysis

Debt to Equity Ratio

• Debt/Equity = Total Liabilities/Owner Equity• Proportion of financing provided by lenders relative to

that provided by owner equity• 1.0 means you and your lenders are providing equal

proportion of financing• 0.75 means for each dollar of equity financing you

provide, your lender provides $0.75 of financing• 1.8 means for each dollar of equity financing you

provide, your lender provides $1.80 of financing• Very large Debt/Equity ratio implies very small equity

and potential for insolvency

Page 66: Farm Balance Sheet Analysis

Relation between Ratios

• Given any of these three financial ratios, you can derive the others

• Basic Accounting Identity must holdAssets = Liabilities + EquityAssets = Debts + Equity

• Notation: A = D + E Debt/Asset = D/A Equity/Asset = E/A Debt/Equity = D/E

Page 67: Farm Balance Sheet Analysis

Relation between Ratios

• A = D + E Divide by A: 1 = D/A + E/A Debt/Asset + Equity/Asset = 1, or Equity/Asset = 1 – Debt/Asset Debt/Asset = 1 – Equity/Asset

• (D/A)/(E/A) = D/E, or Debt/Equity = Debt-to-Asset/Equity-to-Asset

• Rearrange and use D/A and D/E connection Debt/Asset = Debt/Equity/(1 + Debt/Equity) Equity/Asset = 1/(1 + Debt/Equity)

Page 68: Farm Balance Sheet Analysis

Typical Solvency Ratios

• IL Farm Business Farm Management Program of 2,166 IL farms in 1996Debt to Asset Ratios

• Farm Type Upper 25% Median Lower 25%Hogs 0.44 0.30 0.16Grain 0.46 0.29 0.15Beef 0.52 0.31 0.17Dairy 0.50 0.36 0.23

Page 69: Farm Balance Sheet Analysis

WI Center for Dairy Profitability WI Dairy Balance Sheet for 2000

Size (cows) Debt/Asset Equity/Asset Debt/Equity

< 50 22.8% 77.2% 29.6%

51-75 24.3% 75.7% 32.1%

76-100 29.0% 71.0% 40.8%

101-150 31.1% 68.9% 45.2%

151-250 48.8% 51.2% 95.2%

> 250 52.7% 47.3% 111.6%

Page 70: Farm Balance Sheet Analysis

UW ExtensionManaging in Difficult Times

Measure Strong

Stable Weak

Current Ratio

> 1.5 1.0 – 1.5 < 1.0

Debt:Asset < 30%

30% - 70% > 70%

Equity:Asset

> 70%

70% - 30% < 30%

Debt:Equity

< 42%

42% - 230%

> 230%

Page 71: Farm Balance Sheet Analysis

More Information

• Provide a quick list/overview of what sort of information is available on farm finance

• Farm Financial Standards Council• University Extension: UW and other states• UW Center for Dairy Profitability

Page 72: Farm Balance Sheet Analysis

Farm Financial Standards Council

• Home page: http://www.ffsc.org/index.html • Mission: “To provide education and a national forum to

facilitate the development, review, communication and promotion of uniformity and integrity in both financial reporting and the analytic techniques useful for effective and realistic measurement of the financial position and the financial performance of agricultural producers.”

• Financial Guidelines for Agricultural Producers http://www.ffsc.org/html/guidelin.htm

• Recommendations of how to prepare Farm Financial Balance Sheet with several examples

• The source for this sort of information

Page 73: Farm Balance Sheet Analysis

UW-Extension

• Bruce Jones (AAE, UW-Madison) Focuses on dairy farm management and land valuation

• See his home page for most recent papers and presentations: http://www.aae.wisc.edu/jones/

• (Used to be) Gregg Hadley (Ag Econ, UW-Riverfalls) focuses on dairy farm management profitability and finance (replacement being interviewed next week)http://www.uwrf.edu/extension/GreggH.htm

• Both work with UW Center for Dairy Profitability• Your local UWEX County Ag Agent

Page 74: Farm Balance Sheet Analysis

UW Center for Dairy Profitability

• Homepage: http://www.cdp.wisc.edu/ • Focuses mostly (not exclusively) on dairy• Lots of materials, some financial• WI dairy data as Farm Balance Sheets for

comparison and benchmarkinghttp://www.cdp.wisc.edu/Financial%20Benchmarks.htm

• AgFA: Agricultural Financial Advisor• Collect, analyze, and store financial data, create

farm specific benchmarks and reports http://cdp.wisc.edu/AgFAnew2.htm

Page 75: Farm Balance Sheet Analysis

Neighboring States

• Center for Farm Financial Managementhttp://www.cffm.umn.edu/

• Sell/Support FINPACK: “The most comprehensive computerized farm financial planning and analysis system available“

Page 76: Farm Balance Sheet Analysis

Neighboring States• Iowa State University: AgDecision Maker

http://www.extension.iastate.edu/agdm/homepage.html

• University of Illinois: FarmDochttp://www.farmdoc.uiuc.edu/

• Both have sections on Farm Finance with several publications and decision aids

Page 77: Farm Balance Sheet Analysis

Non-Neighboring States• Oklahoma State University• Damona Doye’s web page

http://agecon.okstate.edu/faculty/profile.asp?id=ddoye

• Farm Financial Management Resourceshttp://agecon.okstate.edu/faculty/ffmr.asp

• Farm and Ranch Account Bookhttp://agecon.okstate.edu/farmbook/

Page 78: Farm Balance Sheet Analysis

Summary• Explained balance sheet

assets, liabilities, equity• How to value Assets: cost or market basis• How to depreciate Assets: straight line,

declining balance, income tax methods• Ratios: Current Ratio, Debt:Asset, etc.

How to construct and interpret Typical values by farm type

• Where to go for more information