Financial Statements

Damona Doye

OSU Extension Economist

Finance

Operations Marketing

Personnel

Strategy

BusinessPlan

Financial statements?

What? Where?When?Why?How? Who?

Can You Answer These Questions?

Is the business headed in the right direction?Does it provide enough income to:

Show a profit?Cover your loan payments?Pay family living expenses?

What are your production costs?What price do you need to receive for your

product to break even?

Measuring Financial Position and Performance Liquidity

Ability to pay bills as they come due and cover unanticipated events

Solvency Ability to cover all debts if the business were sold

Profitability Returns to labor and management generated by the

operation

Financial efficiency Efficiency with which assets generate income

Repayment capacity Ability to repay term debt in a timely fashion

Business Analysis Financial statements

Historical Projected Multi-year

Spending plan (budget) Enterprise analysis

Cow/calf Crop Custom work Partner shares

Break-even analysis Marketing plan Investment analysis Risk assessment

Financial statements

Cash flow statement

Cash income

Cash expenses

Income statement

Cash income

Cash expenses

Changes in assets

Changes in liabilities

Net farm income, accrual adjusted (profit)

Balance sheet

Assets

Liabilities

Net worth (owner equity)

AGEC-

753

AGEC-791

792

752

AGEC-

751

http://pods.dasnr.okstate.edu/docushare/

Balance SheetSummary sheet of items owned and owed.

Assets Current Non-current

Liabilities Current Non-current

Net Worth = Assets - LiabilitiesDone at the beginning and end of each fiscal

time period.

North Central Oklahoma

http://agecon.okstate.edu/oklandvalues/

Which Method to Use? Market Value

Typically used by most lending institutions Easiest to determine Easiest to over or under estimate Due to rapidly changing markets, could overstate or

understate net worth. Cost Basis

Must have good records Must know depreciation of assets Gives a truer picture of the value of the business

Current Assets

Current assets are assets that will be used up or sold during the next twelve months.

Examples include: Cash, checking accounts, savings Investments Accounts receivable Prepaid expenses Cash investments in growing crops Inventories

Market livestock, stored crops, purchased feed, supplies

Non-Current Assets

Non-current assets are assets that have a useful life of more than 1 year.

Examples include: Breeding livestock Machinery, equipment Vehicles Investments in capital leases Land Buildings and improvements

Current Liabilities

Accounts payableNotes payableCurrent portion of term debtAccrued interestTaxes payableDeferred taxes

Non-current Liabilities

Notes payable, non-real estateNotes payable, real estateDeferred taxes

Net Worth

Net worth of the business is the difference between the total value of the assets and the total value of the liabilities.

Current Assets + Non-current Assets– Current Liabilities - Non-current Liabilities= Net Worth

Balance Sheet Exercise

Cash Flow Statement

Cash Inflows Operating receipts

Crop and livestock sales, government payments, other farm income

Capital sales Contributed capital

Cash Outflows Operating expenses

(feed, fertilizer, etc.) Capital purchases Family living and

other withdrawals

Uses of a Cash Flow StatementEstablishes target levels for income and

expenses which can be used in monitoring progress towards goals

Points out potential problems in meeting financial obligations

Indicates when cash is available for new investments

Cash Flow Exercise

The Accrual Adjusted Income Statement

Net Farm Income, Accrual Adjusted =

Gross Farm Revenues

- Total Operating Expenses

- Total Interest Expense

+/- Gain/Loss on Sale of Farm Capital

Assets

The Accrual Adjusted Income Statement

RevenuesLivestock and crop salesGovernment payments & other farm incomePlus….

Changes in Inventories

Market livestockRaised crops/feed inventories

Accrual Adjustments (Assets)

Change in:Accounts receivablePrepaid expensesCash investment in growing cropsSuppliesContracts and notes receivable Investment in cooperatives

Gains/Losses on Sale of Farm Capital Assets

Difference between the value for which the items is sold and the adjusted basis (cost minus depreciation taken)

Gains/Losses on Sale of Culled Breeding Livestock

Purchased breeding stock: subtract cost basis from the sale proceeds

Raised breeding stock: subtract base value from the sale proceeds

Change in Value Due to Change in Raised Breeding Livestock Numbers

Number of head transferring from one classification to another, e.g., replacement heifers to cows

Differences in base values of the two classifications

The Accrual Adjusted Income Statement

ExpensesPurchased market livestockCash operating expensesAccrual adjustments

Purchased feed inventories Accounts payable Ad valorem taxes Employee payroll withholdings Accrued expenses Accrued interest

DepreciationDifferent methods of depreciation Tax

Farmer’s Tax Guide at http://www.irs.gov/publications/p225/index.html

Methods Modified Accelerated Cost Recovery System (MACRS) General Depreciation System (GDS) Alternative Depreciation System (ADS) Which one depends type of property

Economic Straight Line Depreciation:

Cost – Salvage Value

Years of Life

Difference Between Cash Flow and Income Statement

Cash flow statement does not include: Depreciation

Changes in inventory, other accrual adjustments

Gains/losses on capital asset sales

Income statement does not include: Capital sales and contributed capital

Principal payments

Family living expenses

Income Statement Exercise

Financial statements

Cash flow statement

Cash income

Cash expenses

Income statement

Cash income

Cash expenses

Changes in assets

Changes in liabilities

Net farm income, accrual adjusted (profit)

Balance sheet

Assets

Liabilities

Net worth (owner equity)

AGEC-

753

AGEC-791

792

752

AGEC-

751

http://pods.dasnr.okstate.edu/docushare/

Measuring Financial Position and Performance Liquidity

Ability to pay bills as they come due and cover unanticipated events

Solvency Ability to cover all debts if the business were sold

Profitability Returns to labor and management generated by the

operation

Financial efficiency Efficiency with which assets generate income

Repayment capacity Ability to repay term debt in a timely fashion

What does business analysis offer?

Cold, hard facts Ability to compare to benchmarks Insights into strengths/weaknesses,

problem identificationDirection for maximizing the returns to

owned resourcesDocumentation to obtain/maintain credit

Communication

Business partnersLendersLandlordsHeirsFamily

IFMAPS

A free, confidential service assisting Oklahoma farmers and ranchers with financial planning since 1985

Trained financial specialists work with families one-on-one to develop financial statements and evaluate alternative plans

Contact the local Extension office, an area Agricultural Economics specialist, or call the IFMAPS office in Stillwater at 1-800-522-3755

Damona’s 30 + 1 plan

Spend 30 minutes each week maintaining and using records

Take one step each month to improve your record-keeping system and financial summaries

Just do it!References: OSU Ag Econ Department,

http://agecon.okstate.edu/websites.asp OSU Extension publications, www.osuextra.com National Ag Risk Management Library,

http://www.agrisk.umn.edu/ Annie’s Project,

http://www.extension.iastate.edu/feci/annie/ Business Planning Guidebook, Minnesota Institute

for Sustainable Agriculture, http://www.misa.umn.edu/vd/bizplan.html