Strategic Farm Management

Income StatementAre you making a profit?Understand and utilize an income statement:Understand the purpose of an income statementBe familiar with income statement terminology and structureBe familiar with cost and accrual methods of determining Net Farm IncomeUnderstand the relationship with the balance sheetBe able to use the income statement for strategic purposes

ObjectivesUse the income statement to determine the profit or loss during an accounting period.Tells you the financial position of the business over a period of time (generally your fiscal year).Return to Assets and EquityReturn to Labor and ManagementOperating Profit Margin

Income StatementProfit = Revenue Expenses

Definitions:Revenue Income earned during the accounting periodCommodity Sales, Inventories, Accounts ReceivableExpenses Cash or noncash expenses during the accounting periodInput Expenses, Depreciation, Accounts Payable, Accrued Interest & Expenses

Income Statement FundamentalsIncome StatementGrant County Farms Co.Year Ending December 31, 2013Revenue:Expenses:Cash crop salesPurchased feed and grainCash livestock salesPurchased market livestockInventory changesOther Operating Expenses:CropsSeed and fertilizerMarket livestockRepairs, maintenanceGovernment paymentsFuel and lubeChange in value of raised breeding stockProperty taxesGain/loss from sale of culled breeding stockHired laborChange in accounts receivableUtilitiesAdjustments Total RevenueAccounts payableAccrued expensesDepreciation Total Operating ExpensesInterest paidChange in interest payableTotal interest expense Total ExpensesNet Farm Income From OperationsGain/loss on sale of capital assets:Machinery Total Gain/Loss on capital assetsNet Farm IncomeAccrual-Adjusted Net Farm IncomeThe Farm Financial Standards Committee recommends that anyone using cash accounting convert net farm income to accrual-adjusted net farm income.More accurateBetter for management purposesIncome Statement AdjustmentsGross RevenuesInventory-Beginning Inventory + Ending InventoryAccounts Receivable-Beginning Accounts Receivable + Ending Accounts ReceivableOperating ExpensesAccounts Payable-Beginning Accounts Payable + Ending Accounts PayableAccrued Expenses-Beginning Accrued Expenses + Ending Accrued ExpensesPrepaid Expenses+Beginning Prepaid Expenses Ending Prepaid ExpensesUnused Supplies+Beginning Unused Supplies Ending Unused SuppliesInvestment in Growing Crops+Beginning Investment in Growing Crops Ending Investment in Growing CropsAccounts receivable balance 1/1/13 was $4,110; balance 12/31/13 was $4,785

Property taxes for the year of $5,650

Accounts payable balance 1/1/13 was $6,131; balance 12/31/13 was $7,800

Utilities expenses were $2,195

Sold 530 tons of hay for $235 per ton

Depreciation expense for the year was $59,600

Change in interest payable for 2011 is +$650

Cash interest paid during the year $14,175

Received $12,400 in farm program payments

Sold a tractor for $24,000, the book value was $23,400Income StatementGrant County Farms Co.Year Ending December 31, 2013Revenue:Cash crop sales $ 124,550.00 Inventory changesCrops $ (9,550.00)Government payments $ 12,400.00 Change in accounts receivable $ 675.00 Total Revenue $ 128,075.00 Expenses:Other Operating Expenses:Property taxes $ 5,650.00 Utilities $ 2,195.00 Adjustments:Accounts payable $ 1,669.00 Depreciation $ 59,600.00 Total Operating Expenses $ 69,114.00 Interest paid $ 14,175.00 Change in interest payable $ 650.00 Total interest expense $ 14,825.00 Total Expenses $ 83,939.00 Net Farm Income From Operations $ 44,136.00 Gain/loss on sale of capital assets:Machinery $ 600.00 Total Gain/Loss on capital assets $ 600.00 Net Farm Income $ 44,736.00 Return to Assets:Adjusted Net Farm Income from OperationsLess Opportunity Cost of Unpaid LaborLess Opportunity Cost of ManagementEquals Return to Assets

$44, 736.00- $10,000.00- $10,000.00$24,736.00

Return to Equity:Adjusted Net Farm Income from OperationsLess Opportunity Cost of Unpaid LaborLess Opportunity Cost of ManagementEquals Return to Equity

$44, 736.00- $10,000.00- $10,000.00$24,736.00

Operating Profit Margin Ratio:Adjusted Net Farm Income from OperationsPlus Interest ExpenseLess Opportunity Cost of Unpaid LaborLess Opportunity Cost of ManagementEquals Operating Profit

$44, 136.00+ $14,825.00- $10,000.00- $10,000.00$39,961.00

Repayment CapacityCapital Debt Repayment Capacity (CDRC)Are earnings available to cover principal and interest on term debt and capital leases?

CDRC = Net Farm Income + Depreciation + Interest on Term Debt Case StudiesGrant County Farms, LLC.ObjectivesEvaluate the companys current financial health based on the income statement.Based on your evaluation, what suggestions would you give Grant County Farms, LLC to better manage their profitability?Based on you evaluation of Grant County Farms, LLCs profitability, how do you feel about a growth strategy? What other information do you need to know?Operation and Background:You are the owner of Grant County Farms, LLC. It is the end of your fiscal year, and you want to measure the health of your business through profitability analyses. Grant County Farms owns 700 acres of non-irrigated cropland on which it runs a winter wheat/fallow rotation. You also run 300 cow/calf pairs on another 700 acres.

You have an excellent reputation as a farmer, and you come from a well-establish family in the area. You are the second generation to own this farm.

Profit to EquityThe relationship between your balance sheet and income statementBalance Sheet for ABC Farms Co.December 31, 20XXASSETSLIABILITIESCurrent AssetsCurrent LiabilitiesTotal Current AssetsTotal Current LiabilitiesNoncurrent AssetsNoncurrent LiabilitiesTotal Noncurrent AssetsTotal Noncurrent LiabilitiesTOTAL ASSETSTOTAL LIABILITIESOWNER EQUITY Total EquityTotal Liabilities and OEProfit from the Income Statement

Paid in Capital from Owners

Debt Capital++--Managing Your Balance SheetProfit comes into the business:Fund growthReplace fixed assetsLeverage/deleverageIncrease liquidityDistribute to owners

Increase risk bearing ability through equity distributionLiquidity RatiosAlready learned Working Capital and Current Ratio.

Working capital as a percentage of expenses: compares adequacy of working capital to operationsHow much of the years operation can you finance?Sales as a percentage of working capital: gauges working capital in relation to a years sales Working Capital as a Percentage of Op. Ex.= Working Capital Operating ExpensesIf W.C. = $180,000 and Op. Ex. = $353,548$180,000 $353,548 = 0.51

Sales as a Percentage of Working = Sales Working CapitalIf W.C. = $180,000 and Sales = $450,000$450,000 $180,000 = 2.5

Current Ratio near 2:1Current Ratio near 1.2:1 to 1.3:1Current Ratio near of 1:1Working Capital near 30% to 40% of Operating ExpensesWorking Capital near 50% of Operating ExpensesLiquidityAdapted from Northwest Farm Credit ServicesSolvency RatiosAlready learned Debt/Asset and Debt/Equity.

Debt Coverage Ratio (DCR): amount of cash flow available to meet annual interest and principal paymentsFixed Charge Coverage Ratio (FCCR): ability to meet fixed financing expenses

First calculate adjusted EBITDA:Adj. EBITDA = Net Profit + Interest Expense + Taxes + Depreciation Expense Taxes Distribution/Draws

Then calculate DCR and FCCR:DCR = Adjusted EBITDA (Interest Expense + Principal Payments Due)

FCCR = Adjusted EBITDA (Interest Expense + Principal Payments Due + Unfunded Capital Expenditures)

Debt/Asset Ratio:Dairy 50%Orchards 50%Irrigated Crops 45%Dry Crops 40%Livestock 40%Debt/Asset Ratio:Dairy 35%Orchards 35%Irrigated Crops 35%Dry Crops 25%Livestock 25%DCR 1.2:1DCR 1:1LeverageAdapted from Northwest Farm Credit ServicesFCCR 1:1FCCR 1.2:1Guidelines for Using RatiosCompare, compare, compareIndustryHistorical informationBusiness lifecycle

Consider the whole picture.

Case StudiesJack & Jill Ranch Co.Objectives:Evaluate the companys current financial health based on the financial statements.Understand the impact of growth on the companys financial position.Based on your evaluation of Jack & Jill Ranch Co.s financial position, how do you feel about their growth strategy? How do you feel that can prepare for growth?

Operation and Background:Jack & Jill Ranch Co. farm 400 acres of irrigated crop ground. They rent 100 acres and own 300 acres. 300 acres are planted to timothy hay, and the additional 100 acres are used to pasture their seedstock cattle operation. The owners of Jack & Jill Ranch Co. would like to expand their operation. They have the opportunity to purchase a neighboring 100 acres.

Growth Opportunity:Jack & Jill Ranch have the opportunity to purchase an additional 100 acres of excellent hay ground. They would like to offer $4,000 per acre. If purchased, this ground would be used to expand their timothy hay enterprise.

HomeworkComplete an income statement for your farm.

Calculate your ROA and ROE.

Set targets for ROA, ROE, and OPMR.Take a minute to write down one or two ideas or takeaways from this lesson. One Minute Takeaway

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