megan’s project farm business planning – case study solutions

Megan’s Project

Farm Business Planning – Case Study Solutions

A Project Funded by:USDA BFRDP

Grant #10506276Development Partners Include:

Mississippi State University

National Association of Agricultural Educators

Oklahoma State University• Agricultural Economics Department• Oklahoma Cooperative Extension

Service

Use the following slides to present solutions for the case study activities

•All lessons are based on a common case study

•High school freshman with a show heifer•Wants to expand her “herd”

▫Buy a bred cow▫Needs beginning farm loan, line of credit▫Must supply business plan to bank

•Students will be taught the tools and then use them to analyze the case study

Case Study

•Owns▫Show heifer, current value $1020▫Blower, current value $300▫$500 cash

•Purchase a bred cow for $750 in January▫Calve in February▫Wean in October, Sell in December after

preconditioning

Case Study “Facts”

CASE Study – Enterprise Budget Key

•To get beginning farm loan needs an enterprise budget

•Revenue▫Sell calf in December for $693▫Increase in value of heifer = $180 (given)▫TOTAL REVENUE (cash + non-cash) =

$873

Case Study: Enterprise Budget

•Expenses▫Heifer feed $172.80▫Cow feed $88.20▫Calf feed $21.60▫Parasite control $10▫Vaccinations $16▫Ear tag $1▫Depreciation

Blower Purchase cow

Case Study: Enterprise Budget

•Depreciation—blower▫Purchase price = $300▫Salvage value =$200▫Useful life = 5 years▫Annual depreciation = ($300-$200)/5 = $20/year

•Cow depreciation▫Purchase price = $750▫Salvage value = $470▫Useful life = 7 years▫Annual depreciation = ($750-$470)/7 = $40/year

Case Study: Enterprise Budget

•Interest on operating▫100% financed▫Cash operating expenses = $309.60▫5% Interest rate▫12 months financing

•Calculation▫Operating interest = 309.60/2 × 0.05/12 ×

12 = $7.74•Interest on long-term debt

▫$250 × 0.05 = $12.50

Case Study: Enterprise Budget

Revenue

Calf sales $693.00

Increase in value of raised

breeding livestock $180.00

Total revenue

$873.00

Expenses

Feed purchases $282.60

Grazing expenses

Veterinary expenses $ 26.00

Other cash expenses (ear tag) $ 1.00

Depreciation $ 60.00

Operating interest $ 7.74

Interest on long-term debt $ 12.50

Total Expenses $389.84Returns to Unpaid Labor, Management and Equity Capital $483.16

•BE Price = $390/630 pounds= $0.62/ pound

•BE Output = $390/$1.10 per pound = 355 pounds

Case Study: Breakeven Analysis

Case Study – Cash Flow Budget Key

•Any additional sources of cash?▫Planned loan proceeds

Cow note Operating note

•Any additional uses of cash?▫Principal payments

Cow note Operating note

Case Study: Cash Flow Budget

Sources of cash

Beginning cash balance $ 500.00

Livestock sales $ 693.00

Proceeds-cow note $ 250.00

Proceeds-operating note $ 309.60

Total sources of cash $1752.60

Uses of cash

Cash expenses $ 309.60

Breeding stock purchases $ 750.00

Principal payments $ 79.00

Interest payment long-term $ 12.50

Operating note repayment $ 309.60

Interest on operating note $ 7.74

Total uses of cash

$1468.44

Net cash surplus of deficit

$ 284.16

Case Study – Balance Sheet Key

Projected of End-of-Year Balance Sheet

Current assets Current liabilities

Cash $284 Operating note $0

Cow note payment $83

Total current assets $284 Interest on cow note $0

Non-current assets Total current liabilities $83

Blower $250 Non-current liabilities

Show heifer $1,200 Cow note $88

Cow $800 Total non-current liabilities $88

Total non-current assets $2,250 Total liabilities $171

Total assets $2,534 Owner’s equity $2,363Total liabilities + Owner’s equity $2,534

Case Study: Solvency and Liquidity

•End-of-year solvency measures▫D/A= $171/$2,534 = 0.07▫E/A = $2,363/$2,534 = 0.93▫D/E = $171/$2,363= 0.07

•End-of-year liquidity measures▫Working capital = $284 - $83= $201▫Current ratio = $284/$83= 3.42

Special Thanks to:

•USDA BFRDP Grant Program

•Oklahoma State University▫Eric A. DeVuyst, Department of Agricultural

Economics

•National Association of Agricultural Educators