financial statements
DESCRIPTION
TRANSCRIPT
Financial Statements
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