Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Business Planning Part One

The Balance Sheet

Managing for Today and Tomorrow

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Agenda

• Financial Terminology• Balance Sheet (net worth statement)• Balance Sheet Activity• Income Statement• Cash Flow• Trend Analysis

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Balance Sheet #1 Cash Flow

Financial Snapshot Financial Snapshot

Meeting financial obligationsGood old-fashioned

recordkeeping

Balance Sheet #2

Working CapitalDebt/Asset Ratio

Net Worth

Working CapitalDebt/Asset Ratio

Net Worth Income Statement(Profitability)

Statement of cash flow (Sources and

uses of money)

Commit This Diagram to Memory

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Financial Terms• Liquidity - working capital, current ratio and look to

cash flow statement• Solvency - what is left over after paying all debts; look

to balance sheet• Profitability - difference between expenses and income• Repayment Capacity - generate cash to pay int. & prin.• Financial Efficiency - percent of expenses to pay for

interest, operating costs, depreciation, etc.

Vocabulary Handout & Benchmark Handout

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Balance Sheet as of [a single date] Consolidated Personal Business

Current Assets Current Liabilities

Non Current Assets Non Current Liabilities

Net Worth or Owner Equity

Cur rent

Non Current

Net Worth = Assets - Liabilities

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Traditional Format Balance Sheet

Current Assets Grain, market hogs

Current Liabilities Operating loan, Int. & L.T.

principal payments

Intermediate AssetsCows, sows, plows Intermediate Liabilities

Long Term LiabilitiesLong Term Assets

Buildings, Land

Net Worth = Assets - Liabilities

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Balance Sheet Basics

• Done annually on the same date (kids’ school pictures)

• Some balance sheets are “Cost Basis”• Some balance sheets are “Market Basis”• Some are both• Most don’t include “Deferred Tax Liabilities”• Note changes from adjustments in asset values

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Key Ratios from the Balance Sheet

• Working Capital• Current Ratio• Debt/Asset Ratio• Net Worth

Benchmark Ratios

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Current Ratio• A ratio that measures the ability of the business to pay

off current farm debts if current farm assets were sold

• Current Farm Assets / Current Farm Liabilities$1,197,000 / $111,021 = $10.78For every $1.00 of current debt there is $10.78 to pay itIf less than 1 you have problems!

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Working Capital (WC)• The amount of operating capital available to the

business in the short run to pay bills and support family living. Might think in terms of $/ crop acre or $/ cow.

Current Farm Assets – Current Farm Liabilities = WC

$1,197,000 - $111,021 = $1,085,979

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Measures of Solvency

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

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Farm Debt to Asset Ratio

The percentage of total assets financed by debt

Total Farm Liabilities / Total Farm Assets X 100$111,021 / $1,197,000 = .12 or 12% of assets are financed

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Profitability• Net Farm Income (from the Income Statement)• Operating Profit Margin (Revenue less cash

expenses)

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Net Farm Income

Net farm income, as calculated by the accrual or inventory method, represents the economic return to your contributions to the farm business: labor, management, and net worth in land and other farm assets.

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Uses of Net Farm Income

• Family Living withdrawal• Pay Social Security and Income Taxes• Pay principle payments or invest• Return to farm management

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Net Income Farm Revenue (income) - Farm Expenses (costs)+/- Inventory Adjustments = Net Farm Income + Non-farm Income = Total Net Income (before taxes) - Taxes Paid and Accrued = Net Income

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Efficiency

• Operating Expense Ratio– How much of revenue is used in

production costs excluding principle and interest?

• Net Farm Income Ratio– How much of revenue is left for you?

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Cash Flow (Timing of Money)

• A cash flow statement is a listing of cash flows that occurred during the past accounting period.

• A projection of future flows of cash is called a cash flow budget.

• Think of it as a “check book registry”.

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Homework:Look up five years of data.

Managing for Today and TomorrowSuccession, Business, Estate, and Retirement Planning for Farm and Ranch Women

Homework• Look at your most current Balance Sheet and

calculate working capital, current ratio, debt to asset ratio and net worth

• Try to fill in a five year trend summary from past Balance Sheets

• If you can’t find Balance Sheets try to find five years worth of income statements; if not, five years of income tax returns.