Measuring the Performance of Your Seafood Business

Quentin S.W. Fong Alaska Sea Grant Marine Advisory Program

Business Plan Components

• Business Concept

• Management Capabilities

• Corporate Structure

• Operational/Production Considerations

• Competitive Analysis

• Marketing Plan

• Financial Projections:

– Sales Forecasts

– Cost Assessment

• Capitalization Requirements

Reports Generated from a Seafood Business Accounting System

• Balance Sheet

• Transaction Journal

• Depreciation Schedule

• Enterprise Reports

• Income Tax Reports

• Statement of Owner Equity

• Income Statement

• General Ledger

• Inventory Report

• Employee Records

• Statement of Cash Flows

• Family Living Expense Report

Balance Sheet

Balance Sheet • A balance sheet is a snap shot of a

company’s financial health.

• It is a systematic organization of everything “owned” and “owed” by a business or individual at a given time.

• Anything of value owned by a business or individual is known as an asset.

• Any debt or other financial obligation owed to someone else is referred to a liability.

Balance Sheet

• The sheet consists of 3 parts:

1.Assets – physical or financial property that has value and is owned by an entity.

2.Liability – financial obligations (debt) that must be paid in a future time.

3.Ownership Equity – Net worth of the entity

Balance Sheet: Assets Current Assets

1.Cash and Cash equivalents.

2.Inventories

3.Accounts Receivable

4.Prepaid expenses for future services that will be used within a year.

Non-Current Assets (Fixed Assets)

1. Property, plant and equipment.

2. Investment property, such as real estate held for investment purposes

3. Intangible Assets e.g. customer lists

4. Financial Assets (exclude accounts receivables and cash)

5. Investments

6. Biological Assets – e.g. oysters, geoducks.

Balance Sheet: Liabilities

Current Liabilities

1. Accounts payable

2. Principle due within the year

3. Income tax payable & property taxes

4. Short-term loans less than one year

Non-Current Liabilities

1. Remaining balance on debt

Alaska Shellfish Farms Balance Sheet Jan1 to Dec 31, 201X

ASSETS LIABILITY

Current Assets Current Liabilities

Cash $ 6,792.00 Account Payable (e.g. boat yard) $ 3,200.00

Account Receivable $ 26,000.00 Deferred Taxes $ 350.00

Short Term Investments $ 1,219.00 Current Debt $ 14,000.00

Inventory $ 72,000.00 Total Current Liabilities $ 17,550.00

Total Current Assets $ 106,011.00

Long-Term Liabilities

Long-Term Assets Equipment, Gear, Vessel etc. Loans $ 180,000.00

Equipment, Gear, Vessel etc. $ 300,000.00 Total Long-Term Liabilities $ 180,000.00

less accumulated depreciation $ 21,000.00

$ 279,000.00 TOTAL LIABILITY $ 197,550.00

Intangible Assets $ -

Long-Term Investments $ - EQUITY

Total Long-Term Assets $ 279,000.00 Capital Contribution $ 25,000.00

Retained Earnings $ 162,461.00

TOTAL EQUITY $ 187,461.00

TOTAL ASSETS $ 385,011.00 TOTAL LIABILITY & EQUITY $ 385,011.00

Balance Sheet : Concepts to Measure the Financial Position

Liquidity

•Measures the ability to generate cash in the amounts needed at the time needed.

Balance Sheet : Current Ratio

1. Current Ratio

•Current Ratio = Current Asset/Current Liability Value

•Decision Rule: More Liquid > 1 > Not Liquid

• E.g. 106,011/17,590 = 6.04

Balance Sheet : Concepts to Measure the Financial Position

Solvency

•Measures the liabilities of the business relative to the amount of owner equity invested in the business.

• The business is insolvent and a possible candidate for bankruptcy proceedings if assets are less than liabilities.

Analyzing Solvency

1. Debt/Asset Ratio

• Debt/Asset Ratio = Total Liabilities/Total Assets

• Decision Rule: Insolvent > 1 > Solvent

• E.g. 197,550/385,011 = 0.51

2. Equity/Asset Ratio

• Equity/Asset Ratio = Total Equity/Total Assets

• Decision Rule: Solvent > 0 > Insolvent

Income Statement

Income Statement: Profit and Loss

Introduction

• Income statement is a company’s financial statement that indicates how the revenue is transformed into net income.

• It shows whether the company made or lost money during the time reported.

• It shows:

1. The revenues recognized for a specific period.

2.Cost and expenses charge against these revenues, including write-offs (e.g. depreciation and amortization of various assets), and taxes.

Year One Capital Outlay and Annual Depreciation Item Useful Life Unit Cost Quantity Cost % of Annual

(Years) (US$) (US$) Outlay Depreciation

A. Farm Equipment List

1" Polyethylene Rope 20 $ 1.60 620 $ 992.00 0.85% $ 49.60

Concrete Anchors (1800lb.) 20 $ 165.00 2 $ 330.00 0.28% $ 16.50

Scope line weights 20 $ 12.00 2 $ 24.00 0.02% $ 1.20

Droplines (75x6') 5 $ 1.60 450 $ 720.00 0.62% $ 144.00

Anchor chain for each end 20 $ 200.00 2 $ 400.00 0.34% $ 20.00

Shackles 10 $ 11.00 75 $ 825.00 0.71% $ 82.50

Buoys 12 $ 25.00 75 $ 1,875.00 1.60% $ 156.25

Lantern Nets 20 $ 23.00 75 $ 1,725.00 1.48% $ 86.25

Water Pump 4 $ 550.00 1 $ 550.00 0.47% $ 137.50

Total Farm Equipment $ 989.20 $ 7,441.00 6.37% $ 693.80

B. Water Support Equipment

Boat (30') 20 $ 75,000.00 1 $ 75,000.00 64.17% $ 3,750.00

Work Platform 10 $ 1,440.00 1 $ 1,440.00 1.23% $ 144.00

Total Water Support $ 76,440.00 $ 76,440.00 65.40% $ 3,894.00

C. Land Infrastructure

Packing Facility 20 $ 20,000.00 1 $ 20,000.00 17.11% $ 1,000.00

Refrigeration Unit 20 $ 5,500.00 1 $ 5,500.00 4.71% $ 275.00

Total Land Infrastructure $ 25,500.00 $ 25,500.00 21.82% $ 1,275.00

D. Logistics Support

Pick-up Truck 10 $ 7,500.00 1 $ 7,500.00 6.42% $ 750.00

Total $ 116,881.00 100.00% $ 6,612.80

Depreciation Schedule: Workboat (30’)

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Value $75,000 $71,250 $67,500 $63,750 $60,000 $56,250 $52,500 $48,750 $45,000 $41,250 $37,500 $33,750 $30,000 $26,250 $22,500 $18,750 $15,000 $11,250 $ 7,500 $ 3,750 $ -

$-

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

$70,000.00

$80,000.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

US

D

Year

Income Statement - Components

Revenue

• Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations.

• It is usually presented as sales minus sales discounts, returns, and allowances. Every time a business sells a product or performs a service, it obtains revenue. This often is referred to as gross revenue or sales revenue.

Income Statement - Components

Expenses

• Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.

• Cost of Goods Sold (COGS) / Cost of Sales

• Selling, General and Administrative expenses (SG&A or SGA)

• General and Administrative (G&A) expenses

• Depreciation / Amortization

• Research & Development (R&D) expenses.

Oyster Farm

Table 2. Pre-Tax Income Statement (First 7 Years)

Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Revenue $0.00 $0.00 $32,173.83 $64,347.66 $128,695.31 $193,042.97 $257,390.63

Operating Costs

Farm Equipment $693.80 $1,250.10 $3,475.30 $6,256.80 $10,150.90 $13,488.70 $15,576.40

Water Pump $137.50 $137.50 $137.50 $137.50 $137.50 $137.50 $137.50

Boat (30') $3,750.00 $3,750.00 $3,750.00 $3,750.00 $3,750.00 $3,750.00 $3,750.00

Work Platform $144.00 $144.00 $144.00 $144.00 $144.00 $144.00 $144.00

Packing Facility $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00

Refrigeration Unit $275.00 $275.00 $275.00 $275.00 $275.00 $275.00 $275.00

Truck $750.00 $750.00 $750.00 $750.00 $750.00 $750.00 $750.00

Owner/Operator Opportunity Cost $42,000.00 $42,000.00 $42,000.00 $42,000.00 $42,000.00 $42,000.00 $42,000.00

Half-Time Employee $0.00 $23,780.00 $23,780.00 $23,780.00 $23,780.00 $23,780.00 $23,780.00

Part-Time Employee $0.00 $0.00 $0.00 $11,890.00 $11,890.00 $11,890.00 $11,890.00

Supply/Maintenance/Telecommunications $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00

Fuel $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00

Seed Cost $3,093.75 $6,187.50 $12,375.00 $18,562.50 $24,750.00 $24,750.00 $24,750.00

Packing Supplies $0.00 $0.00 $1,003.64 $2,007.28 $4,014.57 $6,021.84 $8,029.12

Application and Bond Fee $2,600.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Lease $1,575.00 $1,575.00 $1,575.00 $1,575.00 $1,575.00 $1,575.00 $1,575.00

PSP Testing Fees $0.00 $0.00 $5,124.00 $5,124.00 $5,124.00 $5,124.00 $5,124.00

Freight $0.00 $0.00 $5,450.62 $10,901.23 $21,802.54 $32,703.77 $43,605.00

Total Operating Costs $72,019.05 $96,849.10 $116,840.05 $144,153.31 $167,143.50 $183,389.81 $198,386.02

Income (Pre-Tax) ($72,019.05) ($96,849.10) ($84,666.23) ($79,805.65) ($38,448.19) $9,653.16 $59,004.61

Income Statement: Usefulness and Limitations

Usefulness

• help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses.

Limitations

• Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty).

• Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).

• Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).

Analysis of Net Farm Income: Rate of Return on Assets

•Also called Return to Capital, Return on Investment (ROI) • Rate of Return on Assets (%)

= Net Income ($)/Average Total Assets ($) x 100 • Measure how profitable a company is

relative to its assets.

Rate of Return on Assets: What is the rate of return on Assets on Year 15?

• Net Income: $59,004.61

• Average Net Asset:

Asset Calculation

Item Useful Life

(Years) 14 15

A. Farm Equipment List

1" Polyethylene Rope 20 $ 297.60 $ 248.00

Concrete Anchors (1800lb.) 20 $ 99.00 $ 82.50

Scope line weights 20 $ 7.20 $ 6.00

Droplines (75x6') 5 $ 144.00 $ -

Anchor chain for each end 20 $ 120.00 $ 100.00

Shackles 10 $ 495.00 $ 412.50

Buoys 12 $ 1,562.50 $ 1,406.25 FY15

Lantern Nets 20 $ 517.50 $ 431.25 Average

Long Line Equipment $ 3,242.80 $ 2,686.50 $ 2,964.65

Water Pump 4 $ 275.00 $ 137.50 $ 206.25

Boat (30') 20 $ 22,500.00 $ 18,750.00 $ 20,625.00

Work Platform 10 $ 864.00 $ 720.00 $ 792.00

Packing Facility 20 $ 6,000.00 $ 5,000.00 $ 5,500.00

Refrigeration Unit 20 $ 1,650.00 $ 1,375.00 $ 1,512.50

Pick-up Truck 10 $ 4,500.00 $ 3,750.00 $ 4,125.00

Total Assets $ 39,031.80 $ 32,419.00 $ 35,725.40

Rate of Return on Assets: What is the rate of return on Assets on Year 15?

• Rate of Return on Assets (%)

= (Net Income ($)/Average Total Assets ($)) x 100

• ROA = ($59,004.61/$35,725.40) x 100

= 165%

• The “Profitability” of the farm can now be judged by comparing this ROA to similar farms, other possible investments, the opportunity cost of farm capital, and past ROA for the same farm.

Other Diagnostics

•Return on Equity

•Operating Profit Margin Ratio

•Return to Labor and Management

Cash Flow Analysis

Cash-flow Statement: Introduction

• The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments.

• These non-cash transactions include depreciation or write-offs on bad debts or credit losses.

• Non-cash activities are usually reported in footnotes.

Cash-Flow Statement

• Cash flow is the movement of money into or out of a business, project, or financial product.

• Usually measured during a specified, finite period of time.

• Cash Flow is used for:

1. Calculating internal rate of return and net present value to determine feasibility of projects.

2. Determine a business's liquidity and solvency. A profitable company can fail because of a shortage of cash even while profitable.

3. Project the timing and new borrowing that the business will need during the year and the timing and amount of loan payments.

ACME FISHING

Statement of Cash Flows

For the Year Ending 200Y

Direct method

Cash flows from Operating Activities

Cash received from customers $ 143,220

Less cash paid for:

Inventory $ 21,829

Wages $ 21,219

Other operating expenses $ 15,450

Interest $ 7,500

Income Taxes $ 21,600 $ 87,598

Net cash provided by operating activities $ 55,622

Cash flow from Investing Activities

Purchase of equipment $ (8,000)

More money spent on investments $ (16,000)

Increase (decrease) in CCF $ (13,300)

Increase in permits $ (8,200)

Net cash from operating activities $ (45,500)

Cash flow from Financing Activities

Increase (decrease) in vessel and equipment loan $ (16,480)

Increase (decrease) in current debt $ (1,530)

Increase (decrease) in permit/IFQ loans $ 7,200

$ (10,810)

Net increase in cash $ (688)

Cash Position January 1, 200Y $ 5,871

Cash Position, December 31, 200Y $ 5,183

Cash Flow Example

Item 0 1 2 3 4 5 6

A. Cost

Longline Equipment $ 6,891.00 $ 6,891.00 $ 27,564.00 $ 34,455.00 $ 48,237.00 $ 42,066.00

Water Pump $ 550.00 $ - $ - $ - $ 550.00 $ - $ -

Boat (30') $ 75,000.00 $ - $ - $ - $ - $ - $ -

Work Platform $ 1,440.00 $ - $ - $ - $ - $ - $ -

Packing Facility $ 20,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00

Refrigeration Unit $ 5,500.00 $ 275.00 $ 275.00 $ 275.00 $ 275.00 $ 275.00 $ 275.00

Truck $ 7,500.00 $ - $ - $ - $ - $ - $ -

Owner/Operator Opportunity Cost $ - $ - $ - $ - $ - $ -

Half-Time Employee $ - $ 23,780.00 $ 23,780.00 $ 23,780.00 $ 23,780.00 $ 23,780.00

Part-Time Employee $ - $ - $ - $ 11,890.00 $ 11,890.00 $ 11,890.00

Supply/Maintenance/Telecommunications $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00

Fuel $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00

Seed Cost $ 3,094 $ 6,188 $ 12,375 $ 18,563 $ 24,750 $ 24,750

Packing Supplies $ - $ - $ 1,003.64 $ 2,007.28 $ 4,014.57 $ 6,021.84

Application and Bond Fee $ 2,600.00 $ - $ - $ - $ - $ -

Lease $ 1,575.00 $ 1,575.00 $ 1,575.00 $ 1,575.00 $ 1,575.00 $ 1,575.00

PSP Testing Fees $ - $ - $ 5,124.00 $ 5,124.00 $ 5,124.00 $ 5,124.00

Freight $ - $ - $ 5,450.62 $ 10,901.23 $ 21,802.54 $ 32,703.77

Total Cost Per Year $ 31,434.75 $ 55,708.50 $ 94,147.25 $ 126,120.01 $ 158,448.10 $ 165,185.61

Marketable Oysters 0 0 75,703 151,406 302,813 454,219

B. Gross Revenue

1. Oyster Sales $ - $ - $ 32,173.83 $ 64,347.66 $ 128,695.31 $ 193,042.97

2. Salvage Value $ - $ - $ - $ - $ - $ -

Total Gross Revenue $ - $ - $ 32,173.83 $ 64,347.66 $ 128,695.31 $ 193,042.97

Profit/Loss $ (31,434.75) $ (55,708.50) $ (61,973.43) $ (61,772.35) $ (29,752.79) $ 27,857.36