Assessing Financial Performance: How Am I Doing?

Topics

• Data required• Calculation worksheet• Interpretation

Financial assessment worksheets

Data required

• Balance sheets– Beginning of the accounting period– Ending of the accounting period

• Schedule F and Form 4797 from federal tax return• Miscellaneous information

Worksheet 1- Schedule F DataSchedule F Data Taxable Year:

Cost of livestock sold (Schedule F, line 2) aGross income (Schedule F, line 11) bDepreciation (Schedule F, line 16) cMortgage interest (Schedule F, line 23a) dOther interest paid (Schedule F, line 23b) eTotal expenses (Schedule F, line 35) f

Balance Sheet Beginning Ending

Balance sheet date

Cash g lTotal current farm assets h mTotal current farm liabilities I nAccrued Interest j oFarm accounts payable and accrued exp. k pTotal farm assets qTotal farm liabilities rOwner's equity s

Miscellaneous DataBreeding stock sales (Form 4797) tNumber of operators and employees (annual full-time equiv.) u

Family living expenses (all families supported by the farm)1v

1This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicatesthat 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the business and those wages are already include in the value on line f.

Worksheet 1- Balance Sheet DataSchedule F Data Taxable Year:



Balance sheet date




1This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicatesthat 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the business and those wages are already include in the value on line f. Ending Balance

Sheet

Worksheet 1- Miscellaneous DataSchedule F Data Taxable Year:



Balance sheet date




1This number is used to approximate the value of unpaid family and operator labor. University of Illinois research indicatesthat 1997 total living expenses for 1-2 member families is $39,332; 3-5 member families is $47,950; and 6+ member families is $47,083. Do not include a value here if the operator and family members are paid a reasonable wage by the business and those wages are already include in the value on line f.

Worksheet 1- Case Problem Data

Schedule F Data Taxable Year: X4

Cost of livestock sold (Schedule F, line 21) A -$ Gross revenue (Schedule F, line 112) B 1,432,549$ Depreciation (Schedule F, line 16 or "use cost" number from income statement)

C136,922$

Mortgage interest (Schedule F, line 23a) D 89,808$ Other interest paid (Schedule F, line 23b) E 11,788$ Total expenses (Schedule F, line 35 or B of income statement + depreciation or "use cost" number)

F1,517,050$

Balance Sheet Beginning EndingBalance sheet date 12/31/X5 12/31/X5

Cash G 157,689$ L 5,016$ Total current farm assets H 337,747$ M 485,376$ Total current farm liabilities I 252,136$ N 321,867$ Accrued Interest J 16,968$ O 14,088$ Farm accounts payable and accrued exp. K 4,169$ P 6,131$ Total farm assets (remove all nonfarm real estate) Q 4,655,476$ Total farm liabilities (remove all nonfarm liabilities) R 1,121,439$ Owner's equity S 3,534,037$

Miscellaneous DataBreeding stock sales (Form 4797) T 63,800$ Number of operators and employees (annual full-time equiv.) U 9Family living expenses3 (all families supported by the farm) V 150,000$

Worksheet 1 - Net Farm Income Calculations

Net Farm IncomeGross revenues [A+B+T+(M-L)-(H-G)] WInterest expense [D+E+(O-J)] XOther expenses [A+F-(D+E)+(P-K)] YNet farm income [W-X-Y] Z

Net Farm Income Calculations for Case Problem

Net Farm IncomeGross revenues [A+B+T+(M-L)-(H-G)] W 1,796,651$ Interest expense [D+E+(O-J)] X 98,716$ Other expenses [A+F-(D+E)+(P-K)] Y 1,417,416$ Net farm income [W-X-Y] Z 280,519$

Worksheet 2

Profitability Your Farm Benchmark Strong/WeakReturn on Assets [(z+x-v)/q]*100Return on Equity [(z-v)/s]*100Operating Profit Margin [(z+x-v)/w]*100

LiquidityCurrent Ratio [m/n]

SolvencyDebt-to-Asset Ratio [r/q]*100

Financial EfficiencyAsset Turnover Ratio [w/q]*100Revenue per Full Time Laborer [w/u]Operating Expense Ratio [ (y-c)/w]*100 Depreciation Expense Ratio [ c/w]*100 Interest Expense Ratio [ x/w]*100 Net Farm Income Ratio [ z/w]*100

Worksheet 2 - Case Problem Profitability Your Farm Benchmark*

Return on Assets [(Z+X-V)/Q]*100 4.9% 5.8%Return on Equity [(Z-V)/S]*100 3.7% 5.7%Operating Profit Margin [(Z+X-V)/W]*100 12.8% 13.5%

LiquidityCurrent Ratio [M/N] 1.51 3.62

SolvencyDebt-to-Asset Ratio [R/Q]*100 24.1% 14.5%

Financial EfficiencyAsset Turnover Ratio [W/Q]*100 38.6% 43.0%Revenue per Full Time Laborer [W/U] 199,628$ 251,998$ Operating Expense Ratio [ (Y-C)/W]*100 71.3% 55.2%Depreciation Expense Ratio [ C/W]*100 7.6% 7.2%Interest Expense Ratio [ X/W]*100 5.5% 3.3%Net Farm Income Ratio [ Z/W]*100 15.6% 34.3%

Diagnosis• Assessment in four areas

– Profitability– Liquidity– Solvency– Financial efficiency

Indicators of Financial Strength

• Values larger than benchmark– ROA– ROE– Operating profit margin– Asset turnover ratio– Revenue per full-time worker– Net farm income ratio

Indicators of Financial Strength

• Values smaller than benchmark– Debt-to-asset ratio– Operating expense ratio– Depreciation expense ratio– Interest expense ratio

Worksheet 2 - Assessing Financial Performance

Profitability Your Farm Benchmark* Strong/WeakReturn on Assets [(Z+X-V)/Q]*100 4.9% 5.8% weakReturn on Equity [(Z-V)/S]*100 3.7% 5.7% weakOperating Profit Margin [(Z+X-V)/W]*100 12.8% 13.5% weak

LiquidityCurrent Ratio [M/N] 1.51 3.62 weak

SolvencyDebt-to-Asset Ratio [R/Q]*100 24.1% 14.5% strong

Financial EfficiencyAsset Turnover Ratio [W/Q]*100 38.6% 43.0% weakRevenue per Full Time Laborer [W/U] 199,628$ 251,998$ weakOperating Expense Ratio [ (Y-C)/W]*100 71.3% 55.2% weakDepreciation Expense Ratio [ C/W]*100 7.6% 7.2% weakInterest Expense Ratio [ X/W]*100 5.5% 3.3% weakNet Farm Income Ratio [ Z/W]*100 15.6% 34.3% weak

Source of problems• Scale• Employment• Efficiency• Debt structure

Diagnostic tree

Not OK

Diagnostic factorsEfficiency Scale Debt structure

Courses of action

OKNot OK

OK

OK

OK

OK

OK

OK

Not OK

Not OK

Not OK

Not OK

Not OK

…………. ………….

Source:Financial Troubleshooting

Courses of action to improve efficiency

• Increase analysis of production records looking for clues that will lead to improved efficiency

• Use advisory services to help focus on productivity and thruput

• Work at improving production skills• Improve marketing skill and performance • Devote more time to management

Courses of action to improve scale

• Examine whether management ability is sufficient to handle business of the current size or an expansion

• Use fixed resources fully by adding enterprises and/or custom work

• Expand existing enterprises with low-capital requirements

• Merge with another farming unit

Courses of action to improve employment

• Increase off-farm employment• Eliminate hired family employees• Add labor intensive enterprises with low capital

requirements (increase the scale)• Reduce family withdrawals to a level that is

consistent with efficiency or part-time employment

Courses of action to improve debt structure

• Restructure debt• Sell unproductive assets to reduce debt• Reduce debt through write-off• Scale back farm to allow significant increases

in off-farm employment• Don’t own what you can control through

leases• Evaluate the rate of return expected from

capital investments and compare to interest rate

Summary

• Utilize existing data• Identify appropriate benchmarks• Assess efficiency, scale, employment, and debt

structure to identify actions that will improve performance

Strategic Business Planning for Commercial Producers

Assessing Financial Performance: How Am I Doing?

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