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AP7

Agriculture Management, Economics, & SalesAnalyzing Agribusiness Finances

Unit: Agribusiness Planning & Analysis

Lesson Title: Analyzing Agribusiness Finances

Standards ABS.04.01.02.a. Identify financial concepts associated with production and profit.ABS.05.01.01.a. Identify accounting information in AFNR business reporting and management.ABS.05.01.01.c. Interpret financial information for an AFNR business to determine profitability, net worth position, financial ratios, performance measures and ability to meet cash-flow requirements.ABS.05.01.04.a. Calculate percentages, ratios and related business applications.

CCSS.Math.Content.HSA-SSE.A.1 Interpret expressions that represent a quantity in terms of its context.CCSS.Math.Content.HSA-CED.A.4 Rearrange formulas to highlight a quantity of interest, using the same reasoning as in solving equations.CCSS.ELA-Literacy.W.11-12.9 Draw evidence from literary or informational texts to support analysis, reflection, and research.CCSS.ELA-Literacy.W.11-12.2 Write informative/explanatory texts to examine and convey complex ideas, concepts, and information clearly and accurately through the effective selection, organization, and analysis of content.

Student Learning Objectives

Slide 2 in AP7 Analyzing Agribusiness Finances Lesson ObjectiveAfter completing the lesson on analyzing agribusiness finances, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Here’s the Plan article review.

Enabling ObjectivesAs a result of this lesson, the student will…

1. Explain the purpose of a financial analysis.

2. Explore the purpose of the financial analysis used in agribusiness and define specific tests used in the analysis.

3. Calculate liquidity, solvency, and profitability.

Time: Approximately 230 minutes

List of ResourcesBacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N.

(1988). Agriculture Management and Economics Instructor Guide. Columbia, MO: Instructional Materials Laboratory.

Bacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N. (1988). Agriculture Management and Economics Student Reference Guide. Columbia, MO: Instructional Materials Laboratory.

Berry, J. ( 2010, September 17). Calculating The “Sweet 16” Farm Financial Measures. Penn State College of Agricultural Sciences, Cooperative Extension. Retrieved from http://agmarketing.extension.psu.edu/Business/Sweet16.html.

Farm Financial Standards. (2013) Retrieved from http://www.ffsc.org/.

Farm Financial Standards Council. (n.d.). Financial Guidelines for Agriculture Producers. Retrieved from http://www.ffsc.org/.

Farm Financial Standards Council. (n.d.). Management Accounting Guidelines for Agriculture Producers. Retrieved from http://www.ffsc.org/.

Farrell, M. (2013, April 12). JCPenney fighting for survival. CNN Money. Retrieved from http://money.cnn.com/2013/04/12/investing/jcpenney-blackstone/index.html.

Kantrovich, A. (2011, August 2). What was this years' return on investment? Retrieved from http://msue.anr.msu.edu/news/financial_ratios_part_7_of_21_net_farm_income.

Penn State Extension. (n.d.). Marketing – Marketing strategies to help your business grow. Retrieved from http://extension.psu.edu/business/farm/marketing.

Pepitone, J. (2013, April 21) Netflix hopes for 'House of Cards' Boost. CNN Money. Retrieved from http://money.cnn.com/2013/04/21/technology/netflix-earnings-preview/index.html.

Pepitone, J. (2013, April 23). Apple's profit crunch continues. CNN Money. Retrieved from http://money.cnn.com/2013/04/23/technology/mobile/apple-earnings/index.html.

Agribusiness Planning & Analysis AP7 Analyzing Agribusiness Finances

Rayburn, E. (n.d.). Enterprise Budgets. Retrieved from http://www.caf.wvu.edu/~forage/enterprise/enterprise.htm.

List of Tools, Equipment, and SuppliesAP7 PowerPoint PresentationAP7 Activity Sheet and Evaluation PacketNote cards or small sheets of paper for review activityMissouri Record Book for review activityCalculator Various broken items for interest approach

Key TermsSlide 3 in AP7 Analyzing Agribusiness Finances

The following terms are presented in this lesson (shown in bold italics):Financial AnalysisBalance SheetIncome StatementCash FlowLiquiditySolvencyProfitability


Interest Approach: Use an interest approach that will prepare the students for the lesson. Teachers often develop approaches for their unique class and student situations. A possible approach is included here.

Slide 4 in AP7 Analyzing Agribusiness FinancesA Quick Fix: Bring various items that are broken into class. Be sure these broken items require different levels of fixing – simple to complex. Some suggested broken items might include: a chair, cell phone, heel of a shoe, something metal that would need to be welded, etc.

One at a time, have students examine the broken items (from simplest fix to most complex). Ask question like “How could we fix this item? How long will it take? Are there other methods of fixing the item? Which method will work better? Why? Will this fix be permanent?”

Spur discussion so as items get more complex to fix, they realize there are multiple ways to fix them. Also, get them to discover that the quick fix is not always the longest lasting fix.


When students have gotten the concept, pose to them the question, “What if I’m a business owner and my business needs fixing?” This question would pertain to the business being in debt, losing money, losing business, etc. Gather responses from students, getting them to conclude that in order to fix this business we must evaluate the current situation, reorganize, and take steps

to move in a positive direction. Summary of Content and Teaching Strategies**Background information for Objective 3 is found in AM2.

Objective 1: Explain the purpose of a financial analysis.

Teaching Strategies Related Content1. Tie in the interest approach by

discussing that before a problem can be fixed, the business needs to be analyzed.

Slide 5 in AP7 Analyzing Agribusiness Finances


2. Facilitate a discussion on what students think would be included in a financial analysis.

Slide 7-8 in AP7 Analyzing Agribusiness Finances

Financial analysis The process of evaluating business,

project(s), budgets, or other related entities.

Evaluation of company’s balance sheet, income statement, and cash flow statement

Results establish reporting relationship between components of balance sheet and profit and loss of income statements

Financial analysis: Help management identify strengths

and weaknesses of business Provide comparative statements and

trend analysis Ratio analysis, working capital change,

funds flow analysis Provide consistent information for

“external reporting” – Lenders, shareholders, investors, suppliers, stakeholders

Aid and support management and business decisions

Content of a financial analysis How does the company generate

revenue? Identify products and services; Identify revenue composition, seasonality, and operating cycle of company; Determine billing cycles, credit terms, management understanding of cash flow


Who are the company competitors and what attracts customers to company’s products or services? Is it price, convenience, reliability, or value added: Are there any obstacles to entry or is industry maturing? What are company and management business strategies, and are they consistent with long-term goals?

Who generates review of company business objectives? Need to identify “key managers and decision makers”; Does management have a risk management plan? Is there a need for “key man” risk mitigation?

What is the composition of customer base? Identify customer concentration and related risks; How dependent is a customer on your product or service? What is risk for substitution or obsolescence?

What events can positively or negatively impact revenues? Identify industry and business risks; Is there a risk management plan to mitigate?

What is the company’s plan for next three to five years? Identify expansion plans and need for growth capital or maintenance costs; Liquidity and finance needs; Additional technology, human resources, or other needs

What is the quality of financial information? Market or GAAP Financial Reporting; Accountant prepared or internally prepared; Compilation, review, qualified, or unqualified statements

Objective 2: Explore the purpose of the financial analysis used in agribusiness and define specific tests used in the analysis.

Teaching Strategies Related Content1. Let’s start to discover the specific

financial analysis we use in Financial analysis used in agribusiness

Actual vs. Planned Performance –


agribusiness. (These items are discussed in more detail in AM2.)


2. Based upon these documents, financial analysis tests are “performed.”


Comparison of balance sheet performance to base proforma business projections; Sales and cost of sales; Cash flow and profit margins

Trend Analysis – Comparison of two or more years of financial and earnings data; Sales trends; Cost trends; Profit trends; Cash flow trends

Ratio Analysis and Industry Comparisons – Comparison of business results to other businesses within industry and to performance standards established by lenders, investors, and management internal benchmarks; Production agriculture ratio’s generally compared to Farm Financial Guidelines established by the Farm Financial Standards Council

Financial analysis tests Liquidity – Measure of company’s

ability to pay its bills as they come due without disrupting operation

Solvency – Capital structure of a business in which the sale of all assets would generate sufficient cash to pay off all liabilities; Total assets exceed total liabilities; Net capital ratio is greater than 1

Profitability – Measures relationship between revenue and expenses

Coverage Ratios – Measures ability of business to meet financial obligations

Growth Ratios – Measures growth of total assets, total liabilities, net worth, net sales, operating profit, and net profit

Activity Ratios – Measures efficiency of accounts receivable days, inventory days, and accounts payable days

Cash Flow – Net cash available for repayment of long-term debt; Focus on what funds or dollars are actually available to repay debt after funds are used in the business


Objective 3: Calculate liquidity, solvency, and profitability.

Teaching Strategies Related Content1. Discuss with students the benefits of

knowing whether or not a business is liquid.






2. Complete AP7.1 as a class, small group, pair, or individually.

3. Discuss with students why it would be important for a business to know whether or not it is solvent.


Testing liquidity

Current ratio – Current assets / current liabilities; The higher the ratio may result in sufficient liquidity to meet business needs; Recommended guideline = 1.5 – 2.0

Working capital – Current assets – current liabilities; Adequacy must be related to size of business; May indicate sufficient liquidity; however, funds may not be available to meet business cash flow needs due to timing of funds availability; Recommended guidelines suggest positive to stable trend of working capital

Working Capital/Gross Revenues Ratio – Working capital divided by gross revenues; Gives relationship of working capital to size of farm business; Higher the ratio = greater the liquidity; 20% or greater recommended

Debt structure – Current liabilities / total liabilities; Debt structure percentage increases if debt continues to be paid off without new debt; Decrease in debt structure signifies a newly incurred debt

Asset structure – Current assets / total assets; Liquidity problems if asset structure is less than debt structure

Testing solvency


in AP7 Analyzing Agribusiness Finances


5. Discuss with students why a business would want to test for profitability.





Net capital ratio – Total assets / total liabilities; Net capital ratio less than 1 = total liabilities greater than total assets so business is insolvent

Debt to asset ratio – Total liabilities / total assets; Desired ratio less than 0.4

Debt to equity ratio – Total liabilities / total net worth; Desired ratio less than 0.66

Equity to asset ratio – Total net worth / total assets; Desired ratio greater than 0.60

Solvency ratios are typically measured on market values to provide better indication of business worth if liquidated

Testing profitability

Rate of return on assets – annual earnings / total assets

Rate of return on equity – Net income / Total equity

Operating profit margin – Net profit / net revenue

Net farm income - Gross income – total expenses +/- inventory changes – depreciation

Review/SummarySlide 21 in AP7 Analyzing Agribusiness Finances


A complete financial analysis is essential for a business to achieve maximum profit. The types of analyses we have discussed are commonly used by successful business people. A complete analysis is also helpful in completing income tax forms and receiving tax credits.

Review:

Slide 22 in AP7 Analyzing Agribusiness Finances Liquidity, solvency, profitability: Complete AP7.4 having students use their Missouri Record Books to test the liquidity, solvency, and profitability of their Supervised Agricultural Experience Programs. If personal record books are not available, copy or print a former student’s records (removing name or identifying pieces) for students to practice testing for liquidity, solvency, and profitability.

Slide 23 in AP7 Analyzing Agribusiness Finances Show What You Know review: Divide class into partners or triads. Give each group a flip chart-sized paper with one of the vocabulary words and a marker (each group a different color). Instruct them to find a spot in the room away from other groups, yet visible to everyone, to post their flip chart paper. After all groups are set, instruct students that they will have 30 seconds to jot down everything they know about the topic in front of them. When time is called, switch to another flip chart paper, taking another 30 seconds to add what they know to the previous groups’ flip chart paper. If they think something on the flip chart paper is incorrect, place a check mark next to it with their color of marker. After each group has been to every flip chart paper have them return to their seats and review each paper as an entire class. Facilitate a discussion about each vocabulary word in relation to the comments on the page. Because every group had a different color of marker, teachers can tell who had a vivid understanding of the word and who was still confused.

Slide 24 in AP7 Analyzing Agribusiness Finances Exit cards: Students will answer the following questions on a note card or small slip of paper and hand to teacher as they exit:

What did you learn today about financial analysis? What questions do you still have about financial analysis or their corresponding

calculations?

Application

Extended ActivitiesInvite local, area, and district FFA members to a student-led workshop on how to analyze agribusiness finances with emphasis on analyzing students’ Supervised Agricultural Experience Programs. Teach students how to test their SAE for liquidity, solvency, and profitability. To enhance the program, invite a local business owner to share his/her thoughts, ideas, and advise on how to run a successful agribusiness.


Review the past two year’s records, testing for liquidity, solvency, and profitability. Compare these with the current year done in class during the lesson review. Identify both positive and negative changes over the years that contributed to the results of the tests. Identify three SMART goals to improve and/or maintain the results in the coming years.

Gather the past five year’s FFA chapter budgets and have students figure test profitability. Examine conclusions and have each student come up with three ideas to improve the profitability of the local FFA chapter. If the profit margin is larger than they feel necessary, come up with three ideas of how to efficiently use the extra money. Present findings and ideas to chapter officers at the next FFA meeting.

EvaluationHere’s the Plan AP7.5

Alternate - Paper-pencil Quiz Evaluation AP7.6

Answers to EvaluationEvaluation AP7.5Answers will vary. Use scoring guide on AP7.5 to assess student work.

Alternate Evaluation AP7.61. B2. A3. B4. D5. $51,9156. 1.597. 0.188. 0.129. 1.2210. $450,00011. + $10,00012. 0.16


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