Presentation on theme: "Evaluating Farm Financial Performance and Position How’s Business?"— Presentation transcript:
Evaluating Farm Financial Performance and Position How’s Business?
True or False? zIt is possible for a farm business to be unable to pay bills but solvent at the same time. zIt is possible for a farm business to be able to pay bills but not be making a profit.
Measuring Financial Performance and Position zLiquidity zSolvency zProfitability zFinancial efficiency zRepayment capacity
Liquidity The ability to generate cash to meet financial obligations
Measuring Liquidity Current ratio = Total current farm assets Total current farm liabilities Current ratio < 1 indicates potential liquidity problems.
Solvency The ability to meet long-term commitments as they come due.
Measuring Solvency Debt/asset ratio = Total farm liabilities Total farm assets D/A > 0.5 means less than 50 percent of assets are contributed by owners. D/A > 0.7 means financial stress is likely. D/A > 1 signals insolvency.
Profitability zFinancial performance of the farm over a period of time usually a year zReturn to land, labor, capital & management
Measuring Profitability Net Farm Income = Gross farm revenue - all farm operating expenses incurred to create those revenues +/- gains/losses on sale of capital assets
Measuring Profitability zRate of Return on Farm Assets = (Net farm income from operations + farm interest expense - value of unpaid labor & management) (Average total farm assets) zIs the rate of return higher than the cost of capital?
Measuring Profitability zRate of Return on Farm Equity = (Net farm income from operations - value of unpaid labor & management) (Average total farm equity) zNational average for farms is typically 2-4% zCompare to rate of return on alternative investments
Repayment Capacity Ability to generate funds to repay term debt
Repayment Capacity zLenders use various debt service coverage ratios zLook at a cash flow plan zEvaluate interest expense ratio
Interest Expense Ratio zReflects the extent to which gross farm revenues are spent on interest = Total farm interest expense Gross farm revenues zRatio > 15% indicates potential payment problems.
Financial Efficiency zImportant part of evaluating profitability. Determines if assets are used efficiently to generate income.
Asset turnover ratio Ratio = Gross farm revenues Average total farm assets
Keys to Successfully Using Financial Measures zDevelop measures annually zBe consistent in how the measures are developed zNote reasons for “unusual” measures zUse information to deal with potential problems before they get out of hand
True or False? zYou should analyze the short-term cash flow implications of making a major change in your farm business before deciding to make the change, even though the long-range plan says it should work.