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Measuring the Health of a Business Farm Business Planning– Lesson 3.

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Presentation on theme: "Measuring the Health of a Business Farm Business Planning– Lesson 3."— Presentation transcript:

1 Measuring the Health of a Business Farm Business Planning– Lesson 3

2 A Project Funded by: USDA BFRDP Grant #10506276 Development Partners Include: Mississippi State University National Association of Agricultural Educators Oklahoma State University Agricultural Economics Department Oklahoma Cooperative Extension Service

3 Balance Sheets Used to measure the financial position or “health” of an individual or business

4 A balance sheet is a systematic listing of everything ▫Owned (assets) ▫Owed to others (liabilities) ▫Owner’s equity (net worth) ▫Basic identity: Assets = Liabilities + Owner equity ▫Or, Assets – Liabilities = Owner equity A “snapshot” of the business’ financial health ▫Several years’ balance sheets measure long-term success of business Current and Non-current assets and liabilities What's in a balance sheet?

5 Current assets--“liquid” assets ▫Assets that can be sold without affecting long-term profit-generating capacity ▫Cash and near cash assets  Bank account balance, certificates of deposit ▫Owned and sold within one year  Feeder livestock, crops, assets held for sale ▫Assets to be used up in production process in less than one year  Inventories of fuel, chemicals, feed, parts,… ▫Other  Cash invested in growing crops and feeder livestock Current Assets

6 Cannot be sold (liquidated) without harming long-term profit-generation capacity ▫Land, breeding stock, machinery, buildings ▫Stock in agricultural cooperatives Difficult to sell quickly and realize full market value ▫How low would you need to price your prized possession to sell it TODAY? Non-current Assets

7 Financial obligations that are payable (due) within 12 months ▫Charge account balances (feed store, chemical dealer) ▫Operating note balance ▫Accrued property taxes ▫Accrued interest on long-term debt ▫Loan payments due in next 12 months  Current portion of long-term debt Current Liabilities

8 Portion of long-term debt due in 12+ months Note, need to calculate ▫Principal balance (i.e., total amount owed) – amount owed in next 12 months (current portion) Example: $100,000 note ▫Payment required in next 12 months = $8,000 ▫Current liability = $8,000 ▫Non-current liability = $92,000 Non-current Liabilities

9 Computed as ▫Owner’s equity = Total assets – Total liability Sources of Owner’s equity ▫Contributed capital  $s invested from outside the business ▫Retained earnings  Profit that has not been taken out of the business by the owner(s) ▫Change in market value of assets  Land value trends up over time Owner’s Equity or Net Worth

10 Cost-basis balance sheet ▫Non-current assets valued at  Cost – accumulated depreciation ▫All other assets at market value ▫Used to measure businesses performance over time Market-basis balance sheet ▫All assets valued at market value ▫Used to measure liquidation value of the business ▫Use for class assignments Two Types of Balance Sheets

11 Current assetsCurrent liabilities Cash, near-cash, supplies, accounts receivable, crops held for sale, livestock held for sale, cash invested in growing crops $Accounts payable, accrued taxes (property), operating note balance, accrued interest, current portion of long-term debt $ Non-current assetsNon-current liabilities Machinery, equipment, breeding livestock, fencing, land $Non-current portion of machinery and equipment notes, non- current portion of breeding stock notes, non-current portion of mortgages $ Total assets$Total liabilities$ Owner’s equity$ Total liabilities + Owner’s equity $ Balance Sheet Format

12 Special Thanks to: USDA BFRDP Grant Program Oklahoma State University ▫ Eric A. DeVuyst, Department of Agricultural Economics National Association of Agricultural Educators

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