1. Financial Performance Analysis Charles Brown Field Specialist - Farm Management crbrown@iastate.edu 641-673-5841

2. 9 The Concept of Performance Analysis 1.Where did the money come from? 2.How was the money used?

3. 9 The Concept of Performance Analysis Two step process: –Evaluates the operations area of the business for profits/efficiency/consistency –Capital performance evaluated – areas of equity, liabilities, and assets Components of this evaluation: –Operating efficiency –Use of operating profit

4. 10 Analyzing Cash Flow from Operations Profit for the needs of the areas of assets, liabilities, equity and family living? Operating efficiency of the business? Is operating efficiency consistent? (Trends)

5. 11 Operating Profit Operating profit measures how much capacity is available from operations. Operating Profit Formula Total Revenue or Gross Profit (Value of Farm Production) – whichever is less Minus all expenses except interest, depreciation, and amortization Equals Operating Profit - Think of your Schedule F from your tax return - Take your net profit and add back in interest expense, depreciation and possibly amortization Other adjustments to consider - Breeding livestock sales - Wages paid to spouse and Section 105 Plans for spouse

6. 11 Operating Efficiency Operating efficiency measures how well the business produces capacity (cash). Operating Efficiency Formula Operating Profit Divided by Total Revenues, *Gross Profits or VFP (whichever is less) Equals Operating Efficiency Percentage The higher the percentage, the better the efficiency. -Again think of your Schedule F -Take your Net Profit(addback, interest, depreciation and feed cost if livestock operation)/ Gross Revenues(minus feed costs if livestock operation)

7. Effects of OP Efficiency on Business

8. 21 Operational Summary Is there a reasonable amount of operating profit? Is the operating efficiency acceptable? Is the operating efficiency consistent?

9. 22 How is Operating Profit Used? The use of capital is divided into four areas, which are: 1.Interest 2.Owner withdrawals, usually family and taxes for sole proprietors, dividends for corporations and draws for partnerships 3.Debt-Principal Repayment 4.Assets – Growth/Replacement and Risk

10. Rules of Thumb

11. 9 Asset Turnover Ratio Total Revenue or VFP divided by Average Farm Assets Example - Total Revenue = $1,000,000 - Average Farm Assets = $3,000,000 ATO = $1,000,000/$3,000,000 =.33

12. 12 Asset Turnover Ratio What is a good ATO?.60 or greaterHI.30 to.59AVE.29 or lessLOW ATOAsset Utilization

13. ATO Effects on $ Available

14. ASSETS REVENUE PROFITS DEBT & EQUITY $1,000,000 ATO =.30 $300,000 40% = $120,000 LIVING & INTEREST D/A =.30 Debt = $300,000 $30,000 $15,000 $20,000 $55,000

15. ASSETS REVENUE PROFITS DEBT & EQUITY $1,000,000 ATO =.10 $100,000 40% = $40,000 LIVING & INTEREST D/A =.30 Debt = $300,000 $10,000 $15,000 $20,000 -$5,000

20. Financial Performance

21. Thank You!