October 13, 2020

Financial Management – Statements & Analysis

by Michael Langemeier, Michael Boehlje, and Elizabeth Yeager

Financial management involves the evaluation of liquidity and solvency, financial planning, acquisition and use of financial resources, asset purchases and farm growth, and relationships with agricultural lenders.  This series starts by taking a deep dive into the key components of financial statements such as a market value balance sheet, an income statement, a sources and uses of funds statement, and a statement of owner’s equity.  Key ingredients to this section include computing the sources of changes in farm equity, and the measurement of profitability and the efficiency of farm asset utilization.  With this background, a producer is ready to examine benchmarks of financial performance, repayment capacity, crop machinery investments and costs, and labor efficiency and productivity, and to stress test their financial position and performance.

ARTICLES WITHIN PUBLICATION:

Market Value Balance Sheet and Analysis

August 26, 2020

A market value balance sheet estimates asset values using current prices for similar assets.  The market value balance sheet is relatively easy to derive, more comparable across farms, includes opportunity cost, and often required by lenders.  The market value balance sheet allows us to examine the liquidation values of the assets.

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Components of an Accrual Farm Income Statement

August 26, 2020

An accrual income statement contains one of the most important financial measures used by farms, net farm income.  Because this measure is accrual, it measures the actual performance of a farm during the year.

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Sources and Uses of Funds Statement

August 26, 2020

A sources and uses of funds statement, often referred to as a flow of funds report, provides a mechanism for reporting how a farm’s performance during an accounting period influenced and was influenced by major funding activities.

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Statement of Owner’s Equity

August 26, 2020

This article is one of a series of financial management articles that examine financial statements and financial analysis.  In this article, the components of a statement of owner’s equity are illustrated and described.

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Computation of Deferred Tax Liabilities

September 2, 2020

Income tax liabilities arise from differences between balance sheet values of certain assets and liabilities, and the tax basis of those same assets and liabilities.  Deferred taxes reconcile the tax basis of balance sheet assets and liabilities with the basis currently being used to value assets and liabilities on a balance sheet, which is usually market value.

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U.S. Farm Sector Balance Sheet

September 9, 2020

Since its peak in 2013 at $123.7 billion, average U.S. net farm income has averaged $82.7 billion or approximately 33% less than the peak value. This article discusses changes in the U.S. farm sector balance sheet as well as liquidity and solvency ratios.

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Working Capital: What Is It and Do You Have Enough?

September 9, 2020

Maintain your working capital!  This phrase is commonly heard in discussions with lenders, advisors, and management specialists in today’s environment of relatively low crop net returns or margins.

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How Much Debt Can a Farm Carry?

September 9, 2020

There are numerous factors impacting a farm’s debt holding capacity.  It is important to remember that financial leverage or debt directly impacts a farm’s growth rate through its effect on expected returns and risk.

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Schedule F Net Farm Profit and Accrual Net Farm Income

September 16, 2020

It is widely accepted that accrual accounting provides a more accurate estimate of annual farm profitability than cash accounting or Schedule F net farm profit. This article compares cash and accrual net farm income for a case farm in west central Indiana given alternative scenarios pertaining to prepaid expenses and crop inventories.

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Measuring Farm Profitability

September 16, 2020

The rates of return on assets and equity are extremely useful when comparing farm investments with other investments.  However, these two measures are sensitive to how farm assets are valued on the balance sheet.  For this reason, the operating profit margin is more conducive for benchmarking profitability among farms.

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Measuring Efficiency of Farm Asset Utilization

September 16, 2020

A farm’s ability to operate on the production frontier depends on its ability to produce crop and livestock enterprises efficiently, while a farm’s ability to produce on the cost frontier pertains to its ability to produce on the production frontier, manage costs, and market crop and livestock commodities.  The asset turnover ratio, on the other hand, measures how efficiently farm assets are being used to generate value of farm production (a gross income measure).

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Du Pont Financial Analysis

September 23, 2020

The Du Pont financial analysis model is a useful method of illustrating the relationship between the asset turnover ratio, the operating profit margin ratio, return on assets, and return on equity. In this article, a case farm is used to examine the relationships between profitability and financial efficiency ratios, and to examine the impact of a change in revenue, variable costs, or owning rather than leasing 150 acres on financial performance.

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Measuring Repayment Capacity and Farm Growth Potential

September 23, 2020

For a farm to grow, it is essential that the replacement margin be large enough to repay term debt, replace assets, and purchase new assets, and that the replacement coverage ratio be greater than one.  This article defines and illustrates the use of key repayment capacity measures.

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Benchmarking Crop Machinery Investment and Cost per Acre

September 23, 2020

The continued increase in the size of tractors, combines, and other machinery has enabled farms to operate more acres and reduce labor use per acre.  However, this increase in machinery size also makes it increasingly important to evaluate the efficient use of machinery.  Two commonly used benchmarks to evaluate the efficient use of machinery are machinery investment per acre and machinery cost per acre.

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Benchmarking Labor Efficiency and Productivity

September 23, 2020

It takes a lot of family and hired labor to run modern farms.  Labor is an important and costly input and farm managers need to ask if they are getting the efficiency and productivity needed from that labor to be competitive.  One way to evaluate this question is to use benchmarks created using data from similar farms.  Labor benchmarks should include family and operator labor as well as hired labor. 

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Benchmarking Profitability and Financial Efficiency

September 25, 2020

This article is one of a series of articles that examine financial statements and financial analysis.  In this article, a case farm in west central Indiana is used to illustrate financial performance benchmarks for profitability and financial efficiency ratios.

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Benchmarking Repayment Capacity Measures

September 29, 2020

This article is one of a series of financial management articles that examine financial statements and financial analysis.  In this article, repayment capacity measures are illustrated for a case farm and discussed.

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Persistence in Financial Performance

October 13, 2020

This article examines the persistence of financial performance measures for a sample of farms over a five-year period. Specifically, using KFMA whole-farm data for farms with continuous data from 2015 to 2019, the operating profit margin ratio is computed for each farm and year.

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U.S. Farm Sector Capital Expenditures

October 13, 2020

We examine trends in capital expenditures and compares capital expenditures to capital consumption (i.e., economic depreciation).

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U.S. Farm Sector Financial Performance

October 13, 2020

If we want to include capital gains on assets in our financial performance metrics, return on assets and return on equity are preferable. This article examines trends in return on assets and its components for the U.S. farm sector.

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