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
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.
Read MoreComponents of an Accrual Farm Income Statement
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.
Read MoreSources and Uses of Funds Statement
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.
Read MoreStatement of Owner’s Equity
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.
Read MoreComputation of Deferred Tax Liabilities
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.
Read MoreU.S. Farm Sector Balance Sheet
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.
Read MoreWorking Capital: What Is It and Do You Have Enough?
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.
Read MoreHow Much Debt Can a Farm Carry?
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.
Read MoreSchedule F Net Farm Profit and Accrual Net Farm Income
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.
Read MoreMeasuring Farm Profitability
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.
Read MoreMeasuring Efficiency of Farm Asset Utilization
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).
Read MoreDu Pont Financial Analysis
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.
Read MoreMeasuring Repayment Capacity and Farm Growth Potential
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.
Read MoreBenchmarking Crop Machinery Investment and Cost per Acre
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.
Read MoreBenchmarking Labor Efficiency and Productivity
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.
Read MoreBenchmarking Profitability and Financial Efficiency
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.
Read MoreBenchmarking Repayment Capacity Measures
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.
Read MorePersistence in Financial Performance
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.
Read MoreU.S. Farm Sector Capital Expenditures
We examine trends in capital expenditures and compares capital expenditures to capital consumption (i.e., economic depreciation).
Read MoreU.S. Farm Sector Financial Performance
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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RELATED RESOURCES
Purdue ag economists James Mintert & Michael Langemeier shared key lessons from 2022 and help producers plan for the financial and risk management realities of 2023. Live from Orlando, Florida at the 2023 Commodity Classic Learning Center Session on March 9, 2023.
READ MOREFinancial Risk Management & Contingency Planning
Farming is never the same from year to year – sometimes prices are good, net farm income is high, and other times margins are tight. Planning ahead, or contingency planning for financial hardship is important for any farm operation. How to evaluate farm financials, update financial statements, analyze performance, and when borrowing makes sense.
READ MOREKnowledge, experience, and collaboration work hand in hand with one another to improve farm output per unit of input (i.e., productivity). Pursuit of one of these items without the others creates a disparity between farms able to survive and those that thrive in the industry. But the question arises, why do these factors play such a critical role in farm performance? This article reflects on the impact these three factors have on farm productivity and describes how each relates to management strategy.
READ MOREUPCOMING EVENTS
Webinar each month following USDA’s release of the updated World Agricultural Supply and Demand Estimates (WASDE). Catch the next monthly update on April 1 for the corn and soybean outlook following release of USDA’s Prospective Plantings reports. Registration is free.
Read More2023 Crop Cost and Return Guide
The Purdue Crop Cost and Return Guide offers farmers a resource to project financials for the coming cropping year. These are the March 2023 crop budget estimations for 2023.
READ MORE2023 Indiana Farm Custom Rates
The rates reported in this publication were compiled from questionnaires received from farmers, farm owners, farm custom operators, and professional farm managers in Indiana. Purdue Extension Educators distributed the questionnaires at meetings and events statewide during the last month of 2022 and the first three months of 2023. Respondents were asked to report custom rates they had either paid or received during the past year.
READ MOREMaking Your 2023 Crop Insurance Decision
Now is a great opportunity for producers to review their crop insurance choices for the upcoming season. Purdue University Center for Commercial Agriculture’s ag economists Michael Langemeier and James Mintert walk participants through key considerations for their 2023 insurance options. In particular, they discuss a handy thumb rule to use when considering an increase in coverage levels for RP insurance.
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