Post on 22-Jan-2016
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High-Stakes Workshop
December 17, 2010Doug Marshall
Farm Mgt. InstructorMadison Area Technical College
Looking At The Numbers…
Whose Perspective?
Farm Transfers
• Is there enough money for everyone?– 2 projections need to be done
• Exiting Cash Flow (Parents)• Entering (You)
Exiting Cash Flow Budget
• Enough Money to be “Comfortable”– Living costs
• Food • Household operating• Travel • Car• Any remaining debt
– Health care / insurance– Nursing home / insurance
Entering Farmer Questions?
• Same or different type of farm?
• Same or different management?
• Same or different financial control?
• Answers dictate budgeting numbers…
What Type of Operation Are You Going to Have?
• Where have we been? = Analyze past performance
• New Management = New ways?
• Coordinated effort with prior generation?
Commercial Commodity Production?
• High level of Competition between Producers
• Long run, who produces the cheapest
• Slim margins
• High Volume X Slim Margin = Living
• Higher Investment
Value Added Commodity Production?
• Specialty product
• Name, organic, natural, humane, etc.
• Lower Volume
• Wider margin
• Lower Volume x wider margin = living
• Higher labor pay rate
Get Help!!!!!
• UW Extension Agents
• Tech School Farm Business Instructors
• Independent Consultants
• Wisconsin Farm Center - DATCP
Entering Farmer Must Do Feasibility / Cash Flow Budgets
• FINPACK Computer program to see where the farm is now and determine long run feasibility of your farming operation as you intend to run it….– Looks at everything:
• Investment• Income/Expense• Cropping & livestock• Added debt and repayment• Calculates profitability and cash surplus/deficit• Tax impact
Determine it’s Feasible, Then….
• Do monthly cash flow budgets to see how you get there.
• This is your best estimate of how money will move in your business.
• First 2 years the hardest.
Where Do I Go for Planning Numbers?
• Depends on direction you’re going…– Same operation mode ?– Same management ?– Etc.
Where do I go for planning numbers?
• Industry benchmarks or standards are a good place to start.
• Use as a guide and interject past actual farm numbers where applicable.
• Every farm is different:– Graze or not– Tillable acres– Genetic potential– Etc.
Benchmarks?
• Wisconsin– UW Center for Dairy Profitability
– www.cdp.wisc.edu• Click on Financial Benchmarks• Ag Financial Advisor• Several hundred Wisconsin Dairies• Sort by herd size, production level, crop acres, etc.• Production and Financial performance benchmarks
• Handout
Benchmarks
• University of Minnesota
• Center for Farm Financial Management– “Finbin”
• Production data on all types of farms– Crops, dairy, hogs, cattle
–www.cffm.umn.edu/
Assessing past and future performance????
Each Leg is Important
Productivity
Debt/Investment
Cost Control
Cost Control is Important…
• Expense including Interest as % of Income should be 70% or less.
• Expense without Interest 60% or less
Debt & Investment Structure is Important
• Limit Investment to $10000 per cow
• Limit debt to $2500 to $5000 per cow
• Asset/liabilities = 40% or less
• Not feasible at the start….
Productivity is Important
• Decent production per cow 22000+
• Good crop yields5-7 TDM Alfalfa
160-180 bu corn
50+ bu beans
20-25 ton Silage
Liquidity Measures
• Indicators of positive cash flow
• Current Ratio of 1.5 to 2.0
• Working Capital should be positive
Solvency Measures
• Debt / Asset Ratio < .4 or 40% in debt– Not at entry
• Equity / Asset Ratio > .6
• Debt / Equity Ratio < .66
Profit Measures
• Net Farm Income should be as high as possible --- really no standard
• Rate of Return On Assets > 5%
• Rate of Return on Equity > RROA
• Operating Profit Margin > 15%
Loan Repayment Capacity Measures
• Term Debt Coverage Ratio > 1.2
Financial Efficiency Measures
• Asset Turnover > 30%
• Operating Expense Ratio < 70%
Without Interest < 60%
• Depreciation Expense Ratio < 15%
• Interest Expense Ratio < 10%
• Net Farm Income Ratio > 15%
Thumb-rule per cow costs
• Breeding fees• Purchased feed• Supplies• Vet, Medicine• Seed, Chemicals,
Fertilizer• Fuel• Repairs• Other
$56.
$600. add $40/1000Lb RHA
$150.
$125
$500
$125
$225
$ 364
Generally Looks Like This Per Cow….
• Gross Farm Income = $3300
• Gross Operating Expense = $2145 65%
• Debt Service = $ 500 15%
• Family Living = $ 500 15%
• Left for Cap. Replacement = $ 155 5%
Dr. David Kohl’s Quick AnalysisRedRed YellowYellow GreenGreen
LiquidityLiquidity Current Ratio Working Capital
< 100%< 20%
100 – 150%
20 – 50%
> 150%
> 50%
SolvencySolvency Debt/Asset > 70% 30 – 70% < 30%
ProfitabilityProfitability Return on Assets < 1% 1 – 5% > 5%
RepaymentRepayment Term debt coverage < 100% 100 – 150% > 150%
EfficiencyEfficiency Operating Expense > 80% 65 – 80% < 65%
Business Success Factors
Baseline Yr 1 Yr 2 Benchmark
Breakeven/cwt Milk < $14.50
CDRD (Repayability) >115%
Expense Ratio <70%
Solvency > 50%
Term Debt/cwt <$20
Net Cash Income/cow >$600
Net Profit/cow >$200
Return on Assets (ROA)
>9%
Business Success Factors
Baseline Yr 1 Yr 2 Benchmark
Return on Equity (ROE)
> 12%
C&I Equity 50%
Working Capital/AGI 10%
CDRC Margin/AGI >5%
Debt/cow (total cows) <$3,500
Milk Income/cow (avg. milking)
>$2,500
Debt Service as % of total income
<25%
Business Success Factors
Baseline Yr 1 Yr 2 Benchmark
Principal Reduction/ cow/year
$200
Interest Expense/ Gross Revenue
<12%
Feed Costs - $/cwt <$3.50
Debt Service - $/cwt <$3.20
Labor Costs - $/cwt <$2.25
Labor Costs as % of Total Income
<15%
In Summary….
1. Analyze past business performance– Strengths/weaknesses
2. Determine future production scheme
3. Project feasibility and cash flow
4. Monitor financial performance