Analyzing Farm Financial Performance

Joe HornerDairy/Beef Economist573-882-9339

The Challenge

Lenders and “some” farmers need to be able to track and analyze financial trends for farm businesses.Few of our clients currently do so, even those using Quicken and QuickBooks as we have taught them.Evaluations from our week long bankers school reveal lenders consider simple trend analysis of FFSC ratios most valuable.

Opportunity…add to tool kit

Add simple 1,2,3, financial trend analysis to some farm borrower files.Use Purdue’s booklet “Measuring and Analyzing Farm Financial Performance” cost $10 or free pdf already on CD.Or, use the 4-pager, Reader’s Digest Version and simple spreadsheet on CD and at http://agebb.missouri.edu/modbu/archives/v3n12/modbu6.htm

Simple 1,2,3, financial trend analysis…steps

1.Complete a good quality balance sheet as of December 31st every year.

2.Plug balance sheet totals and selected lines from Federal Income Tax into Purdue’s spreadsheet to calc ratios

3.Record ratios by year for trend analysis.

Step 1 – Balance Sheet, Dec 31st every year (hard copy)

Step 1 – Balance Sheet, Dec 31st every year (spreadsheet)

Step 2 –Plug #’s into Purdue’s spreadsheet to calc ratios

Step 3 –Record ratios by year for trend analysis

Step 3 –Record ratios by year for trend analysis

1999 2000 2001 2002 2003ProfitabilityReturn on Assets Operating Profit Margin

LiquidityCurrent Ratio

SolvencyDebt-to-Asset Ratio

Financial EfficiencyAsset Turnover Ratio Revenue per Full Time Laborer Operating Expense Ratio Depreciation Expense Ratio Interest Expense Ratio Net Farm Income Ratio

Summary

You has the ability to track, analyze and demonstrate financial trends for the farm business.This works no matter what accounting system client uses, (or no accounting system).Trends scrub out tax management, accounting errors and unusual years.