You can improve your current ratio by selling capital assets that are not generating return to the business. This will allow you to use the cash to reduce current liabilities. Also, you can use any extra cash income generated by the farm to pay accounts payable or to reduce your farm operating line of credit rather than making additional principal payments on term loans. If your farm operating loan is close to the maximum principal level, or if your farm has carryover operating debt from the previous year, consider refinancing some of the farm operating debt with longer term financing. You can also consider funding capital investments with longer term financing rather than cash. Working Capital Working Capital = Total Current Assets – Total Current Liabilities Working capital is the money available to fund a business’s day-to-day operations. Positive working capital indicates the business can pay off its short-term liabilities almost immediately. For your operation, this might look like $/acre or $/cow.
The Return on Assets (ROA) shows the percentage of how profitable a farm’s assets are in generating revenue. The ratio to determine ROA is: • <4% - evaluate and make changes* • >8% - strong financial position* *Depending on what industry you are involved with, these benchmarks could change. Determining your internal benchmark will help to show individual business progress over time.
*Depending on what industry you are involved with, these benchmarks could change.
As a young or new farmer, writing your business plan is typically a solid starting point to developing your farm's financial future. But, how do you understand the financial portion of your agribusiness? This guide will walk you through the steps to help you better understand your farm financials.
Repayment Capacity
Why do I need to understand my farm finances?
Another key to long term success is positive cash flow. Is the business generating sufficient income to cover the debt service obligations? To measure repayment capacity, the Debt Coverage Ratio can be used to show the relationship between operating income and the annual principal and interest obligations of term debt and capital leases. This is calculated with the following formula:
Understanding farm financials is important to make sure your operation is efficient and profitable, remains compliant with legal requirements for taxes and payroll purposes, and to understand when you may need a loan to grow your business.
Debt Coverage Ratio = (Net Income + Depreciation + Interest Cost + Capital Leases) / (Scheduled Annual Principal and Interest Payments on All Debt + Capital Lease Payments) • <125% - evaluate and make changes*
Your equity position depicts the relationship between your assets — what you own — and your financial obligation — what you owe. The equity ratio helps you to evaluate the percentage you own of the assets reported on your balance sheet, versus how much of it may be financed by a lender.
• 125-175% - monitor the situation*
% Equity = Total Farm Equity / Total Farm Assets • <40% - evaluate and make changes*
• >175% - strong financial position* Know Your Numbers While farming is a risky business, identifying production and financial projections are an important management skill. As an owner-operator, it is important to keep accurate financial and production records for your operation — this will enable you to calculate these projections for the future.
• 40-70% - monitor the situation* • >70% - strong financial position* *Depending on what industry you are involved with, these benchmarks could change. Profitability One key to long term business success is being profitable. Do you currently own assets, equipment, or livestock that aren’t making you any money? If so, is there an opportunity to put your business in a better position by using those assets in another way to potentially liquidate them?
WINTER 2024
HOW TO ANALYZE Farm Financial Statements
• 60-80% - monitor the situation*
Equity
The basic ratio to determine percent equity is:
WINTER 2024
OER = Farm Expenses / Farm Receipts
• <60% - strong financial position*
*Depending on what industry you are involved with, these benchmarks could change.
COLUMBIA SC PERMIT 1160
To measure efficiency, the Operating Expense Ratio (OER) can be used to show the relationship between operating expenses and gross revenue. This is calculated with the following formula:
Working Capital as a percentage of Annual Expenses = (Current Assets – Current Liabilities)/ Farm Expense.
• >40% - strong financial position* Depending on your industry and personal risk tolerance, it can be assumed that if you fall above 40% for this ratio you are in a comfortable position because you are able to maintain over half of your annual farm expenses with the funds that you currently have available for daily operations.
PAID
300 Winding Creek Blvd. Mechanicsburg, PA 17050
Efficiency
• >80% - evaluate and make changes*
• 20-40% - monitor the situation* This ratio tells you that you will only be able to maintain 20-40% of your annual farm expenses with the funds that you currently have available for daily operations.
Hitching Post
PRESORTED STANDARD U.S. POSTAGE
• 4-8% - monitor the situation*
A good ratio to calculate to reflect liquidity is working capital as a percentage of annual expenses.
• <20% - evaluate and make changes*
THE
ROA = (Net Income + Interest) / Total Farm Assets
We encourage meeting with your loan officer to walk you through this conversation and to help interpret what the ratios and benchmarks mean to your individual operation. You can also contact a member of our Business Consulting team to help you with a more in-depth analysis of your farm financials. Give our team a call at 888.339.3334.
STRENGTHENING YOUR
Family's Future
At Farm Credit, we understand the unique challenges of farming life and are here to support your goals with guidance tailored to your needs. From financial planning to growth strategies, our Business Consulting team offers expertise that allows you to focus on what matters most — keeping your farm strong for future generations. Contact our team at 888.339.3334 to discover how we can help secure your farm’s legacy.
NMLS# 452721
Understanding Farm Financial Statements Income Statements A farm income statement is an important financial statement used for reporting a farm’s financial performance over a specific period of time. The income statement can also be referred to as a profit and loss statement. The statement focuses on three key items: revenue, expenses, and the resulting profits or losses. Net Farm Income = Income – Expenses Cash Flow Statements A cash flow statement is a listing of cash (or cash equivalents) entering and leaving an operation that occurred during the past accounting period. A cash flow budget is a projection of future flows that would include expected payments or payments to accounts receivable. Balance Sheet We commonly utilize a farmer’s balance sheet for a financial reference. A balance sheet is a snapshot of a farmer’s financial position and outlines an individual’s net worth. Net worth reflects the value or dollar amount of the reported assets you actually own versus how much is currently financed. Balance sheets from December 31 are the most useful and coincide with taxes. Even if you aren’t requesting a loan, it’s a good idea to gauge your growth and financial position at a given point throughout the year and to keep this timing consistent from year to year. This should help you to determine both your personal and business financial position.
Assets are what you own. Some examples of assets are cash, real estate, and equipment. Liabilities are what you owe. Some examples of liabilities are credit card debt, mortgages, and equipment. Farm Financial Ratios & Benchmarks Financial ratios will tell you how one aspect of your operation relates to another in the form of assets and liabilities. You can use these ratios to compare yourself to industry specific benchmarks to measure your performance against the competition and other industry producers. These ratios will change over time and there is value in keeping an eye on these changes to assess the overall progress you are making. Your current assets are typically balance sheet items that are reasonably expected to be converted to cash within one year in the normal course of your farm business. These are typically feed, seed, crops held for resale, market livestock, and accounts receivable. Your current liabilities are farm debts that are due within one year. These are expenses such as the current portion of term debt for the operation, cash rent, credit card debt, and accounts payable for seed, feed or fertilizer. Liquidity Current ratio and working capital are measures of liquidity — the ability of the business to meet financial obligations as they come due. It is also defined as the availability of cash or near-cash assets to cover short-term obligations without disrupting normal business operations. Current Ratio Current Ratio = Total Current Assets/Total Current Liabilities • <1.3 – evaluate and make changes* • Between 1.3 and 2 – monitor the situation* • >2 – is strong financial position* Current ratio determines whether or now, if we were to liquidate all current assets, you could satisfy current debt obligations. This ratio allows you to see that you have $X available to service every $1 of current debt. Ideally, as an owner-operator, you aim to have a minimum of a 1:1 ratio. (Continued)