The Farm Financial Standards Committee recommends four measures of profitability: 1. Net Farm Income 2. ROA 3. ROE 4. OPMR Income Statement Are you making a profit? The income statement is used to determine the profit or loss during an accounting period. The income statement tells you the financial position of the business over a (your fiscal year). Notes: = Income Statement Adjustments Income Statement Definitions: Revenue income earned during the accounting period. Expenses cash or noncash expenses during the accounting period. Profit revenue above expenses that can be reinvested into to the business or distributed to owners. The Farm Financial Standards Committee (FFSC) recommends that anyone using cash accounting convert net farm income to accrual-adjusted net farm income. Accrual- adjusted net farm income is: More Better for
Income Statement Adjustments: For Gross Income: Inventory: -Beginning Inventory + Ending Inventory Accounts Receivable: -Beginning Accounts Receivable + Ending Accounts Receivable For Operating Expenses Accounts Payable: -Beginning Accounts Payable + Ending Accounts Payable Accrued Expenses: -Beginning Accrued Expenses + Ending Accrued Expenses Prepaid Expenses: Beginning Prepaid Expenses Ending Prepaid Expenses Unused Supplies: Beginning Unused Supplies Ending Unused Supplies Investment in Growing Crops: Beginning Investment in Growing Crops Ending Investment in Growing Crops Answer Key: Period of Time Profit Revenue Expenses Accurate Management Purposes
Use the following information to fill out the balance sheet: Accounts receivable balance 1/1/13 was $4,110; balance 12/31/13 was $4,785 Property taxes for the year of $5,650 Accounts payable balance 1/1/13 was $6,131; balance 12/31/13 was $7,800 Utilities expenses were $2,195 Sold 530 tons of hay for $235 per ton Depreciation expense for the year was $59,600 Change in interest payable for 2013 is +$650 Cash interest paid during the year $14,175 Received $12,400 in farm program payments Sold a tractor for $24,000, the book value was $23,400 Revenue: Cash crop sales Cash livestock sales Inventory changes Crops Market livestock Government payments Change in value of raised breeding stock Gain/loss sale of culled breeding stock Change in accounts receivable Total Revenue Income Statement Grant County Farms Co. Year Ending December 31, 2013 Expenses: Purchased feed and grain Purchased market livestock Other Operating Expenses: Seed and fertilizer Repairs, maintenance Fuel and lube Property taxes Hired labor Utilities Adjustments Accounts payable Accrued expenses Depreciation Total Operating Expenses Interest paid Change in interest payable Total interest expense Total Expenses Net Farm Income From Operations Gain/loss on sale of capital assets: Machinery Total Gain/Loss on capital assets Net Farm Income
[Net farm income] should be considered more as a starting point for analyzing profitability than as a good measure of profitability itself. ~Kay, Edwards, Duffy Farm Management Income Statement Analysis Profitability is a measure of efficiency in how the farm business is utilizing its resources in producing profit. Measures of profitability: Profitability is concerned with the size of the business. Equal profit in two farms is not equal if one used twice as much labor, land, and inputs. ROA indicates how efficiently assets are producing profits while ROE indicates how well your invested capital generating profits * Average Total Assets can be found on your beginning and end of year balance sheets. Average Total Assets = Beginning Total Assets+Ending Total Assets ** Average Total Equity can be found on your beginning and end of year balance sheets. 2 Average Total Equity = Beginning Total Equity+Ending Total Equity 2 Return to Assets/Equity = Adjusted Net Farm Income from Operations Opportunity Cost of Unpaid Labor Opportunity Cost of Managment Once you have determined your Return to Assets, you can calculate your farm s profitability ratios. Return on Assets (ROA) = Return to Assets Average Total Assets Goal: ROA greater than 0.05. Compare to similar operations and farm s historical ROA. Return on Equity (ROE) = Return to Equity Average Owner Equity Goal: ROE greater than. Compare to similar operations and farm s historical ROE. Want ROE > ROA. Operating Profit = Adjusted Net Farm Income from Operations Interest Expense Opportunity Cost of Managment Once you have determined your Operating Profit, you can calculate your farm s profitability ratios. Operating Profit Margin Ratio = Operating Profit Total Revenue Goal: Operating Profit Margin Ratio greater than 0.25.
One Minute Takeaway: What is the most valuable thing you learned and how can it improve your operation? Homework: Complete an income statement for your farm. Construct an income statement or make sure your current income statement is thorough and correct using your financial software. Calculate your ROA, ROE, and OPMR. Use these ratios to determine the financial health of your farm. What ratios are healthy and what ratios do you need to work on? How will you go about improving your ratios? Set targets for ROA, ROE, and OPMR. After setting targets for your ROA, ROE, and OPMR, develop a plan of action for moving your business towards these targets. Discuss the financial condition of your business with your management team. Brainstorm ways that you can improve or sustain the health of your farm business. Use information from both the income statement unit and the balance sheet unit.