High-Stakes Workshop

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High-Stakes Workshop. December 17, 2010 Doug Marshall Farm Mgt. Instructor Madison 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). - PowerPoint PPT Presentation

Text of High-Stakes Workshop

  • High-Stakes WorkshopDecember 17, 2010Doug MarshallFarm Mgt. InstructorMadison Area Technical College

  • Looking At The Numbers

    Whose Perspective?

  • Farm TransfersIs there enough money for everyone?2 projections need to be done

    Exiting Cash Flow (Parents)Entering (You)

  • Exiting Cash Flow BudgetEnough Money to be ComfortableLiving costsFood Household operatingTravel CarAny remaining debtHealth care / insuranceNursing 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 ProducersLong run, who produces the cheapestSlim marginsHigh Volume X Slim Margin = LivingHigher Investment

  • Value Added Commodity Production?Specialty productName, organic, natural, humane, etc.Lower VolumeWider marginLower Volume x wider margin = livingHigher 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 BudgetsFINPACK 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:InvestmentIncome/ExpenseCropping & livestockAdded debt and repaymentCalculates profitability and cash surplus/deficitTax impact

  • Determine its 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 youre goingSame 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 notTillable acresGenetic potentialEtc.

  • Benchmarks?WisconsinUW Center for Dairy Profitabilitywww.cdp.wisc.eduClick on Financial BenchmarksAg Financial AdvisorSeveral hundred Wisconsin DairiesSort by herd size, production level, crop acres, etc.Production and Financial performance benchmarksHandout

  • BenchmarksUniversity of MinnesotaCenter for Farm Financial ManagementFinbinProduction data on all types of farmsCrops, dairy, hogs, cattle

    www.cffm.umn.edu/

  • Assessing past and future performance????

  • Each Leg is ImportantProductivityDebt/InvestmentCost 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 ImportantLimit 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 ImportantDecent production per cow 22000+

    Good crop yields5-7 TDM Alfalfa160-180 bu corn50+ bu beans20-25 ton Silage

  • Liquidity MeasuresIndicators of positive cash flow

    Current Ratio of 1.5 to 2.0

    Working Capital should be positive

  • Solvency MeasuresDebt / Asset Ratio < .4 or 40% in debtNot at entry

    Equity / Asset Ratio > .6

    Debt / Equity Ratio < .66

  • Profit MeasuresNet Farm Income should be as high as possible --- really no standardRate of Return On Assets > 5%

    Rate of Return on Equity > RROA

    Operating Profit Margin > 15%

  • Loan Repayment Capacity MeasuresTerm Debt Coverage Ratio > 1.2

  • Financial Efficiency MeasuresAsset 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 costsBreeding feesPurchased feedSuppliesVet, MedicineSeed, Chemicals, FertilizerFuelRepairsOther

    $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 Kohls Quick Analysis

  • Business Success Factors

  • Business Success Factors

  • Business Success Factors

  • In Summary.

    Analyze past business performanceStrengths/weaknessesDetermine future production schemeProject feasibility and cash flowMonitor financial performance