Dairy Farm Finances

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Dairy Farm Finances

• AVS346 Dairy Cattle Technology

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Farm Finances

• Unless your independently wealthy or farming for
  the heck of it farm finances are very important.
• Make decisions based on profitability.
• More farms won or lost not on management of the
  cows but on how they manage their money

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Farm Business Management 

• Investing business inputs (capital) wisely and
  productively
• Money
• Labor
• Land
• Equipment
• Management expertise

All these have many uses!
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Five Steps to Successful Management

• Identify needs
• Set goals and plan
• Organize
• Direct and execute
• Monitor progress
• Buy a car

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First Step Accounting

• Accounting is the tracking of the financial
  information
• Production
• Sales
• Expenses
• Inventory
• Ownership
• Debt

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Two Types of Accounting Systems

• Cash
• Track the money when it changes hands.
• May misrepresent income or income or expenses
• A checkbook would be a type of cash accounting
  system
• Acrual
• Transaction is recorded when income is earned or
  an expense is incurred
• Accounts receivable Income not yet received
• Accounts payable Expenses not yet paid
• Also includes changes in inventory
• Gives a better financial picture of the person or
  business
• Both the balance sheet and income statement
  should be adjusted for acrual transactions.

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Enterprise Accounting

• Enterprise A portion of a farm business that
  can separated and analyzed separately
• Difficult to separate the corn silage from the
  corn grain
• Examples
• Separate dairy operation from the crops
• Dairy herd from the replacements
• Divide expenses that are shared
• Pay market price for products used in another
  enterprise
• Enterprise budgets

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Four Types of Financial Statements

• Balance sheet
• Income statement
• Cash flow
• Budget

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Balance Sheet

• Indicates the financial condition of a farm
  business at a given point in time
• What you OWN versus what you OWE
• Assets Owned
• Liabilities - Owed
• Measure of the overall financial strength
• Requires an inventory of all personal and real
  property
• Determine a fair market value of all assets

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Assets and Liabilities

• Current
• Used up or due within one year
• Examples
• Feed, cash, this years loan payments
• Intermediate
• Useful life of 7-10 years
• Examples
• Cows, tractors, temporary structures or the loans
  on these.
• Long term
• Useful life over 10 years
• Land and buildings
• Want to see balance in assets and liabilities of
  each

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What do You Look for on a Balance Sheet?

• Evaluate liquidity
• Can you generate cash to meet cash obligations
  and not affect production?
• Evaluate solvency
• Are assets greater than liabilities?
• Evaluate net worth or owners equity
• Amount remaining after selling business and
  paying off all debts
• Assets minus liabilities

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Liquidity

• Do you have enough cash and other current assets
  to pay current liabilities?
• Current Ratio
• Current assets/current liabilities
• gt1.5 Good
• 1 to 1.5 Caution
• lt1 - Trouble

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Solvency and Net Worth

• Solvent - Own gt Owed
• Net worth
• Also called equity
• Assets minus liabilities
• Portion of the assets that are really owned
• Does it increase over time?
• Changes when
• Owner puts in additional capital - Up
• Owner withdraws capital - Down
• Business generate profit - Up
• Business shows loss Down
• Purchase an asset No change

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Key Numbers to Consider

• Current ratio
• Net worth
• Debt per cow
• lt2500 Good
• gt2500 - Caution
• Assets per cow
• Average 9000/cow

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Balance Sheet Example
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Income Statement

• Summarizes the income and expenses over a period
  of time
• Also known as a Profit and Loss Statement
• Includes interest payments but not principle
• Includes depreciation and changes in inventory
• Profit
• Also called net cash income
• Income minus expenses
• Net Farm Income
• Profit Depreciation -Inventory changes
• More inventory
• Less inventory -

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Key Numbers to Consider

• Net cash income
• Net farm income
• Return to management, labor and equity
• Owner provides
• Money
• Labor
• Management expertise
• Milk sold per cow and worker
• Feed costs per cow
• Consider other big ticket items
• Labor, repairs, supplies
• Cost of production
• Expenses per cwt of milk produced

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Income Statement Example
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Cash Flow Statement

• Summary of cash inflows and outflows over a
  period of time.
• Projects income and expenses in the future to see
  if they meet obligations
• Timing of transactions becomes important
• Farms can have a good balance sheet and income
  statement and a poor cash flow because income and
  expenses dont coincide

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Uses of Cash Flow

• Developing a borrowing or debt repayment plan for
  a farm
• Rearrange payments of some expenses to months of
  higher income
• Measures ability to pay bills

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Cash Flows

• Especially important when making major changes to
  a farm business
• Examples
• Expanding herd size
• Buy heifers that wont hit peak production for
  several months
• Conversion to organic
• Added costs associated with transition period
• Project ahead 3 years
• To find critical months when profits are low

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Example of Cash Flow
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Key Financial Questions to Ask

• In the business
• Profitable?
• In cash flowing? (Do they have cash for debt
  repayment)
• Financially secure? (Solvency)
• Efficiently spending money?
• Efficiently utilizing capital? (Capital
  Efficiency)

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Big Five Measures of Financial Performance

• Profitability
• Return on assets
• Repayment capacity
• Term debt and lease coverage ratio
• Solvency
• Percent equity
• Financial efficiency
• Operating expense ratio
• Capital efficiency
• Asset turnover ration

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Term Debt and Lease Coverage Ratio

• Formula
• (Net Farm IncomeDepreciationInterestNon Farm
  IncomeOwner Draw)/(Principle and Interest on
  Term DebtCapital Lease Payments)

• Benchmarks
• Average 1 1.15
• Leaders - gt1.5
• Goal - gt1.25

• Factors Affecting TDLCR
• Poor profitability
• Financial efficiency
• Debt levels and structure
• Production level
• Milk price
• Owner draws

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Benchmarking

• Comparing your farm business from year to year
• Comparing yourself to other farms
• Make sure comparison group is appropriate
• Location
• Size
• Cropping system
• Breed

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Budgets

• A list of all planned expenses and revenues
• Projection of the future
• May be used to control spending
• Measure financial impact of some change to
  business
• Unless you have a crystal ball be conservative in
  your estimates
• Put greatest effort into accurately predicting
  big ticket items

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Budgets

• Three types
• Partial budget
• Used for small changes to a business
• Whole farm/business budget
• Used for major changes to the business
• Enterprise budget
• Used to analyze an income/cost center

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Partial Budget

• Small change
• Sell 2 low producing cows
• Is it profitable?
• Has four parts
• Additional income
• Cows sold for beef
• Reduced costs
• Less feed, labor etc.
• Reduced income
• Less milk sold
• Additional costs
• Trucking, commission and beef check off fees

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Whole Farm Budget

• Assess profitability of a major change to the
  farm business
• Expansion of herd
• Affects every line in income statement
• Milk sales, beef sales
• Feed, fertilizer, labor, taxes, utilities,
  interest, fuel, repairs, and vet expenses
• Same structure as income statement
• Sensitivity analysis
• What effect does a slight change in projection
  have on the bottom line

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Question - What is the farm good at?

• High milk production
• Care of cows
• Good crops
• Forages exceptional
• High milk price
• Feeding for components, Low SCC
• Low production costs
• Pinch pennies well
• Jack of all trades
• Sound everywhere, great nowhere