Recommendations on Using Financial Information

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Dr. Barbara M. Wheeling. Montana State University Billings. Financial Benchmarking. Process of comparing the performance of an enterprise against the performance of other similar enterprises through the use of comparable and reliable data. ID: 619556 Download Presentation

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Recommendations on Using Financial Information




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Presentations text content in Recommendations on Using Financial Information

Slide1

Recommendations on Using Financial Information

Dr. Barbara M. Wheeling

Montana State University Billings

Slide2

Financial Benchmarking

Process of comparing the performance of an enterprise against the performance of other similar enterprises through the use of comparable and reliable data

Slide3

Trends

Farm benchmarks on the production side are common

Yields, weaning weights, pounds of milk, etc.

Increasing use of financial data in farm benchmarking

Benchmarking databases

Articles, webinars, worksheets

Consultant services, surveys

Slide4

U. S. databases (examples)

CFFM, Purdue Extension, Illinois FBFM, Farm Credit Services

NPPC, NCBA, DHIA

International

databases (examples)

UK, New Zealand, Canada, Australia, South Africa, France

Slide5

Comparability

Comparability requires

Reliable accounting information

Similar inputs

Similar systems of classifying income, expenses, assets and

liabilities

Similar procedures for constructing financial statements

Similar procedures for calculating financial ratios and measures

Slide6

Benchmarks

Previous year’s

data

Comparative

Analysis: Year-to-year

comparisons

for a farm over time

Common-size statements can

also be

compared from year to year

Base year’s data

Trends over multiple years may be more meaningful than current year compared to past

year

Data from

farm-to-farm

comparisons

“How is my neighbor doing?”

Comparisons with averages of similar

farms

Slide7

Ratios

Financial ratios “level the playing field”:

Example: Farm “A”

Accrual Adjusted Net Income = $50,000, Total Assets = $400,000

Return on Assets = 12.5%

Example: Farm “B”

Accrual Adjusted Net Income =

$100,000

, Total Assets =

$1,000,000

Return on Assets =

10.0%

Slide8

Issues to Consider

Comparability from an Accounting Perspective

SFAC #2: Common accounting methods are central to comparison of financial information

Compromised by

incomplete or inaccurate information

i

nconsistency in accounting methods

Slide9

Example:

Debt/Asset ratio

Balance

sheet that includes deferred taxes

Debt = $555,339 Assets = $1,107,764 Debt/Asset =

50.1%

Balance sheet that excludes deferred taxes

Debt =

$338,596

Assets = $1,107,764 Debt/Asset =

30.6%

(Data from Appendix A, Financial Guidelines for Agricultural Producers, 2011.)

Slide10

Accounting factors affecting

comparability (a partial list)

Farm organization, entity mix

Cash

vs

accrual or accrual-adjusted accounting

Valuation methods

Treatments for owner withdrawals, investments, wages, income taxes

Financial statement dates

Non-farm activities

Slide11

Example of

cash-basis

vs

accrual-adjusted

accounting:

Net Farm Income From Operations Ratio

Cash-basis

: $26,000 ÷ 175,000 =

14.86%

Accrual-adjusted

: $70,000

÷

200,000 =

35%

(Data from Appendix

E,

Financial Guidelines for Agricultural Producers, 2011.)

Slide12

Comparability from

a Business Perspective

Variability in farm characteristics is ultimately reflected in financial statements

Benchmarking

against similar farms can help identify and explain how producer’s decisions are affecting financial performance

Slide13

Farm characteristics

affecting

comparability (a partial list)

Farm size

Farm type

Farm location

Ownership of land

Management and financing decisions

Slide14

Group

exercise (Handout

)

Slide15

Further Analysis

Comparisons are the beginning of more in-depth analysis.

Explanations of the differences between a farm’s data and the benchmarks are necessary to truly understand what can be controlled by the farm manager.

Variance analysis becomes a useful tool.

Examine the components of the ratios.

Slide16

Example:

Years

Ended December 31,

'X8

'X7

Gross Revenues

$

304,699

$304,699

Net Income from Operations 54,306

57,205

Total

Assets $

753,147

$

748,509

Slide17

Question to ask: Gross Revenues maintained at the same level in ‘X8 as in ‘X7. Is that a good result?

Answer: It depends!

If Gross Revenues did not change, what caused the decline in Net Farm Income from Operations?

Total Assets increased—why? Buildup of inventory? Purchase of new machinery or other assets? Was this a good business decision?

What does it mean if Total Assets decrease?


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