Two Hands on the Wheel 2016 Objectives Get you familiar with basic financial documentation Balance Sheet Cash Flow Statement of Cash Flow Cash Flow Budget Record Keeping Income Statement Net Farm Income ID: 672227
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Financial Statements
Nebraska Farm and Ranch Financial Literacy
Two Hands on the Wheel2016Slide2
Objectives
Get you familiar with basic financial documentationBalance SheetCash Flow
Statement of Cash FlowCash Flow BudgetRecord KeepingIncome StatementNet Farm IncomeUnderstand purpose for each Slide3
Balance Sheet #1
Cash Flow
Financial Snapshot
Financial Snapshot
Income Statement
Profitability
Meeting Financial Obligations
Balance Sheet #2
Working Capital
Debt/Asset Ratio
Net Worth
Working Capital
Debt/Asset Ratio
Net Worth
Statement of cash flow
Fund sources & uses
Statement of Owner Equity
Reconciles changes between Balance Sheet #1 & #2Slide4
Uses for a Balance Sheet
To know assets and liabilities on a regular basisRequired when applying for a loan
Help guides considering a major changeRisk assessmentSlide5
Building a Balance Sheet
1. Inventory assets and resources
2. Determine asset values3. Record liabilitiesSlide6
Taking an Inventory
1. Land
2. Buildings 3. Breeding livestock4. Machinery, equipment, implements, & tools5. Operating inputs purchased not yet used up6. Harvested crops in storage7. Market livestock
8. Financial assetsSlide7
Asset Valuation methods
• Cost
Net selling pricePurchase cost less depreciationReplacement cost less depreciation
Replacement cost for equivalent function less depreciation
• Income capitalization
• Market valueSlide8
Liability Information
1. Loan information2. Current portions of principal and interest payments
3. Accounts payable4. Unpaid, accrued interest5. Delinquent principal and interest payments6. Credit and debit card account information7. Personal liabilities (if using consolidated b.s.)Slide9
Balance Sheet as of [a single date] Consolidated / Personal / Business
Current Assets
Current Liabilities
Non Current Assets
Non Current Liabilities
Net Worth or Owner Equity
Current
Non Current
Net Worth = Assets - LiabilitiesSlide10Slide11
Balance Sheet
Two pairs of columns due to two methods of asset valuation:• Cost basis (actual cash plus investment expenses) Examples:
new boundary fence cost basis =materials plus labor to build fenceNew equipment purchase + delivery & set up costs• Market value (what a willing buyer would pay you)Slide12Slide13
Key RatiosFrom the Balance Sheet
Working Capital
Debt/Asset RatioNet Worth Slide14
Bankruptcy-A Financial Tool
Debt Relief outside of bankruptcy creates an income for which income tax must be paid.
Debt forgiven in bankruptcy wipes the slate clean, however impacts credit worthiness and takes a while to earn back.Chapter 7 is a dissolution plan.Chapters 11, 12 and 13 are plans to reorganize and work out debt under court supervision.Slide15
Part 2Cash FlowSlide16
Objectives
Get you familiar with basic financial documentationBalance SheetCash Flow
Statement of Cash FlowCash Flow BudgetRecord Keeping Income StatementUnderstand purpose for each Slide17
Cash Flow Budget
Spending plan for whole farm financial planningUsually created from past experience with minor adjustments
If major events have happened (lost leases, changed major enterprises, etc.) then reconstruct new planRefer to blank cash flow budget formSlide18
Statement of Cash FlowDivides cash flows and uses of cash by:
Operating activitiesInvesting activitiesFinancing activities
Historical document looking back on how cash moved through an operationTies into the Income StatementSlide19
Cash Flow Makes Your Business
GO!
No Cash Flow No Business!Slide20
Tips for Recordkeeping
Keep categories simpleTags (Quicken) or Asset Class (QuickBooks)
Work on records everyday (even for a few minutes)Run reports to catch errorsShare reports with key decision makers
Let the software do the work
Manage the paper trail as fits your needsSlide21
Demo SoftwareSlide22
How the Pieces Fit Together
http://www.montana.edu/softwaredownloads/documents/software/RDFinancial_MT_RepresentativeFarmRanch-Oct-2011.swfSlide23
Part 3Income StatementSlide24
Objectives
Get you familiar with basic financial documentationBalance SheetCash FlowStatement of Cash Flow
Cash Flow BudgetKeeping RecordsIncome StatementNet Farm IncomeUnderstand purpose for each Slide25
Use of Net Farm Income
Pay income taxesFamily living withdrawalsSource of investment dollarsPay principle portion of debt
Values managementSlide26
Income Statement
Income/revenue from products/commodities (cash)• Less costs incurred to produce a product to sell (cash)
Adjusting for changes in inventories (non cash)• Results in net farm income for a certain period of time (usually a year)Slide27
Accrual Accounting
• Accounts for changes in inventory
• More accurately measures income generated within one year• Is better for evaluating business results and plansSlide28
Structure of the Income Statement
Revenues
Operating expensesFinancing expensesNet Farm Income(FFSC’s gross revenue format) Refer to handoutSlide29
Building an Income Statement
1. Cash income and expenses from farm accounting
2. Inventory information from the inventory process3. Purchases and sales of inventory items4. Depreciation from the depreciation schedule5. Net Farm Income calculated
Gross revenues
Less operating expenses
Less financing expenses
Plus or minus inventory changes
Equals Net Farm IncomeSlide30
How the Pieces Fit TogetherSlide31
Statement of Owner Equity
Allocates how wealth was accumulated on balance sheet
Sources of wealthEarn it from productionInvestmentsGovernment/policyAssets appreciatingInheritanceOff farm income (cash infusion)
Change due to
retained earning (the business)
market asset values
policy changes
personal net worth.Slide32Slide33
Wrap Up Discussions
InsuranceMarketingNon farm/ranch income
DiversificationBe a neighbor, lend an earKeep two hands on the wheel!