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: 739101
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Slide1
Recommendations on Using Financial Information
Dr. Barbara M. Wheeling
Montana State University BillingsSlide2
Financial Benchmarking
Process of comparing the performance of an enterprise against the performance of other similar enterprises through the use of comparable and reliable dataSlide3
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, surveysSlide4
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, FranceSlide5
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 measuresSlide6
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 methodsSlide9
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 activitiesSlide11
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 performanceSlide13
Farm characteristics
affecting
comparability (a partial list)
Farm size
Farm type
Farm location
Ownership of land
Management and financing decisionsSlide14
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
$
748,509Slide17
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?