Oct 19, 2017
Dean covers basic financial ratios with insights from ag finance specialist Tim Brhel.
Business is a three-legged stool:
1. Make things
2. Sell those things
3. Count what’s happening
William Bruce Cameron (Sociologist, wrote Informal
“Not everything that can be counted counts, and not everything that counts can be counted.”
Knowing and understanding financials isn’t enough. You have to use them to better understand the operation. Then leverage that information to make decisions which move the farm forward intelligently.
Water Street Solutions ag finance specialist Tim Brhel says he’s found through his work that all farmers’ mindsets regarding financials fall on a spectrum.
ONE END: Does balance sheet because the bank needs it. Does books for tax reporting. Would rather not do any of it, given a choice.
OTHER END: Proactive, open-minded about leveraging financials. Plans next year in advance. Makes decisions based on metrics.
A farmer’s approach to financials drives how effectively they use them as tools.
How do I start using my numbers as a tool that gives me power as a business leader? Start with three questions:
WHERE AM I? Beginning point of journey/Current state of the
WHERE AM I GOING? Create a future to arrive at/Not just distant; near future too/Envision your goals
HOW DO I GET THERE? Game plan of strategies/Road map to goals/Tools to keep you on track
Financials provide the metrics that show your progress toward goals and allow course adjustments along the way.
INCOME STATEMENT: Reports on the financial performance over a specific period. Also known as Profit & Loss (P&L) Statement. Summarizes how revenue and expenses are occurring in the business.
BALANCE SHEET: Summarizes a company’s assets, liabilities and equity at a specific point in time. Snapshot of what the business owns, what it owes, and what its owners have invested.
Current and long-term ASSETS =
Current and long-term LIABILITIES + SHAREHOLDERS’ EQUITY
Ratios can bring context and meaning to data by normalizing it and bringing it to life.
LIQUIDITY: The ”cushion” to weather bumps in the road. Allows you to seize opportunities as they arise, and helps protect your equity.(Current assets - Current liabilities)/Expected gross revenue
CURRENT RATIO: How able is the operation to pay current
liabilities? Wisest to have a Current Ratio of at least 1.5.
SOLVENCY: Ability to pay off debts, including long-term debts. Two key ratios involved:
1. EQUITY RATIO (How much of the operation you own)
2. DEBT RATIO (smaller number is better)
Using these tools and ratios will help give you a sense of the health of your operation and of how your current state will change heading into the new crop year, allowing you to make decisions based on your position. Lenders will also have more confidence in taking you on as a risk if you’re regularly using these ratios in making your operational decisions.
1. Narrow your focus. There are many valid ratios you can watch. Figure out which ones you need to focus on as a business owner.
2. Use that narrowed focus in your forward planning and decision-making for the farm.
We always welcome your feedback at Modern Farm Business Podcast. Do you have suggestions for future episodes, or questions on something we’ve already covered? Drop Dean a line at firstname.lastname@example.org. He’ll look at each email personally and respond as quickly as possible.
Thanks for listening! See you next week!