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Fiancial, production data critical for farmers Tuesday, August 25, 2009
Agri News staff writer
DUBUQUE, Iowa -- At times like these, producers need to turn their financial and production data into information for making knowledgeable decisions and survival strategies, said Larry Tranel, Iowa State University Extension dairy field specialist.
"You're giving creditors more insurance or confidence in your management abilities," Tranel said at last week's Dairy Financial Situation meeting in Dubuque.
Tranel says farmers need to have what he calls the Big 3 financial statements, net worth, net farm income from operations and cash flow.
"The big three financial statements are critical during critical times as they help us better understand the farm business and each parties role within the farm," Tranel said.
Tranel recommends starting with a net worth statement on Jan. 1 so farmers have a snapshot of their businesses at the beginning and ending of each accounting year.
Current assets minus current liabilities equals working capital. Current assets divided by current liabilities equals the current ratio. Working capital should be enough to cover family living and current debt payments with a current ratio of 1.5 or higher. The net worth statement measures the distance between a farming operation and insolvency.
The second statement needed is the net farm income from operations statement, Tranel said. While the net worth statement shows beginning and ending points, the net farm income from operations statement shows how a farm got from beginning to end.
"It is extremely important that producers take their cash records, but account for inventory and other changes that do not get 'cashed out' during the year like gains in cattle inventories or depreciation," Tranel said. "It truly is a gain or loss, but it is not turned into cash during the year."
The third important statement is the cash flow statement, which shows all sources and uses of cash, monthly or yearly, Tranel said.
For farming operations that need immediate cash flow analysis, a cash flow spreadsheet is available on request, Tranel said. Many FINPACK associates across the state can assist farmers in doing an analysis. The service is free.
Tranel urges farmers to also show a few years of records to demonstrate that they are good herd and production managers as well as good financial managers.
ISU Extension also offers the Dairy TRANS financial analysis system. This spreadsheet-based program uses tax (Schedule F) basis records with inventory changes from beginning to the end of the year to analyze the dairy farm business.
Cash income and expenses are divided by cow numbers and hundredweights of milk sold. Dairy TRANS also breaks down financial information based on labor full-time equivalents, number of acres and number of cows.
For more information on managing dairy farm finances, contact Tranel at (563) 583-6496 or e-mail at tranel@iastate.edu or Dale Thoreson at (319) 267-2707 or dthores@iastate.edu.
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