Survivor…Survivor…The Balance The Balance

Sheet ChallengeSheet Challenge

Presented by:Presented by:

Carol Roth, Outreach Specialist, Carol Roth, Outreach Specialist, Program on Agricultural Technology Program on Agricultural Technology

Studies (PATS)Studies (PATS)

Rose Skora, UWEX Agricultural Rose Skora, UWEX Agricultural Educator, Racine & Kenosha CountiesEducator, Racine & Kenosha Counties

Power Point Content Developed by Power Point Content Developed by Bob Cropp, Agriculture Agent, UWEX-Pepin CountyBob Cropp, Agriculture Agent, UWEX-Pepin County

Balance Sheet Challenge Developed by:Balance Sheet Challenge Developed by:UW-Extension Building a Vision Team UW-Extension Building a Vision Team

Goals For This Workshop

Participants will:

• Understand the value of balance sheets• Why we create themWhy we create them

• Learn the components of balance sheets• What goes inWhat goes in

• Learn what a balance sheet measures• What comes outWhat comes out

INFORMATION = POWER

The Right Amount of Information is Powerful

What is Right for YOU?

Good Business Managers

• Make Good Decisions• Manage Change Well

– Rate of Change, Adaptability, Innovation Treadmill

• Confident Risk Takers – Knowledge and Skill • Mission – Vision – Goals - Benchmarks• Problem Solvers – Engineering Language

A Language of Business

Who will you be Talking To?

Financial Statements&

Financial Analysis Tools

Yourself

Where are youWhere do you want to be

How will you get there

Financial Statements Financial Statements Serving Management’s NeedsServing Management’s Needs

Records Management Reports Decision-Making

Financial Statements Financial Statements serving serving management’s needsmanagement’s needs

Records Management Reports Decision-Making

Collecting &Collecting &OrganizingOrganizing

Accounting Accounting SystemSystem

Organizing, Analyzing, & Reporting - Financial Position - Financial Performance

Financial StatementsFinancial Statements

1.1. BALANCE SHEETBALANCE SHEET2.2. Income StatementIncome Statement3.3. Statement of Cash FlowsStatement of Cash Flows4.4. Statement of Owner EquityStatement of Owner Equity

PlanningPlanning - Feasibility- Feasibility - Profitability- Profitability - Risk-ability- Risk-ability

5. Cash Budget5. Cash BudgetPartial BudgetPartial BudgetEnterprise BudgetEnterprise Budget

Balance Sheet – Balance Sheet – a “a “balance”balance” concept concept

AssetsAssets are everything in the business are everything in the businessLiabilitiesLiabilities are the claims upon the assets are the claims upon the assets

Equity Equity is the part the farmer ownsis the part the farmer owns

Financial position at a point in time Liquidity- measured by current ratio and working capital Solvency- measured by net worth and equity/asset ratio or debt/asset ratio or debt/equity ratio

Balance Sheet

• Also known as a “Net Worth Statement”• Measures position…not performance• A snapshot In time• Usually compared on an annual basis• Reveals liquidity and solvency• Five of sixteen FFSTF measurements

Balance Sheet Components

• AssetsAssets – Everything in place that is needed to run the business

• LiabilitiesLiabilities – The portion of Assets claimed by a lender

• Equity or Net WorthEquity or Net Worth – The portion of the assets contributed or owned by the business owner

Balance Sheet Categories(Assets and Liabilities)

– Current – 12 months or less

– Non-current • Intermediate – 1 to 10 years• Long-term – Over 10 years

Current Items

• Cash on hand (Business• Savings (Business)• Prepaid items• Purchased inventories• Raised crops• Growing crops• Accounts receivable

Non-Current Items

• Intermediate (1-10 years)– Machinery– Farm Vehicle– Kitchen Equipment

• Long-term (over 10 years)– Buildings– Land

The Balance

Assets = Equity + Liabilities

Examples of Assets

Time for Active Learning…practice makes better.

Let’s Help Blue and Straw Berries Farm With Their Balance Sheet

• Input the Balance Sheet Items onto the blank balance sheet

• Calculate– Total assets, – Liabilities– Equity (net worth)

The Answers!

Current Assets and Liabilities

Blue and Straw Berries Farm Balance Sheet

Why is EQUITY important ?

Equity…– is the portion of the business assets

contributed by the owners

– growth is part of the annual business profit

– trends over time help measure the overall health and profitability of the business

Liquidity and Solvency*(As determined from the Balance Sheet)

• LiquidityLiquidity– Current Ratio– Working Capital

• SolvencySolvency– Debt to asset ratio– Equity to asset ratio– Debt to equity ratio

*First Five FFSTF (Farm Financial Standards Task Force) Measures

Liquidity

The ability of your farm business to: – Meet financial obligations when they come due.– Generate enough cash to pay your family living

expenses and taxes, and make debt payments on time.

“Can you pay your bills?”Equity Rich Cash Poor

Measuring Liquidity

• Current ratio– Compares current assets with current liabilities– Current assets/current liabilities– Should be at least 1.5 (2.0 preferred)

• Working capital– Current assets minus current liabilities– Needs to be a positive dollar amount

Solvency(Leverage)

The ability of your farm business to pay all its debts if it were sold tomorrow. Measured as ratios of: Debt, Equity, Assets.

How are you funding your Assets?“Can you sell your business?

Measuring Solvency

• Debt-to-asset ratio– Total debt/total assets

• Equity-to-asset ratio– Total equity (net worth)/total assets

• Debt-to-equity ratio– Total debt/total equity (net worth)

Farm Financial Score Card

• Developed by Universities of Vermont and Minnesota • Is found at: www.cffm.umn.edu/pubs/vermont.pdf• Scores financial condition of your farm business with 16

measures, with the first 5 result from the Balance Sheet!

Assignment

• Compute the following for the Blue and Straw Berries Farm:

–Current ratio–Working capital–Debt-to-asset ratio–Equity-to-asset ratio–Debt-to-equity ratio

• Mark them on the Farm Finance Scorecard

Assignment Answers• Current Ratio

– Current Assets / Current Liabilities– $1900 / $17,413 = .11

• Working Capital– Current Assets minus Current Liabilities– $1,900 - $17,413 = - $15,513

• Debt-to-Asset Ratio – Total Liabilities / Total Assets– $131,500 / $187,900 = 70%

• Equity-to-Asset Ratio– Total Equity (net worth) / Total Assets– $56,400 / $187,900 = 30%

• Debt-to-Equity Ratio– Total Debt (liabilities) / Total Equity (net worth)– $131,500 / $56,400 = 233%

How would you assess the financial position of the Blue and Straw Berry Farm, at this point in time?

Balance Sheets…Take Home Stuff!

• About position…not performance

• Net worth = equity

• Assets =Equity + Liabilities

• Liquidity…Can you pay your bills?

• Solvency…Could you sell your business?

• Gives you 5 of 16 FFSTF measurements

INFORMATION IS

POWER

Survivor…Survivor…The Balance The Balance

Sheet ChallengeSheet Challenge

Presented by:Presented by:

Carol Roth, Outreach Specialist, Carol Roth, Outreach Specialist, Program on Agricultural Technology Program on Agricultural Technology

Studies (PATS)Studies (PATS)

Rose Skora, UWEX Agricultural Rose Skora, UWEX Agricultural Educator, Racine & Kenosha CountiesEducator, Racine & Kenosha Counties

Power Point Content Developed by Power Point Content Developed by Bob Cropp, Agriculture Agent, UWEX-Pepin CountyBob Cropp, Agriculture Agent, UWEX-Pepin County

Balance Sheet Challenge Developed by:Balance Sheet Challenge Developed by:UW-Extension Building a Vision Team UW-Extension Building a Vision Team