Econ 230Name______

Lab #11Lab: 9:00 ______10:00 ______

Spring 2010

FARM FINANCIAL ANALYSIS

(Due Monday, April 5)

The objective of this lab exercise is to analyze the financial health of your Farmsim farm business. Use figures from your Year 6 Farmsim report unless otherwise indicated.

A.Cash Available and Cash Needed

Did your farm generate enough cash net income to pay all your cash expenses in year 6? Look at your Cash Flow Summary for year 6.

Sales of corn, soybeans, hogs, cattle, sows and boars, crop insurance pmts. / $ ______
Operating expenses (total) / $ ______

Did your sales exceed your cash expenses? ______

Did you have to borrow extra operating money to meet your cash flow needs? Look at your Cash Flow Summary again.

New Borrowing / Principal Paid
Operating loan / ______/ ______
+ Emergency loan / ______/ ______
+ Land loan (refinance) / ______/ XX
+ Carryover operating loan / ______/ XX
Total / ______/ ______

Did you borrow more operating credit than you repaid? ______

B.There are several areas where cash flow problems can arise, causing cash needed to be greater than cash available, such as low profitability and /or high interestrates.

A quick indicator of financial condition is the ratio of return on assets divided by average interest rate, which can then be compared to the total debt-to-asset ratio. All are found in the Farm Business Analysis page.

1.Return on assets (profitability) / ______%
2.Average interest rate on debt (cost of loans) / ______%
  1. Estimated maximum total debt-to-asset ratio which will cash flow
(line 1 divided by line 2) / ______
4.Actual Year 6 total debt-to-asset ratio (leverage) / ______

Does this comparison indicate any potential cash flow problems? Why or why not?

  1. Liquidity problems can also be caused by paying off debt too quickly.

(Look under Current Liabilities in your year 6Net Worth Statement.)

Next principal payments on debt for: Machinery ______

Combine______

Swine facilities______

Total$______

Total depreciation in year 6 was equal to (look in your Profit and Loss Statement): $______

Are debts for depreciable assets being paid off more quickly than they are depreciating? How does this affect cash flow?

D. Family Living Expenses

1.Value of operator labor utilized: / total labor hours used / ______
(from Farm Business Analysis) / minus hours hired / ______
= operator hours used / ______
x $12.00 per hour = / $______
2.Family living expense (year 6) / $ 35,000
Were living expenses greater than the value of operator labor utilized? / ______
If so, this could mean that: / labor is underutilized
less hired labor is needed
living expenses are too high

E.High land costs can also make a positive cash flow difficult to achieve.

1.Land cost per acre, year 6 (Farm Business Analysis)______

2.Average cash rent, year 6$195.00

Are your land costs (this includes cash rent paid, interest on land debt, and real estate taxes) higher than the average cash rent? ______

The average cash rent is used for comparisons, as a rough "breakeven" figure. If your cash land cost is higher, it is most likely due to excessive land debt. How much land debt do you have per acre of land owned? Include both current and long-term debt owed on land (Net Worth Statement).

$______debt divided by _420__ acres owned = $______per acre land debt.

Your land debt at the beginning of Farmsim was $914 per acre. Has it increased or decreased? How has this affected your liquidity?

F.Inventory Changes

Building up inventories decreases cash flow in the short run, and reducing inventories increases cash flow in the short run. How did your inventories change from the beginning of year 6 to the end? Look at your Hog Production Summary and Crop Summary.

Beginning Inventory / Ending Inventory / Change
(+ or -)
Pigs (no.) / ______/ ______/ ______
Gilts and sows (no.) / ______/ ______/ ______
Corn (bu.) / ______/ ______/ ______
Soybeans (bu.) / ______/ ______/ ______
Silage (tons) / ______/ ______/ ______
Did you increase or decrease hog inventories?
Did you increase or decrease crop inventories?

What effect did your changes in inventories have on your cash flow?

G.Debt Structure

1.List your subtotals for current, intermediate and long-term assets and debts at the end of year 6 (Net Worth Statement). Show what percent of total assets or liabilities each one is.

Assets / Liabilities
Current / $______/ ______% / $______/ ______%
Intermediate / ______/ ______% / ______/ ______%
Long-term / ______/ ______% / ______/ ______%
Total / $______/ 100% / $______/ 100%

Paying off debt too quickly can create cash flow problems. Is the proportion of your liabilities in the current category higher or lower than the proportion of your assets in the current category?

How does this affect your cash flow?

.

H.Liquidity

Cash flow needs that occur before the next crop harvest will have to be met from current assets and/or borrowing.

1.What is your current debt / assetratio at the end of year 6? ______

(Net Worth Statement)

2.How much is your working capital?$ ______

(current assets minus current liabilities)

Family living / $ 35,000__
Income tax due in year 8 (see year 6 Tax Report) / ______
Total / ______

Do you have enough working capital to pay expected family living expenses plus income tax due in year 8? ______

I.Do you expect to have problems generating enough cash in year 7? If so, what could you do to improve your cash flow situation?

Remember, low profits contribute to cash flow problems in the

farm business. But factors such as those discussed above can

cause even profitable farms to have cash flow problems. The

goal of a good farm manager is to maximize profits (consistent

with risk-bearing ability) while maintaining sufficient cash flow

to meet all obligations on time.