Financial Basics. VT Organic Dairy Producer Conference 2018

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1 Financial Basics VT Organic Dairy Producer Conference 2018 Andy Wood, Agricultural Loan Officer Vermont Economic Development Authority (VEDA)

2 Financial Performance Financial performance is the culmination of agronomic, herd management and business management. Wide variation in financial performance $8 range in cost per Cwt. in most recent UVM Organic financial analysis Understanding your financial performance is essential to knowing how to manage you business

3 Two Types of Records Income and Expense Records Reports financial performance over a period of time Did you make money? Balance Sheet (Statement of Financial Position) Reports financial position at a point in time What do you have? Who do you owe?

4 Income and Expense Records Income Statement Reports whether the business is profitable by reporting operating income and operating expenses over a period of time Operating income and expenses are income and expenses related to annual business operations May be called other names such as profit and loss or operating statement Determines if the business was profitable

5 Income Statement

6 Income and Expense Records Statement of Cash Flows Determines change in cash position over a period of time. Includes capital sales, capital purchases, debt repayment, loan advances, and any other non-operating income or expenses that impact cash position.

7 Statement of Cash Flows

8 Combined Income & Expense Statement It is very common in practice to use a statement that combines the income statement and the cash flow statement into one form. This allows for the user of the report to quickly look at the document to determine the business profitability and the change in cash position.

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10 Balance Sheet The balance sheet records assets, liabilities and equity at a point in time. Ag balance sheets are typically divided into 3 categories Current Assets/ Liabilities Used/Paid for in 12 Months Intermediate Assets/Liabilities Assets with useful life of 10 years or less and liabilities with an original maturity 10 years or less Long Term Assets / Liabilities - Typically just real estate, buildings and improvements and liabilities with a original maturity greater than 10 years

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12 Current Assets / Current Liabilities

13 Intermediate Assets / Intermediate Liabilites

14 Long Term Assets/ Long Term Liabilities

15 Balance Sheet Needs to be done at the beginning/end of each year at a minimum. A beginning and ending balance sheet is essential for tracking financial performance in conjunction with a income statement Primary changes are to: Current Assets Current Liabilities Cattle Inventory Coop Stock and Investments Loan Balances

16 Relationship Between Income Statement and Balance Sheet Income statement to determine the profitability of the business Compare beginning and ending balance sheets to determine change in financial position Was the business profitable and did financial position improve? Did they adjust at a similar level?

17 Accrual Adjusted Income Statement Farms generally record all income and expense records on a cash basis (i.e. when the money is spent or received it is recorded) Cash basis records can be influenced with various management decisions Accrual adjustments can be made if beginning and ending balance sheets Accrual adjustments are made by looking at changing in several balance sheet accounts Note: Accrual adjustments are different than accrual accounting

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19 Production Measures In analyzing a dairy s financial performance there are a number of herd records that additionally will be helpful in analyzing farm performance. A few are: Total Milk Production for time period (lbs. or Cwts.) Average number of mature cows These allow you to look at income and cost on a per Cwt. basis or a per cow basis.

20 Fundamentals for Capturing Records Understand your record keeping method and your records. Accuracy matters Work with a professional when needed Take the time while developing your system Maintain current financial records Consistency is key

21 Ledger Used to record hand written records Should provide the ability to generate a monthly income statement When done well can provide good quality records

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24 Software Computer software provides superior analysis ability Allows for quick and easy analysis of a variety of situations Ability to quickly summarize data in a various ways Monthly statements Year to date statements Last 12 months Utilizing the power of computer to quickly do various calculations

25 Common Software QuickBooks Widely used due to ease of use and overall name recognition Can manage income and expense records well Challenges with balance sheet records How to handle things like cattle inventory and feed inventory

26 Common Software CenterPoint Ag specific software Allows for incorporation of various ag crop assets more easily and can generate a balance comprehensive balance sheet Tougher learning curve, but due to the balance sheet component there may be advantages

27 What to do with Financial Records Look at business performance Profitable or losing money Balance Sheet position How has it changed? Compare with yourself year to year Compare with others Benchmarking Use financial information to drive business decision making Use records to set goals