To help producers be aware of the ratios for their farm businesses, Alberta Agriculture and Forestry has a decision-making tool called the ABA Simple Farm Ratio Analyzer.
Start with your year-end net worth statement (the balance sheet for 2016), which is also your opening net worth statement for 2017, said farm finance specialist Rick Dehod.
“With this current information in hand, it’s a good time to look at your farm’s business financial health and how it compares to your opening net worth statement for 2017,” said Dehod. “This comparison will give you great insight on how your business has performed and what parts of your business may need some attention. Using your own information will provide ratios you can compare to previous years and also to industry benchmarks.”
The ratio analyzer is an Excel program that takes just eight key financial entries and calculates 11 financial ratios for a farm or ranch and colour codes them in comparison to industry benchmarks.
“The eight key financial numbers can be taken from your accountant-prepared financial statements for the past year and can be entered into the various open cells in the one-page spreadsheet,” said Dehod. “It’s very important you use accrued revenue and expense information and assets at fair market value to enter into these spaces.”
The eight entries are: farm gross revenue, farm gross expenses, depreciation, debt servicing payments, current assets, long-term assets, current debt, and long-term debt. Long-term assets and debts include intermediate assets and debts in these entries. The ratios will tell you how the operation is doing and “where your farm is strong and where it’s weak,” he said.
“You can then consult with your accountant or an agricultural finance specialist to come up with plans to mitigate and improve those areas where your financial ratios are weak.”
Each ratio has a bullet that opens and provides the formula used to calculate the ratio. The ratio is colour coded and compared with industry benchmarks.
This information can also be used for income and expense projection, cash flow for the year, and to project closing net worth statement for the year,” said Dehod.
“Once you have your projected 2017 closing net worth statement, you can generate the year-end financial ratios, and compare them to the ratios you generated from your beginning net worth statement. This will give an indication of whether or not your 2017 operating plan will progress the financial viability and health of your farming operation.
“It may seem like a lot of work, but using this decision-making tool will help give producers an awareness that’ll help them make better decisions to increase the viability and success of their farm business.”
The ratio analyzer can be found at www.agriculture.alberta.ca.