As you review your 2013 farm financials and prepare for 2014, your year-end net worth statement or balance sheet for 2013 becomes your opening net worth statement for 2014,” says Rick Dehod, agricultural farm finance specialist with Alberta Agriculture and Rural Development.
“With this current information in hand, it is a good time to look at your farm’s business financial health and how it compares to your opening net worth statement for 2013. 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 that you can compare to previous years and also to industry benchmarks.”
To help producers be aware of the ratios for their farm businesses, Alberta Agriculture and Rural Development has a decision-making tool called the Agricultural Business Analyzer (ABA) Simple Farm Ratio Analyzer.
ABA is a shortcut Excel program that takes just eight key financial entries and calculates 11 financial ratios for the farm/ranch and colour codes them in comparison to industry benchmarks. These 11 ratios give producers a quick idea of the financial status of their farm or ranch and a comparison of the business’s ratios 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,” says Dehod. “It is very important to note that you should be using accrued revenue and expense information and assets at fair market value to enter into these spaces.”
The eight entries to make 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.
“With these eight quick entries from your accountant’s review engagement report, or accrued notice to reader report for the previous fiscal year, you will know how your farm is doing financially,” says Dehod. “It will also tell you where your farm is strong and where it is weak. 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.
“Having your net worth statement for the beginning of 2014, you can do your income and expense projection, sources and uses of funds (cash flow) for the year and project your closing net worth statement for 2014,” says Dehod.
“Once you have your projected 2014 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 2014 operating plan will progress the financial viability and health of your farming operation.”
It may seem like a lot of work; however, using this decision-making tool will help producers create an awareness that helps them make better decisions to increase the viability and success of their farm business.
The ABA Simple Farm Ratio Analyzer can be downloaded from the AARD website. Farmers with questions or problems with the program can contact Ron Lyons, manager of Business Commercialization, at 780-980-4363.