Farm$en$e: Farm Management tools for Financial Success

Are you looking for a farm business management class to help brush up your financial and production planning skills?  Penn State Extension’s Agricultural Entrepreneurship Team will offer Farm$en$e across the state at various locations starting in December and running through early April.

Farm$en$e is a finance and production education class for Pennsylvania farm businesses.  Farming is a complex business.  The key to running a successful farm business is the ability to manage scarce financial resources and plan farm production accordingly.  This short course teaches participants how to organize and use financial records; develop and analyze financial statements; and make informed decisions regarding finances and production. The concepts covered promote better internal decisions for farm management and stronger relationships with external partners, such as lenders.  The adoption of farm records and the use of financial statements, such as the balance sheet, cash flow, and income statement significantly impact farm financial performance.  This course satisfies the requirements for borrowers of the Farm Service Agency, but is also available to borrowers and lenders of any private agricultural bank.

Farm$en$e will be offered in the following locations:

December 12^th, 17^th, 19th

The use of financial statements can significantly
impact a farm's financial performance. 

Somerset County

9:30 am to 2:30 pm

January 7^th, 21^st, 28^th

Blair County

9:30 am to 2:30 pm

January 9^th, 16^th, 23^rd, 30^th

Berks County

10:00 am to 2:00 pm

January 31^st, February 7^th, 21^st, 28^th

Lancaster County

10:00 am – 2:00 pm

February 3^rd, 10^th, 24^th

Mercer County

9:30 am – 2:30 pm

February 4^th, 11^th, 18^th

Crawford County

9:30 am – 2:30 pm

  

March 3^rd, 10^th, 17^th

Bradford County

9:30 am – 2:30 pm

March 7^th, 14^th, 21^st, 28^th

Cumberland County

10:00 am – 2:00 pm

March 21^st, 28^th, April 3^rd

Union County

9:30 am – 2:30 pm

Register online for the session in your area by clicking on the link above or by phone by calling Kathy Shaffer at 814-445-8911, ext. 7.  The cost of the program is $225 per participant, pre-registration is required for all those attending.  For more information contact Miguel Saviroff, mas60@psu.edu or 814-445-8911, ext. 144.

Farm Financial Analysis Tool Proves Useful in Analyzing Solvency and Liquidity

By Miguel Saviroff, Extension Educator, Somerset County

For a farmer, making economic decisions may be a stressful task if accounting records and financial statements are not available.  The use of spreadsheets and computerized financial records help farmers relax while making a plan. Penn State Extension Farm Management Educators have used FINPACK as one of the tools in training farmers to evaluate the farm’s financial position, explore alternatives, and make informed farm management decisions. There are, of course, other financial programs that can be purchased for this use.

Dave Van Pelt is fine tuning and monitoring his operation's current financial strategies. He used FINPACK to simulate expansion strategies and analyze the possible new challenges. “My experience with FINPACK was with dairy start-up strategies, it has helped me see the level of production needed to support a herd large enough to meet financial obligations,” said Van Pelt.

The road map of a farm financial analysis starts at the beginning of the year with a beginning balance sheet. Once this point of reference is set, a monthly cash flow is planned and compared with the actual at the end of each month. At the end of the year, the accounting cycle closes and an ending balance sheet is prepared. Both balance sheets are used to calculate inventory changes and a year-end analysis leads to an Income Statement. Financial performance can be assessed using three concepts: Profitability, Liquidity, and Solvency.

In the FINPACK program using the data entry mode, a complete listing of assets, liabilities, and ownership equity is fed into the system, and the program creates the beginning balance sheet. Assets and liabilities are listed as current, intermediate, and long term. The output section presents this balance sheet with assets in order of liquidity in one section, and liabilities and net worth in the other section, with the two sections "balancing."  Owner’s Equity (aka Net Worth) is the difference between the assets and the liabilities, and it should be more that 50% of total assets. For example, assume my total assets are worth $800,000 and my total liabilities are $320,000. My owner’s equity would be $480,000 ($800,000 - $320,000). Owner’s equity should increase between 2 consecutive balance sheets. An owner’s equity growth rate should be at least 6% annually. If the business does not grow it could be a sign of liquidity problems, such as an income decrease.

FINPACK provides a suite of tools that guide producers 
and ag professionals to sound financial decisions. 

Two financial ratios obtained from the balance sheets are found in the FINPACK output screen. They are the liquidity and the solvency ratios. The liquidity ratio states the ability of the farm to pay its short term obligations. The liquidity ratio is also known as the current ratio and is obtained by dividing current assets by current liabilities. For example, if your current assets are $20,000 and your current liabilities are $16,000, then your current ratio would be 1.25 ($20,000 / $16,000). We interpret this ratio as follows: you have $1.25 of current assets (cash, savings, etc.) for every $1.00 of obligations (i.e. loan payments, line of credit or accounts payable) you owe within the upcoming year. A ratio greater than 1.7 is “Strong”; a 1.7 to 1.1 would fall in the “Caution” range; and less than 1.1 would be “Vulnerable.” A “vulnerable” situation can have potential causes, such as a farm expansion, low returns and high costs, and rapid debt payments. Strategies to get out of this “liquidity crunch” include raising cash by partially liquidating (selling) non-current or non-essential assets or borrowing to meet the current liabilities. Restructuring current debt into non-current debt reduces current liabilities. Debt restructuring should not be the first alternative in trying to solve liquidity problems. Other alternatives may need to be tried to provide a faster infusion of capital.

The solvency ratio indicates the financial position of the farm, and whether the business can cover its total debts with its asset base. A business is “insolvent” if it has more debts than it has in assets. The Debt to Assets ratio measures a farm’s solvency and is calculated by dividing total liabilities by total assets. From the above example, my debt/asset ratio would be 40% ($320,000 / $800,000). This measure helps us compare our solvency to similar operations.

A Debt to Asset Ratio less than .3 (30% debt) should be comfortable; between .3 and .6 (30% to 60% debt) is a medium to heavy load; and over .6 (60% debt) becomes heavy and if high enough, impossible to service. Overcoming a poor solvency measure will depend on the cause. A new operation will be expected to have a poor solvency. It will require hard work, strong cash flow, and solid profitability over time. In general, selling unneeded assets and using the proceeds to pay down your debts, can work. Refraining to take on additional debt can possibly help. You will need to increase your asset base by reinvesting your profits in the operation or bringing in outside investors. Also important, is taking good care of the assets by preventative maintenance, so they will hold their value longer.

In my next blog article,  I will discuss cash flow, financial efficiency, repayment ability, and profitability, which are highly important areas when looking at the overall financial condition of an agribusiness.

For information on Farm Financial Management educational programs, or if you have questions on financial aspects of your farm business, contact Miguel Saviroff at Penn State Extension in Somerset County at 814-445-8911 extension 144.

Financial Management Invaluable for Farm Success

by Miguel Saviroff, Extension Educator, Somerset County

A farm business depends on its finances!  Financial management is as critical as the other components of the business, such as crop, labor, nutrient, and pest management.  Lenders expect farmers to manage the funds they lend to them, so a farmer-lender relationship is very important.  Credit institutions will rarely extend credit when there is no visible record of your past income or when a financial plan cannot be prepared to convience them of the ability to use funds efficiently and repay the loans.  Financial literacy and management are a must for anyone aspiring to be a successful farmer.

Miguel Saviroff leads a Farm$en$e workshop

The Farm$en$e program trains farm managers who receive financial assistance from the USDA Farm Service Agency.  The course is 25 hours spread over 4 days.  Making decisions on the farm is a daily activity, but buying land or equipment requires informed decisions and the use of financial statements.  The program covers the use of the balance sheet, a "snapshot" of the farm financial condition at a single point in time.  In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.  The accrual income statement is a summary of the revenues, and the expense associated with generating those revenues, during a production cycle.  The accrual concept applies directly to agriculture; farm managers in the program learn that changes in inventory are part of the farm revenues.  The cash flow budget statement allows producers to project cash flows for each month of the upcoming year; it is the best financial planning tool.  Participants are required to prepare these statements for their own farm.

The workshop is designed to teach farmers how to assess their financial strengths and weaknesses, to identify the specific goals of the farm, and how to prepare a production plan that outlines the changes required to improve profitability.  Enterprise budgets are used to better analyze short and long run fiscal impacts and evaluate profitability.  Managing risks like price, cost, and interest rates are considered in this plan.

Monitoring financial ratios can be useful to adjust operations throughout the year, rather than once a year.  Borrowers attending the program learn to calculate their farm's financial ratios obtaining them from the key financial statements.  The liquidity ratio measures the ability to pay bills when due, the solvency ratio indicates the amount of debt relative to equity, and the profitability ratio indicates the true financial performance of the business.  These ratios are applied to troubleshoot and fix financial and production problems.

As many beginning farmers, Orlo St. Clair, attendee of the program, lacked land, equipment, managerial experience and access to financial resources.  St. Clair started as a herd manager on a farm in Indiana County.  "I asked the owner if I could raise my own heifers, and he accepted," St. Clair said.  "I wanted to have a base to start with."

Orlo St. Clair and his girlfriend review some of his financial records

"Since I am a production guy, usually it is my sister helping me with the financial accounting, but now I enjoy planning my year's cash flow," said St. Clair, who milks 90 cows and crops 175 acres.  "Thanks to the Farm$en$e program, I am able to plan my goals, changes, and measure the impact on the net income due to these changes."

Penn State Extension and the FSA assist farmers in adopting the financial tools necessary to become active managers.  For more information about Farm$en$e, contact Miguel Saviroff at the Somerset Extension office at 814-445-8911 ext. 144.

Getting turned down for a business loan

As we've mentioned many times in this blog and our other educational channels (like farmbusiness.psu.edu, Extension courses, educational materials, etc), you must have a well-developed business plan BEFORE applying for a loan. What should you do if you've prepared a business plan but still get turned down for a loan?

In an openforum.com article, author Trent Hamm discusses what you should do if you're turned down for a loan. First, ask your banker for honest feedback as to why your loan was denied. If you are told some not-so-positive things about your plan or idea, DON'T TAKE OFFENSE. You are of course very passionate about your business idea and may not be able to objectively see flaws. It's better to get honest constructive criticism and make changes now than in 2 years from now when your business is failing. Take all of the feedback and arrange it into a checklist so that you can update your business plan accordingly. You may also want to practice your presentation skills by joining a club like Toastmasters. By improving your speaking skills, you may be able to present your idea more clearly with to banker.

What if the problem isn't with your idea or business plan? It could be possible that your bank is having cash flow problems and might not be able to make the loans it normally would. Research other banks and ask your banker to recommend another bank that may be able to help. Whatever the reason, be sure to stay positive. Being told "no" doesn't mean that your dream can never happen. You will most definitely see other major road blocks in your journey as an entrepreneur, so be sure to view this as a learning experience and not a failure.


As an entrepreneur, have you ever been turned down for a loan? Did you ask for feedback on why you were denied? Did you use the feedback to improve your business plan and then reapply for the loan?

Budgeting for your small business

Let’s pretend that you’ve just thought of a great agricultural business idea and you want to jump right into becoming an entrepreneur. This sounds great, but there are many steps missing in between the “great idea” and actually opening a business. One of those key steps is creating a budget. A business idea may sound great, but you can’t go anywhere with it if the idea isn’t financially viable. To assess the financials of creating a business (and maintaining it), you must create a budget.
The purpose of a budget is to carefully map out how you will spend your money (and how money has been spent in the past). What exactly should be included in a budget? Very simply, a budget should show where you will be spending your money. This may include rent or mortgage, utility bills, payroll expenses, supplies, etc. A budget is not a one-time creation, but a living, working tool that will help you plan for the future. If an unexpected problem arises (like a sudden increase in supplies), you should go back to the budget and evaluate how this problem will affect your profits.
The intention of a budget is not to intimidate you, so don’t make it so complex that you can’t understand it. Your budget should be specific so that you can see where you may be over-spending (or under-spending in the case of expanding your business), but it shouldn’t be so complex that you are spending all of your time and energy on it. For example, office supplies are an expense that should be included on your budget, but is it really necessary to calculate the cost of using 15 paper clips per week? If budgeting in general is not your forte, consult a professional. In a recent article on Openforum.com, author Trent Hamm suggests getting the help of an accountant. “The more eyeballs you get on your goals and plans for future spending along with your records of how you currently spend, the better off you are.”

Openforum.com article

Investopedia.com is a great resource for learning about budgeting and other types of financial planning for your business. In one article, they list 6 tips to help you create a budget that will help you plan for the future of your business.

Tip No.1: Check Industry Standards
Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the local library for information about the industry, speak with local business owners, and check the IRS website to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings. Small businesses can be extremely volatile as they can be more susceptible to industry downturns than larger, more diversified competitors, so you only need to look for an average here, not specifics.

Tip No.2: Make a Spreadsheet
Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc.

Tip No.3: Factor In Some Slack
Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it's wise to factor in some slack and make sure that you have more than enough money put away or coming in before expanding the business or taking on new employees.

Tip No.4: Look To Cut Costs
If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost cutting. Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle, or to take full advantage of payment terms offered by suppliers and any creditors.

Tip No.5: Review the Business Periodically
While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.

Tip No.6: Shop Around for Services/Suppliers
Don't be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.

Investopedia.com article

As an agricultural entrepreneur, how has budgeting helped you plan for your business’s future? Has your budget helped you realize an area you were over-spending or under-spending? Do you have any advice for those thinking about starting an agricultural business?

Keep your business and personal finances separate to avoid IRS problems

Many entrepreneurs start out with little up front capital and therefore think that it will be “easier” (or just don’t think about it at all) to not separate their business finances from their personal finances. By not separating your finances, you blur the lines between business and personal which can create some major IRS headaches down the road. By law, corporations, LLCs, LLPs, and partnerships are required to have separate business accounts, but not sole proprietorships (the most popular type of small business).

As a small business owner, you will want to deduct purchases on your taxes that are business-related. If your personal and business expenses are coming from the same pot of money, the IRS may question if what you are claiming as “business expenses” are legitimate. This could lead to an audit which NO ONE wants. Not only will an audit cause personal grief, it can also hinder you from getting a business loan. Kay McDermott, a New York City-based CPA reported to BankofAmerica.com, "Banks want to see clear, clean business accounts before they lend you any money. You need to demonstrate to the bank that not only is your business generating enough revenue to repay the loan, but that you are running the business professionally enough to keep that revenue coming in."



How does one keep business separate from personal? A recent article on openform.com from Trent Hamm, author of “Six Steps to Audit-Proofing Your Small Business” and “The Simple Dollar” describes the steps you should take to separate.

1. Erect a wall- Make it very difficult for money to cross the boundary between your business finances and your personal finances. For example, house your personal money in a completely different bank from your business money.

2. Document everything extremely carefully- Something can easily fall through the cracks unintentionally. Take it slow, do it carefully, and keep track of every single dime.

3. Once the separation is in place, cash should only flow directly over this wall- Do not directly pay business bills from your personal accounts. Don't put personal income into your business accounts. Handle everything by direct transfers from your personal account to your business account and allow no other financial contact between yourself and your business.



As a current business owner, do you keep your finances separate? Have you always done so? If you did not always keep personal and business finances separate, when did you change and why?