The Rural Voice, 2000-01, Page 30FIGURES THAT TELL THE TALE
Careful use of the figures in your financial statement can help
you analyse your farm business
BALANCE SHEET
Assets
Current
Cash and bark.
Accounts receivable
Inventories
Capital Assets
U bilhies
Gutter!'
Avco iris peyaoIe arid acc.r;ec I blit}es
Currer&uor1100u1 ut';+} e r.p • t r
ons erg, rt.bt.
•
.....:.8
A1�
$ 10,005
17,447
143 519
170,971
524.934
695.905
24,405
45:946
174'.125;
Fifteen numbers from your farm's
financial statement can help you
determine five key areas of financial
strength said Mary Jane Combe,
Business Management Specialist
with OMAFRA at Vineland Station
when she spoke to the Poultry
Producer Update in Seaforth recently.
Combe credited Dr. David M.
Kohl, professor of agricultural
economics tat Virginia Tech
University with creating financial
benchmarks that other farmers can
judge their farms against. Kohl has
created.a system of green, yellow and
red lights for farm operations based
on numbers your financial statement
yields.
One task she urges all farm
businesses to do if they're not
already is to write down what their
family expenses are. "Farmers often
underestimate their family living
expenses by up to 25 per cent," she
said.
"Just the act of writing it down
helps me save money on living
costs," she said. Keeping records of
your family expenses for three or
four months is a good indicator of
what your living costs are.
In one case she helped with, she
recalled, the family was drawing
$70,000 a year from their farm
26 THE RURAL VOICE
business when their net income was
only $25,000. They were going
farther and farther in debt to support
their living expenses.
Family living expenses, or
personal drawings, are probably the
third or fourth highest costs on the
farm, Combe says. There needs to be
a balance between personal drawings
and the competitive edge of the farm.
If your living expenses are too high,
you won't be able to service the debt
needed to keep your farm up to date.
On Kohl's scale, if a family is
taking under 10 per cent of the farm's
revenues (not counting off -farm
income), it rates a green. A family
drawing 10-15 per cent of the farm's
income should be cautious. A farm
using more than 15 per cent of
revenue for family expenses rates a
red.
Repayment capacity measures the
amount of cash available from the
farm to cover debt servicing
(principal and interest payments) and
new purchases or depreciation. Debt
Servicing Requirements are the
principal and interest due during the
year.
Debt Servicing Capacity is
determined by a formula:
Farm Cash revenue
- Farm Cash Expenses
= Net Cash Expenses
+ GST in
- GST out
+ Interest Payments
+ Owners Contributions (off -farm
income)
-Owners withdrawals
-Reserve for asset acquisition
= debt servicing capacity.
There should be.a minimum of
$1.25 in debt servicing capacity for
every $1 of debt. If the debt to debt
servicing capacity ratio is 1-1, Kohl.
gives it a red light, meaning don't
take on extra debt. If the ratio is from
1-1 to 1-1.5, you should be cautious.
If the ratio is greater than 1-1.5, it's a
go.
If you have insufficient debt
repayment capacity you need to
increase income by selling assets,
increasing production or increasing
prices or by taking an off -farm job.
You can also cost your personal
drawings, which requires accurate
knowledge of what your living
expenses are. You can also seek to
reduce your four largest business
expenses.
There may be an alternative to
restructure debt over a longer period
but it's important to structure the
length of your loans to the useful life
of the asset, Combe said.