The Rural Voice, 2000-01, Page 34MUTUAL
AAFARM
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Tillsonburg 842-7557
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30 THE RURAL VOICE
return on assets is one ratio used to
measure profitability:
Rtn. on Assets= Net Income x 100
Assets
You might, Combe says, view
return on assets as a measure of how
efficiently farm assets are being used
to generate income. Given two
identical farms with $750,000 in
assets, obviously the one with a net
income of $50,000 is more profitable
than the one with a net income of
$20,000. Return on assets would be
10 per cent for the first farm and four
per four per cent for the second.
If your return on assets declines
there could be a number of
reasons:
• You have too many capital assets
• You have too many or too lazy
human assets.
Too often, Combe says, children
come home to work on the farm but
the business doesn't change.
"A person should bring $150,000
in gross farm sales" she says.
• Some fauns just lack the size and
scope of the business to produce a
good return on assets.
• There is poor cost control or
business "killer toys".
• There are high levels of debt.
• There's too high a management fee.
• There's poor working capital.
Financial efficiency measures how
efficiently the farm is using its assets
to generate revenue. Financial
efficiency is determined by taking the
fair value of your assets and dividing
by the gross revenue. A lower capital
turnover means better financial
efficiency. A capital turnover of less
than 3.3 means the farm is making
excellent use of assets. A rate of 3.3
to 5 indicates a good use of assets. A
rate of more than five indicates that
assets are under utilized.
Combe outlined seven signs of a
business that's in danger,of failure:
1. A build-up of accounts payable
and supplier credit.
2. Credit cards size and amount.
3. Terming -out operating lines of
credit every three to five years.
4. Delinquent real estate or income
taxes.
5. Cancelling insurance.
6.Borrowing from friends and
relatives with no specific payback.
7. Slow payroll, or no payroll.0