Last week, we described how compiling your financial information will be beneficial to you in being able to analyze your previous year’s results so as to equip yourself in making informed decisions in the current, and future, years. This week, we discuss how to use that info.
Critical Balance Sheet Metrics
- Your Current Assets should be greater than your Current Liabilities by an amount that at least matches your cost to put in next year’s crop.
Ideally, the difference between current assets and current liabilities should at minimum match your entire costs to run your farm for one year.
- You want your Total Liabilities to be no more than your 125% of your equity after net worth adjustments have been made.
- ROE is an acronym for Return On Equity. It is your net income divided by your net equity. Are you happy with the returns you’ve earned in each of the last 5 years?
Critical Income Statement Metrics
- First and foremost, is your Income Statement accrued? You can tell if you find an adjustment, up or down, to your income that would be labelled “inventory adjustment.” If your income statement is not accrued, call me for a quick description on how to do it yourself. It’s easy.
Accruing your income statement is the only way to truly measure your profitability from the crop produced in a specific year.
- Did you have a profit? EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) is a very important figure to know. It represents your profitability from operations; it shows you can generate profits. The calculation is Net Income + Interest Paid + Taxes Paid + Depreciation Expensed.
- Now that you’ve got EBITDA calculated, divide it by the following figures: Current Portion of Long Term Debt (found on balance sheet) + ALL interest paid (found on income statement) + ALL lease payments made (found on income statement). This is an important indicator for your lenders. This figure indicates to them your capacity to meet your financing obligations.
Critical Cash Flow Statement Metrics
- Cash Flow from Operations divided by Gross Sales indicates how many dollars in cash your business generates from every dollar in sales. The higher the figure, the better.
- Cash Flow from Operations divided by your “Property, Plant & Equipment” indicates how well your business uses its hard assets to generate cash.
- Cash from Financing divided by Cash from Operations indicates how dependent your business is on financing. The higher the figure, the more dependent on external money.
|Liabilities / net worth||current assets / current liabilities|
|EBITDA / loan payments, interest & leases||current assets – current liabilities|
Does the thought of doing such calculations overwhelm you, scare you, or just plain bore you? If the urgency of knowing these numbers doesn’t strike urgency into you, are you willing to ask for help?
How would you describe the benefit to your decision making if these figures were readily available?
From the Home Quarter
The comment has been made time and time again: “It’s easy to make money in the good times.” With tighter margins of late, more attention than ever before is being paid to management and finances. These calculations above are only a few of the measurements that you can take to gauge your financial strength or weakness.
And if you need a hand figuring out what to do next, contact me any time.