Surviving in Agriculture
What's your Plan?
Objectives For This Session
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Gain an understanding of the need for
adequate “financial business performance
analysis”
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Gain a basic understanding of the interaction
of financial statements
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What is the key factor for long term financial
survival of the farm/ranch operation
Why it is critical (for some businesses) to prepare
a complete set of financials
Gain understanding of the interaction/impact
the family has on the business
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Survival Has a Time Frame
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This presentation addresses the long run
Short run may also be a concern
Short run strategies may be quite different
than long run strategies.
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Many short run strategies are very detrimental to
long run financial health of the firm
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Selling down inventories; reduces working capital
Selling assets; reduces future income generation
Accumulate heavy short run debt load
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Some Brief History
No. Farms & Land In Farms
7,000
21% decline
6,000
1,200
1,000
5,000
800
4,000
600
66% decline
3,000
400
2,000
200
1,000
Number of Farms
1994
1988
1982
1976
1970
1964
1958
1952
1946
1940
1934
1928
1922
0
1916
0
Number of Farms in Thousands
1,400
1910
Land in Farms - Thousands of Acres
8,000
Land in Farms
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Some Brief History
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What was happening in Ag during this time?
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Industrial revolution
Mechanization of Agriculture
Establishment of Land Grant University System to
conduct Ag research
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Tremendous improvement in yields (grains and
livestock) through enhanced genetics
Increased opportunities to educate our young
Government Farm Program Support
Expand World markets for US Ag products
List of positives goes on and on
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So What’s the Problem
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Competitiveness of agricultural industry
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Still largely bulk commodity producers
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Profits always tight
“Family Farm” not assured to be efficient
Minimal chance for designer product prices
Increased access to world markets also
means we must compete globally
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Forces us to be very efficient
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What Key Factors Determine Survivability?
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Is it a positive Cash Flow
A large Net Worth
Paying no taxes to reduce cash outflows
Lots of family labor (good hard work)
Location
Positive Net Income
?
?
?
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Living With Past Mistakes
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Allowed producers, lenders, others to prepare
financial statements that were/are:
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Inconsistent between operations
Inconsistent for a single operation through time
Aimed at only one particular objective - (Loan
collateral analysis, i.e the lenders best interest)
Misleading for both the lender and
owner/operator with respect to:
 Business Performance, Profitability, Earned
Growth in Equity, Repayment Capacity
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Living with past mistakes
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Current statement formats utilized by lenders
& producers do not answer enough questions
about Short and Long run Viability
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Balance Sheet and Cash Flow Statements
Must get away from equity lending
Must understand the critical nature of being
or becoming profitable
You absolutely MUST have a plan
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Management team to implement the plan
Prepare financial analysis to monitor progress
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Living with past mistakes
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Record keeping for tax purposes
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Is simple and straight forward
Typically cash based and on a calendar year
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Tax Records & Past Mistakes
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Can be manipulated to show desired tax
results
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Does not measure business performance
Has instilled the belief that tax basis
records are a measure of business
performance rather than simply a
measure of tax liability.
Has set the tone for the amount of
record keeping required for agriculture
operations.
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What is Required?
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Reconciled set of Financial Statements
Prepared at least annually at the same time
every year.
Shared with your management team and all
others concerned with the operation
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Family, lenders, partners, etc.
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Just Like Balancing a Check Book
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+
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-
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=
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Beginning Cash Balance
Inflows
These are
Linked
Outflows
Ending Cash Balance
Your business performance is measured
the same way using a complete set of
financial statements
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Complete Set of Financial Statements
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Beginning and Ending Balance Sheets
Statement of Cash Flow/Cash Flow Statement
Accrual Adjusted Income Statement
Statement of Owner Equity
All cash inflows are not income
Expense
All cash outflows are not expenses
You can have non-cash expenses
You can have non-cash income
Versus
Expenditure
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Balance Sheets
Left Side
Current Assets
Long Term Assets
Intermediate
Long Term
Right Side
Current Liabilities
Long Term Liabilities
Intermediate
Long Term
Total Assets
Total Liabilities
(Assets - Liabilities) = Net Worth
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Cash Flow Statement
Cash Inflows
Cash Income
+ Other Inflows
Cash Outflows
Cash Expense
+ Other Outflows
= Total Cash Inflows
= Total Cash Outflows
(Inflows - Outflows) = Net Cash Flow
       Profit
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Critical: Some inflows are not income and
some outflows are not expenses
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Accrual Adjusted Income Statement
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Cash Income
+ Non-cash Income
= Gross Income/Revenue
Cash Expense
+ Non-cash Expense
= Total Expense
Net Income (Gross Income - Total Expense) =
Profit
Profit

Net Cash Flow or Taxable Income
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Statement of Owner Equity
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Beginning Owner Equity
+ Net Income
Balancing a Checkbook
- Withdrawals
Beginning Equity
+ Contributions
+/- Activity
= Ending Equity
- Distributions
+/- Change in Valuation
= Ending Owner Equity
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Topics for Examination
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Withdrawals
Government Payments
Cost of Production
Debt Load (asset and liability structure)
Contributed capital
Distributed capital
Asset revaluation
Capital asset purchase
Non-business income
Non-cash income
Non-cash expense (not depreciation)
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Withdrawals
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Note the:
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Net worth (equity) on the balance sheet and the change
is equity from beginning to end of year
Note net income (Accrual Adjusted Income Statement)
The relationship between cash flow and the balance
sheet, follow the red arrows.
Change family withdrawals to zero
What is relationship of Net Income and change in
equity
What does this tell us about how equity growth in
the business MUST occur
Change family withdrawals back to $30,000
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Government Payments
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Note current profit levels and cash flow
position
Reduce/eliminate government payments on
crops
Effects on cash flow, net income, equity
Implications for profit
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Stop – What is Profit?
Implications for the size of the business
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Where is the risk?
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Cost of Production
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Implications for this operation
Do you know your cost of production??????
If you can not measure it, you can not
manage it
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Enterprise record keeping system with Quicken or
Quickbooks
Spreadsheets that allow you to allocate income and
expenses to enterprises
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Debt Load
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Starting with approximately 20% debt load
What is the debt load that can be carried by
an operation this size?
What about debt structure?
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Short vs long term debt
How does family living withdrawal effect debt
carrying capacity?
Crop vs Livestock operations
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Contributed Capital
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What is contributed capital?
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Capital not generated by the operation but given
to the operation to support our farming habit
Off farm income (wages/salary)
Nonbusiness income (dividends, etc.)
Gifts, inheritances, etc.
Effects of contributed capital on:
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Equity
Profits
Cash Flow
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Distributed Capital
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What is distributed capital?
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Capital taken out of the operation
Effects of distributed capital on:
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Equity - Short term vs long term
Profits - Short term vs long term
Cash flow - Short term vs long term
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Asset Revaluation
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Assets are occasionally revalued to reflect
inflationary pressures
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Machinery, land, buildings, improvements,
breeding livestock
This is necessary to accurately reflect the
true value of these assets
Caution: Do not let yourself misinterpret this
increase in equity
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Is not due to business performance
Can be very misleading to those unaware
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Capital Asset Purchase
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Question: Will purchasing a new capital asset
increase your net worth?
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What is affected
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Pickup, new bull, combine, center pivot, etc.
Ending asset balance, ending liabilities, cash inflows and
cash outflows, net income
Bottom line, You CAN NOT buy equity
Equity or growth in equity must be earned
The only way to do this is make the new asset earn
additional revenue and/or save costs
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Increase net income
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Non Business Income
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Income not generated by business assets
Types of non business income
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Off farm wages
Non farm earnings (interest, dividends, etc)
Interest earned on a farm business checking
account would be considered business
income.
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Non-Cash Income
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Non-cash income adjustments are made on
the Accrual Adjusted Income Statement to
reflect changes in Current Asset values on
the beginning and ending balance sheet.
Include changes in:
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Crops Held for Sale
Market Livestock
Other Current Assets
Cash Invested in Growing Crops
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Non-Cash Expense (Not Depreciation)
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Non-cash expense adjustments are made on
the Accrual Adjusted Income Statement to
reflect changes in Current Asset and Current
Liabilities section of the beginning and
ending balance sheet.
On the Current Asset side
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Crops Held for Feed, Cash Invested in Growing
crops and Supplies & Prepaid Expenses are
adjusted as expense
On the Current Liability side
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Accounts payable, Other current Liabilities
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Summary
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You MUST know how to measure your
Financial Business Performance
Must be efficient
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Maximize output per unit of input
Often we try to maximize just output
Low cost producer
The right size producer (minimum size)
Family matters
Manage marketing, production, family risk
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Financial analysis measures the impact of these
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Business Performance?
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What do we use to measure this?
What are the best tool(s) to use?
What is the key to your survivability?
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Profits
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Profits  Net Cash Flow (Positive or Negative)
Profits  Taxable Income
If you can’t measure it, you can’t manage it!!
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Your Business Must Produce Net Worth Internally
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Every dollar of income goes towards
increasing net worth
Every dollar of expense goes towards
decreasing net worth
If you only have external growth in Net
Worth; puts you on shaky ground
You must be profitable
Profitable enough to pay for:
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Family Living , Debt Principal, Savings,
Reinvestment, Retirement
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Accrual Adjusted Financials:
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Catch problems with:
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Inventory sell down to manage cash needs
Selling capital asset base, your manufacturing
plant (livestock, machinery, land, etc.)
Capital distributions
Unearned equity increases
Allows accurate business performance
evaluation for each time period
Just simply keeps you out of trouble
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Will not be easy the first time through
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Must do your own detailed analysis
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http://www.montana.edu/extensionecon
Then click Farm Management
Then click Software Downloads
“RDFinancial” = Readers Digest Version
“WFBudgets” = Intermediate version
“Financial Statements” = Very detailed
“Machines” = Enterprise budgeting for crops
“CCFS” = Cow-Calf, Feeder, Stocker
enterprise budgeting
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How To Get There
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What is your business plan
Do you have a management team to help
with
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Production decisions
Marketing decisions
Financial analysis
What are communications like among team
members?
Are there team members missing that are
critical to the overall success of the business?
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What is Your Plan?
Production
Financial
Marketing
Is it written?
Has it been Shared?
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The End
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Part Two or separate show
Presenters
The next few slides can be used to
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Sprinkle in the previous set of slides for emphasis
or additional support material
As a stand alone presentation on the financial
condition of ag and ag families
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Who, why, what, where, how
As a “phase two” of the first set of slides in this
presentation.
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Recent Research
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Rural Population Growth, 1950 – 1990: The
Roles of Human Capital, Industry Structure,
and Government Policy, American Journal Ag
Econ., August 2002
Summarize key findings
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Key Factors for Shifting Rural Populations
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Differential income levels between rural farm
and nonfarm populations
Young farm population has a wider gap in
urban-rural returns to human capital than
older farm or nonfarm populations
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Translations, young people can earn more over
their lifetime in nonfarm employment
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Key Factors Continued
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Increased rural education levels has retarded
rural population growth.
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Young working age population particularly
sensitive
No evidence that rural investment in public
services will attract new residents
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Raising taxes, increase gov. debt for this activity
may actually decrease rural population
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Other Recent Research Results
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Income,Wealth, and the Economic WellBeing of Farm Households. ERS, July 2002
Main Findings Summarized
See “Farm Household Earnings 2003.xls” to
review recently reported data in ERS: Farm
income and costs: farm income forecasts
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Finding #1
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Farm households are no different than
other households in pursuing two careers
and diversifying earnings.
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More than half of all U.S. farm operators work offfarm
80 percent of these working full-time jobs.
Nearly half of all spouses are also employed off the
farm.
Off-farm work is no longer viewed as a transitional
position between the agricultural and the industrial
economy, but as a lifestyle choice, with farming as a
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second job or investment. Montana State University
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Sources of Farm Household Income by
Farm Typology 2001 - 2002
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Farm Operators Reporting Off Farm Work
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Finding #2
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The farm business as a source of income
has played an increasingly smaller role in
determining the well-being of farm
households.
Nearly 90 percent of total farm household
income in 1999 originated from off-farm
sources.
The contribution of earned income (off-farm)
alone amounted to 53 percent of total farm
household income.
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Sources & Share of Total Household Income
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Household Income Trend
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Finding #3
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While farm business income exhibits
considerable variability, farm household
income is relatively stable.
Fluctuations in farm output, commodity
prices, business cycles, Government policy
all contribute to the variability in farm income.
Since these factors are beyond any farmer’s
control, many farm households have relied
successfully on off-farm income to stabilize
their total household income.
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Income Variability in Farm and All US
Households
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Finding #4
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While the age and status of the farm
operator (life cycle) most determines the
level and sources of household income
and wealth, farm type and size, operator
education, farm tenure, and family size
also factor in.
Of the contributing factors, perhaps most
significant is the size of the farming
operation.

I would add, as a personal observation, the
family structure imposed on the Ag resource base
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Finding #5
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Income available to farm households can
support a standard of living equal to or
above that of nonfarm households.
Associated with the considerable rise in total
farm household income in recent years have
been a rise in expenditures (on goods and
services) and a rise in savings and/or
investments.
Farm households, on average, are better
able to support their consumption needs with
income.
53
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Net Farm Income & Off Farm Income
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Average Income of Farm & Nonfarm
Households
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Finding #6
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Consumption expenditures of farm
households are lower than for all U.S.
households.
Farm household expenditures appear to be
lower than nonfarm household expenditures,
even when the analysis controlled for
differences in income, age, location, and size
of farm.
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Income and Expense for Farm and NonFarm
Households
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Finding #7
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For most nonfarm households owning
businesses, the business is the main
source of income; for most farm
proprietorship households, the farm
detracts from total household income.
Based on either median or average incomes,
farm operator households are now on par
with all U.S. households.
Closing the income gap has been
substantially driven by the increase in income
from off farm sources.
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Finding #7
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continuted
Despite the convergence of the income
levels, farm businesses were much more a
household liability than nonfarm businesses.
For more than 60 percent of farm households
in 1998, the business was a detriment to a
household’s before tax-income.
Only 4 percent of nonfarm businesses
incurred income-reducing losses.
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Finding #8
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Despite conventional thinking, farm
households are not financially
disadvantaged compared with other U.S.
households.
Almost half of farm households have both
higher incomes and greater wealth than U.S.
households as a whole.
Of these households, 98 percent reported
household income greater than consumption
expenditures.
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Finding #9
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Average wealth of farm households has
increased, and farm households have
broadened their portfolio to include more
nonfarm investments.
Nominal wealth of the average farm
household grew by 54 percent over 1993-99.
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Source of Farm Household Wealth
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Finding #10
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Even for farms located in rural areas, offfarm income is still the dominant source
of household earnings.
Income and wealth of farm households based
on the location of the farm follow a similar
pattern.
Households in or near a metro area tend to
be significantly better off than nonmetro
households.
Farm households in metro areas depend
heavily on off-farm income (95 percent of
total income). Through their offfarm work,
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Summary of Findings
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Taken together, these findings demonstrate
that it is no longer suitable to class all farm
households together and consider them
either disadvantaged or without financial
problems.
While the economic well-being of most
farm households eclipses that of all
households, 6 percent of farm households
clearly remain disadvantaged relative to
both the farm and nonfarm population in
terms of their low income and wealth.
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Economic Well being of Farm Households
Compared to All US Households
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More Research
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The Main Street Economist: Commentary on
the rural Economy, November 2002
Rural America referred to as the “fly-over
states”
Rural counties hold 19.2% of all US
businesses but receive only 1.6% of venture
capital investments
Bottom line, income potential is critical to
draw venture capital investment
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Emphasis on Financial Analysis


Must measure business performance
Do this with Complete set of Financial
Statements
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Measure
Measure
Measure
Measure
Measure
Affects of physical production decisions
changes in market structure, prices
changes in government support
changes in family structure
changes in ……………..
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Survive in Ag Excel Template
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Complete set of Financial Statements
Used to provide “ball park” analysis and
teach financial analysis.
Can download at:
http://www.montana.edu/extensionecon
Then click on Farm Management
Then click on Software Downloads
Montana State University
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The End
Montana State University
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Statement Linkages
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What are the linkages among the financial
statements?
Purpose is to measure business performance
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What the business generates
Clearly identify business vs non-business activity

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Can be easier said than done
Identify the affects of non-business activity on
the business
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Economies of Size
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Profit is the key determinant in ability to
survive in the long run.
Economies of scale
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Low cost does not guarantee profit
Cut costs without hurting production
You must know where you are and what
must happen to help assure survivability

You must be able to measure profitability for all
enterprises
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Balance
Sheets
Financial
Statements
and
Accounts
Income
Statement
(accrual)
Assets
Liabilities
Equity
Cash Income
Non-cash Income
Cash Expense
Non-cash Expense
Types of Accounts
Assets Liabilities
Cash Flow
Statement
Asset
Liabilities
Income
Expense
Other Inflows/Outflows
Equity
Income
Expense
Statement of Owner Equity
Results from Balance Sheets
Results from Income Statement
Information from Cash Flow
Capital Contributions
Capital Distributions
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The Gold Nugget Affect
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Distribution of Farm Operator Households
by Measures of Economic Well Being
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Farm Operator and Spouse Career
Employment Choice
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Total Production Expenses, Including
Operator Dwelling
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Strategies for Cost Control by Farm Type
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Government Payments for Farms 2001
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Annual Change in Farm Equity 2002
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Sources of Farm Household Income
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