Financial Analysis
From A Lender’s Perspective
Editor’s Note: This is the sixth of a seven part series to explain how
Farm Credit analyzes farm and ranch businesses. A different aspect
of financial analysis is addressed
Net earnings the
barometer for your
future
Consider the farmer who is trying to answer
the simple question how did 1 do last
year 0 His cash flow statement shows a
542.000 shortfall while his earnings statement
shows net earnings of 517.000. Which one is
right 0 The answer they both are correct.
Knowing cash flow isn ’t enough
While cash flow analysis show's if there is
enough cash to pay bills in a given period, the
key to knowing the true profitability of a
business is to analyze its net earnings on an
accrual basis That means taking numbers
from cash income and expense records and
adjusting them for changes reflected on
balance sheets from year to year
Determining if an operation is profitable
requires the farmer to compare the cost of
production with the value of crops regard
less of when he paid the bills associated with
the crop or when the crop is sold.
For example, a farmer might prepay
fertilizer costs an expense that will be used
to generate income next year but shows up on
the cash flow statement this year. Or a farmer
may choose to hold crops produced in one
year and sell them in the next.
How to determine net earnings
Start with your actual cash flow which shows
the cash income you received and expenses
paid during a certain period of time. Adjusting
cash income begins with recognizing income
generated but not yet received. For example, if
the inventory' of crops or livestock you plan to
market is greater than it was last year at the
same time, that increase is income your farm
generated even though it has not been sold.
Income generated in prior years, but sold in
the period analyzed, must also be adjusted.
Cash expenses should be adjusted to
in each issue.
Numbers tell the story
CASHFLOW
Cash Accounting
Cub income $40,000
Cash expenses 82.000
Net cash income $( 42,000) Net accrual Income $17,000
consider supplies such as fertilizer or feed that
you have purchased but will not use until next
year. In other words, if an expense was
incurred for something that was not produced
during the penod of time you are measuring
profitability, it is not counted as an expense for
that period.
Interpreting the results
Once net earnings have been determined, the
next step is to look at how those earnings are
used, which usually falls into three
categories: family living expenses, reduction
of term debt, or changes in the net worth or
equity in the farm or ranch operation.
Analyzing net earnings is important in
evaluating your financial progress. When net
earnings are positive, you should be building
equity. Increased equity can reduce your need
to borrow, provide a cushion for adversity or
provide a financial base for expansion. ♦
Next week we will look at off-farm
income.
KSQMjfV thel
HScoular
c«o»m*p»a*n«y
Grain division
OPERATING
ATLAS GRAIN FACILITY
NORTHAMPTON, PA
BUYING AND SELLING
WHEAT
Picked Up and Delivered Bids Available
Prices Quoted for Spot or
Future Delivery
Prompt Payment
WE WANT TO BUY YOUR
NEW CROP WHEAT
ASK FOR BILL KRUEGER
(800) 487-1474
NET EARNINGS
Accrual Accounting
Caih income $40,000
Inventory
adjuilmenl 49.000
Accrual Income 89,000
83,000
Cash expenses
Accrual Adjustments
Unused
fertilizer
( 15,000)
Unpaid items 1.000
Accrual Expenses 68.000
Depreciation
Total expenses 72,000
FFA’ers Learn
(Conllnuod from Pago A 1)
Included at the conference were
workshops on the legislative pro
cess, college preparation, ag litera
cy, supervised ag experience/new
project ideas, fundraising ideas,
Use Vaccinations
They Are
For What
ELKTON, Md. Vaccinating
livestock is an inexpensive way to
assure healthy, productive animals
on your farm. Always work with
your veterinarian in designing a
vaccination schedule because each
farm is unique and a “typical”
recommendation won’t be the best
recommendation.
How do vaccines work? A true
vaccine lakes advantage of the ani
mals own immune system and sti
mulates it to produce antibodies
towards the disease. You give an
injection of the disease-causing
bacteria or virus into the healthy
animal and they react.
In a day or two your livestock
may seem sickly (fever, droppy
head, tired, no appetite, etc.) due to
the vaccination. This is normal as
long as the animal doesn’t become
extremely ill. Their bodies are
Fighting off the disease and, in the
process, producing antibodies
which will prevent serious out
breaks when they are exposed to
higher, more dangerous levels of
the disease.
Immunity doesn’t last forever.
Newborn animals which receive
adequate colostrum from their
mother’s first milk will receive
antibodies in a “passive” form.
This passive immunity will work
for about 6 months and then the
level drops off.
Now the young animal has to
produce it’s own antibodies; this is
known as “active immunity.”
Remember, though, the animal
will fight off only the diseases it is
exposed to.
Now you can see the potential
for problems when moving ani
mals from farm to farm, show to
show, because they will suddenly
be exposed to a wide variety of dis
eases all at once. Properly vacci
nated animals will carry resistance
to many common diseases.
BARTVILLE WELDING SHOP
1' ■ \i ‘N I'M < 1111 1(j ii i 1’ \ 1 'i lll ■a\ I Mil 1 111 1
Lancaster Farming, Saturday, May 22, 1993-A29
and others.
On Thursday, Kleiboekcr vis
ited many county FFA chapters to
speak to members about their roles
as FFA officers.
Why give booster shots? Here
again, the immunity doesn’t last
forever and multiple exposure to a
disease causes the animal to create
more antibodies and have greater
resistance. (Figure 1)
Vaccines come in different
forms. A live vaccine (LV) is
simply the “bug” in its normal
form. A modified live vaccine
(MLV) is a slightly changed
organism. The bactcria/virus may
have been healed, cooled down or
treated in some way that it is no
longer so dangerous.
A MLV vaccine will still cause a
reaction and the animal will pro
duce antibodies. A killed vaccine
(KV) is the safest form to work
with, but it might not cause the
greatest reaction and less antibo
dies will be made.
These different forms have dif
ferent advantages. Pregnant ani
mals could abort if given a LV or
MLV, so they must be given a KV
of certain diseases. Read the label
to be sure the vaccine is safe for
that animal.
One other factor to
remember young animals with
passive immunity will NOT react
to vaccinations well.
If you try injections at an early
age, the antibodies present from
the mother’s colostrum will fight
off the disease and no new antibo
dies will be produced. You Just
wasted your time and money.
Also, remember that animals
given the LV can “shed” the dis
ease. If you treated certain animals
and they come in contact with bred
animals, the pregnant animals
could pick up the disease and
abort.-Be careful!
Vaccinations are part of the
proper management of your lives
tock, but vaccinations arc not
perfect.