Agriculture & Business Management - Colorado State University ...

Agriculture & 

Business 

Management 

Rod Sharp & Jeff Tranel 

Agriculture and Business Management Economists 

CCAA/Extension Professional Improvement Conference 

2009 November 17-19 

Salida, Colorado

1. Where am I? 

2. Where do I want to go? 

3. How can I best get there? 



Management

Human Element 

◦ Likes/Dislikes 

◦ Aptitudes 

◦ Risk Tolerances 

◦ Willingness (to do things) 

◦ Skills 




Human Element 

Heirlooms 

◦ Land 

◦ Genetics (animals, seeds, etc.) 

◦ Community Involvement 

◦ Beliefs and Values 




Human Element 

Heirlooms 

Business Assets/Liabilities 

◦ Land 

◦ Machinery & Equipment 

◦ Animals 

◦ Other Assets 

◦ Debts 




Personal 




Spouse You Other Team 

Member(s) 

Family 

Farm 

Personal Personal 

Family 

Farm 

Team 

Inventory 

Family 

Farm

A projected state of affairs that a 

person or system plans to achieve 

Goals 

◦ Short, intermediate, and long term 

Ask ‘Why’ 

◦ Sheds light on true reason for the goal 

◦ Enhances reflection and discussion 

(relationships) 

◦ Aids in determining “how to best get there” 




Specific 




Measurable 

Achievable 

Realistic 

Time Sensitive

Shows where you are going (road map) 

Makes it easier to get where 

you want to go 

Prepares you for the future 

Give purpose and directions to 

your decisions and actions 




Takes time 

It is a difficult task and 

may cause conflicts 

May appear to be a waste 

of time (if farmer/rancher 

fail to see the need for goals) 




To make a profit on the farm every year. 

To reduce operating costs by $50 per acre by 

2011. 

To generate enough income to go on a vacation 

every year. 

To build a new house by 2015. 

To provide education for the children. 

To be a strong community leader. 




The process of meeting your life goals through 

proper management of your finances. 







l Capital Investment 

l Tractors/equipment 

l Irrigation systems 

l Breeding livestock 

l Plants/trees 

l Revenue 




l Production yields 

l Market prices 

l Cost of production

l Complicated to analyze 




l Generates returns over a long period of time

1. Economic Profitability of the Investment 

◦ payback period 

◦ simple rate of return 

◦ net present value 

2. Financial Feasibility 







Year 

Investment 

A 

Investment 

B 

Initial Cost $10,000 $10,000 

1 $2,500 $4,000 

2 $2,500 $4,000 

3 $2,500 $4,000 

4 $2,500 $0 

5 $2,500 $0 

6 $2,500 $0

1. Investment A 

2. Investment B 







Year 

Investment 

A 

Investment 

B 

Initial Cost $10,000 $10,000 

1 $2,500 $4,000 

2 4.0 Years $2,500 $4,000 

3 $2,500 $4,000 

4 $2,500 $0 

5 $2,500 $0 

6 $2,500 $0 

Total $15,000 $12,000 

2.5 Years

l Widely used 

l Has some disadvantages 

l Does not consider the time value of money 

l Difficult to compare to other investment options. 




Investment A: 




Year 

Investment 

A 

Investment 

B 

Rate = I – D = $2,500 - $1,667 = 8.33% 

Initial Cost O $10,000 $10,000 $10,000 

1 $2,500 $4,000 

2 $2,500 $4,000 

Investment 3 B: $2,500 $4,000 

Rate = 4 I – D = $4,000 $2,500 - $3,333 = $06.67% 

5 O $2,500 $10,000 

$0 

6 $2,500 $0 

Total $15,000 $12,000

l Superior analysis to payback period 

l Analyzes earnings over the entire expected life 

l Can be more easily compared to external criteria 

l Still has some disadvantages 

l Numerous methods are used to calculate 

l Does not consider the timing of the capital outlays and 

benefit stream 




Year 




Investment 

A 

Discount 

Factor 5% 

Present 

Value 

Initial Cost $10,000 1.0000 -$10,000 

1 $2,500 0.9524 $2,381 

2 $2,500 0.9070 $2,267 

3 $2,500 0.8638 $2,159 

4 $2,500 0.8227 $2,056 

5 $2,500 0.7835 $1,959 

6 $2,500 0.7462 $1,866 

Net Present Value 

$2,688

Year 




Investment 

B 

Discount 

Factor 5% 

Present 

Value 

Initial Cost $10,000 1.0000 -$10,000 

1 $4,000 0.9524 $3,810 

2 $4,000 0.9070 $3,628 

3 $4,000 0.8638 $3,455 

4 0.8227 $0 

5 0.7835 $0 

6 0.7462 $0 

Net Present Value 

$893

l One of the more desirable methods to evaluate 

investment alternatives 

l Reflects the time value of money 

l Reflects opportunity cost of having funds tied up in the 

investment 







l Determines whether or not the investment will 

generate sufficient funds to make principal and 

interest payments on borrowed funds. 







1. Liquidity 

2. Profitability 

3. Solvency 

4. Financial Efficiency

Measures the ability to generate sufficient cash 

inflow to pay your bills as they come due! 




Current Ratio 

Current Assets Current Liabilities 

Resilient greater than 1.5 

Caution 1.0 - 1.5 

Risk less than 1.0 

Working Capital 

Current Assets - Current Liabilities 




Measures the long run ability to pay all 

obligations and ability to withstand adversity! 




Debt to Asset Ratio 

Total Liabilities Total Assets 

Resilient less than .35 

Caution .35 to .50 

Risk greater than .50 

Equity to Asset Ratio 

Total Equity Total Assets 

Resilient greater than .60 

Caution .50 - .60 




Risk less than .50

Measures the ability of a firm to generate profits 

over a period of time! 




Rate of Return on Assets 

(NFIFO + Interest - OUL) Avg. Farm Assets 

Resilient greater than 6 percent 

Caution 3-6 percent 

Risk less than 3 percent 

Rate of Return on Equity 

(NFIFO - OUL) Average Farm Equity 

Resilient greater than 15 percent 

Caution 5 to 15 percent 

Risk less than 5 percent 

Net Farm Income 




Measures whether or not the physical resources 

of the farm business are being utilized and 

combined in a profitable manner. 







Asset Turnover Ratio 

Gross Revenue Average Farm Assets 



Risk less than .10 

Operating Expense Ratio 

Operating Expenses Gross Revenues 



Risk greater than .80

Interest Expense Ratio 

Interest Expense Gross Revenues 



Risk greater than .20 

Net Farm Income From Operations Ratio 

NFIFO Gross Revenues 



Risk less than .05 







1. Farm profitability 

2. The ability of a business 

to generate enough cash 

to pay bills without 

disrupting the business. 

3. Long-term sustainability 

4. Investment profitability 




Farm profitability 

11% 

0% 0% 

The ability of a business... 

89% 

Long‐term sustainability 

Investment profitability

1. Cash flow is improving 

2. Cash flow is getting worse 

Remember: CA/CL 

Resilient: > 1.5 

Caution: 1.0-1.5 

Risk < 1.0 




Cash flow is improving 

10% 

Cash flow is getting worse 

90%

1. Farm profitability 

2. The ability of a business to 

generate enough cash to pay 

bills without disrupting the 

business. 

3. Long-term sustainability 

4. Investment profitability 




Farm profitability 

0% 0% 0% 

The ability of a business... 

Long‐term sustainability 

100% 

Investment profitability

1. Ratios are improving 

2. Ratios are getting worse 

Remember: 

Resilient: 0.50 




Ratios are improving 

70% 

Ratios are getting worse 

30%

1. Liquidity 

2. Solvency 

3. Profitability 

4. Financial efficiency 




Liquidity 

0% 

Solvency 

0% 

Profitability 

0% 

Financial efficiency 

100%







Ag Survivor

• Definitions of Agricultural Enterprises 

• Common Traits 

• Alternative Enterprises 

• Factors for Success 

Section 1: 

Agriculture and Rural Enterprises 

48

Enterprise Relationships: 

One Relationship Can Impact the Other 

49

Strengths 

50

• Assessing Feasibility 

• Competitive Analysis 

• Business Planning 

Section 2: Selecting and Planning 

for Alternative Enterprises 

51

• Personal Assessment 

• Production Assessment 

• Market Assessment 

• Economic Assessment 

Assessing the Feasibility 

of Alternative Enterprises 

52

• Current Situation 

– Your business description 

– Description of target market 

• Competitive Analysis 

• Market Objectives 

• Market Strategies 

• Action Plans 

• Marketing Budget 

Marketing Plan 

53

• Risk Preferences 

• Sources of Risk 

• Risk Management Strategies 

• RightRisk Example 

Section 3: 

Assessing Risks 

54

• Risk Preferrers or Risk Takers 

Risk Preferences 

– More adventuresome individuals 

– Prefers more risky business alternatives 

– Willing to accept some probability of lower income or losses for the 

opportunity of higher income 

55

Authors: 

Trent Teegerstrom, University of Arizona 

John P. Hewlett, University of Wyoming 

Rodney L. Sharp, Colorado State University 

Jeffrey E. Tranel, Colorado State University 

Getting on Track: 

Better Management Through 

Basic Ag Records 

Why Keep Records? 

Basic Record Keeping: 5 Easy Steps 

Keeping Production Records 

Keeping Financial Records 

Schedule F 

Where Do I Go From Here?

Preserving the Tradition 

Meet the Burbanks… 

Family members: 

- Joe and Jane 

- Two children, David and Kath 

- Joe’s parents 

- Jane’s parents 

Joe and Jane both have off-ranch jobs 

in addition to the livestock enterprise.

Putting All Your Eggs in One Basket 

A Tale of Two Families 

The Wilsons 

• Expecting their first child 

• Dawn wants to stay home with the 

baby 

The Griffs 

• Have a three-year-old and one 

on the way 

• Jacob works in construction, 

Emily sells insurance

Putting All Your Eggs in One Basket 

Money Problems 

• Not enough income to offset operating 

expenses 

• Credit card balances are increasing 

• Lack of cash flow and increasing debt is 

a constant concern and causing stress 

in these marriages

Get the Max From Your Tax 

Meet the Family 

• Harlan and Lena Hoffstedtler live on 60 

acres about 20 minutes from town 

• Harlan commutes each day to his job in 

town 

• Lena cares for their three young 

children – ages 12, 9, and 8 – and 

manages their small farm

Get the Max From Your Tax 

Hoffstedtler Farm 

Counting Sheep: 

• Small flock of 25 white face ewes and one ram 

• Sheep graze on 50 acres 

Fresh from the Garden: 

• Five acres 

• Lena sells 3/4ths of the veggies and other crops 

at a roadside stand and the farmer’s market 

• The Hoffstedtler’s oldest daughter helps out 

selling the vegetables

4-H Gone Hog Wild 

How It All Began… 

The Family: 

• Dad works as a radiologist at a hospital in 

town 

• Mom works as a dental hygienist 

• The family works the farm in the evenings 

and on weekends 

• Juan showed an early interest in caring for 

the animals

Authors: 

Trent Teegerstrom, University of Arizona 

John P. Hewlett, University of Wyoming 

Rodney L. Sharp, Colorado State University 

Jeffrey E. Tranel, Colorado State University 

Getting on Track: 

Better Management Through 

Basic Ag Records

Section 1: Definition of a Farm 

Section 2: Importance of Records 

Section 3: Farm Income 

Section 4: Farm Expenses 

Section 5: Strategies for Managing Tax Liability

Form 1040 Schedule F Expenses 

65

Depreciation Calculation 

• What if you took a section 170 allowance? 

• Assume you purchase a machine, such as a tractor, for 

$125,000 

66

Increase Taxable Income 

• Here are some reasons why someone might want to increase 

taxable income: 

67

Authors: 

Rodney L. Sharp, Colorado State University Extension 

John P. Hewlett, University of Wyoming Extension 

Jeffrey E. Tranel, Colorado State University Extension

Learning Objectives 

In this section, you will: 

• Identify the five sources of 

agricultural risk 

• Review the different types of 

farm insurance programs 

69

History of Federal Crop Insurance 

70

Traditional Insurance Products 

71

The Claims Process 

72

Claims Processing Example 

73

www.coopext.colostate.edu/ABM/




Topics 

◦ Where am I? (Financial Risks) 

Financial statements 

Costs of production 

Sources of risk 

Risk preferences 




Topics 


◦ Where do I want to be? 

Goal setting – personal and business 

Succession planning (Lasting Legacy course) 




Topics 


◦ Where do I want to be? 

◦ Alternative management strategies 

Insurance products 

Record keeping 

Income tax issues 

Business planning 




Format 

◦ Workshops 

◦ Adobe Connect 

Tools 

◦ Personal Response System (clickers) 

◦ RightRisk Ag Survivor 

◦ “Family” discussions 

◦ Worksheets (electronic and hardcopy) 

Team 

◦ Jeff Tranel, John Deering, Rod Sharp, 




◦ John Hewlett, Rodney Jones 

$700 for 

each of two 

host 

counties

1. Phenomenal 

2. Great 

3. Outstanding 

4. Fabulous 

5. Awesome 

6. Terrific 

7. Beyond Belief 




Phenomenal 

14% 14% 14% 14% 14% 14% 14% 

Great 

Outstanding 

Fabulous 

Awesome 

Terrific 

Beyond Belief




Rod Sharp 

Rod.Sharp@colostate.edu 

Rod Sharp 

Rod.Sharp@colostate.edu 

Jeffrey E. E. Tranel Tranel 

jtranel@colostate.edu 

jtranel@colostate.edu

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