Agriculture & Business Management - Colorado State University ...
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<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Rod Sharp & Jeff Tranel<br />
<strong>Agriculture</strong> and <strong>Business</strong> <strong>Management</strong> Economists<br />
CCAA/Extension Professional Improvement Conference<br />
2009 November 17-19<br />
Salida, <strong>Colorado</strong>
1. Where am I?<br />
2. Where do I want to go?<br />
3. How can I best get there?<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Human Element<br />
◦ Likes/Dislikes<br />
◦ Aptitudes<br />
◦ Risk Tolerances<br />
◦ Willingness (to do things)<br />
◦ Skills<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Human Element<br />
Heirlooms<br />
◦ Land<br />
◦ Genetics (animals, seeds, etc.)<br />
◦ Community Involvement<br />
◦ Beliefs and Values<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Human Element<br />
Heirlooms<br />
<strong>Business</strong> Assets/Liabilities<br />
◦ Land<br />
◦ Machinery & Equipment<br />
◦ Animals<br />
◦ Other Assets<br />
◦ Debts<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Personal<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Spouse You Other Team<br />
Member(s)<br />
Family<br />
Farm<br />
Personal Personal<br />
Family<br />
Farm<br />
Team<br />
Inventory<br />
Family<br />
Farm
A projected state of affairs that a<br />
person or system plans to achieve<br />
Goals<br />
◦ Short, intermediate, and long term<br />
Ask ‘Why’<br />
◦ Sheds light on true reason for the goal<br />
◦ Enhances reflection and discussion<br />
(relationships)<br />
◦ Aids in determining “how to best get there”<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Specific<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Measurable<br />
Achievable<br />
Realistic<br />
Time Sensitive
Shows where you are going (road map)<br />
Makes it easier to get where<br />
you want to go<br />
Prepares you for the future<br />
Give purpose and directions to<br />
your decisions and actions<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Takes time<br />
It is a difficult task and<br />
may cause conflicts<br />
May appear to be a waste<br />
of time (if farmer/rancher<br />
fail to see the need for goals)<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
To make a profit on the farm every year.<br />
To reduce operating costs by $50 per acre by<br />
2011.<br />
To generate enough income to go on a vacation<br />
every year.<br />
To build a new house by 2015.<br />
To provide education for the children.<br />
To be a strong community leader.<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
The process of meeting your life goals through<br />
proper management of your finances.<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
l Capital Investment<br />
l Tractors/equipment<br />
l Irrigation systems<br />
l Breeding livestock<br />
l Plants/trees<br />
l Revenue<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
l Production yields<br />
l Market prices<br />
l Cost of production
l Complicated to analyze<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
l Generates returns over a long period of time
1. Economic Profitability of the Investment<br />
◦ payback period<br />
◦ simple rate of return<br />
◦ net present value<br />
2. Financial Feasibility<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Year<br />
Investment<br />
A<br />
Investment<br />
B<br />
Initial Cost $10,000 $10,000<br />
1 $2,500 $4,000<br />
2 $2,500 $4,000<br />
3 $2,500 $4,000<br />
4 $2,500 $0<br />
5 $2,500 $0<br />
6 $2,500 $0
1. Investment A<br />
2. Investment B<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Year<br />
Investment<br />
A<br />
Investment<br />
B<br />
Initial Cost $10,000 $10,000<br />
1 $2,500 $4,000<br />
2 4.0 Years $2,500 $4,000<br />
3 $2,500 $4,000<br />
4 $2,500 $0<br />
5 $2,500 $0<br />
6 $2,500 $0<br />
Total $15,000 $12,000<br />
2.5 Years
l Widely used<br />
l Has some disadvantages<br />
l Does not consider the time value of money<br />
l Difficult to compare to other investment options.<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Investment A:<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Year<br />
Investment<br />
A<br />
Investment<br />
B<br />
Rate = I – D = $2,500 - $1,667 = 8.33%<br />
Initial Cost O $10,000 $10,000 $10,000<br />
1 $2,500 $4,000<br />
2 $2,500 $4,000<br />
Investment 3 B: $2,500 $4,000<br />
Rate = 4 I – D = $4,000 $2,500 - $3,333 = $06.67%<br />
5 O $2,500 $10,000<br />
$0<br />
6 $2,500 $0<br />
Total $15,000 $12,000
l Superior analysis to payback period<br />
l Analyzes earnings over the entire expected life<br />
l Can be more easily compared to external criteria<br />
l Still has some disadvantages<br />
l Numerous methods are used to calculate<br />
l Does not consider the timing of the capital outlays and<br />
benefit stream<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Year<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Investment<br />
A<br />
Discount<br />
Factor 5%<br />
Present<br />
Value<br />
Initial Cost $10,000 1.0000 -$10,000<br />
1 $2,500 0.9524 $2,381<br />
2 $2,500 0.9070 $2,267<br />
3 $2,500 0.8638 $2,159<br />
4 $2,500 0.8227 $2,056<br />
5 $2,500 0.7835 $1,959<br />
6 $2,500 0.7462 $1,866<br />
Net Present Value<br />
$2,688
Year<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Investment<br />
B<br />
Discount<br />
Factor 5%<br />
Present<br />
Value<br />
Initial Cost $10,000 1.0000 -$10,000<br />
1 $4,000 0.9524 $3,810<br />
2 $4,000 0.9070 $3,628<br />
3 $4,000 0.8638 $3,455<br />
4 0.8227 $0<br />
5 0.7835 $0<br />
6 0.7462 $0<br />
Net Present Value<br />
$893
l One of the more desirable methods to evaluate<br />
investment alternatives<br />
l Reflects the time value of money<br />
l Reflects opportunity cost of having funds tied up in the<br />
investment<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
l Determines whether or not the investment will<br />
generate sufficient funds to make principal and<br />
interest payments on borrowed funds.<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
1. Liquidity<br />
2. Profitability<br />
3. Solvency<br />
4. Financial Efficiency
Measures the ability to generate sufficient cash<br />
inflow to pay your bills as they come due!<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Current Ratio<br />
Current Assets Current Liabilities<br />
Resilient greater than 1.5<br />
Caution 1.0 - 1.5<br />
Risk less than 1.0<br />
Working Capital<br />
Current Assets - Current Liabilities<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Measures the long run ability to pay all<br />
obligations and ability to withstand adversity!<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Debt to Asset Ratio<br />
Total Liabilities Total Assets<br />
Resilient less than .35<br />
Caution .35 to .50<br />
Risk greater than .50<br />
Equity to Asset Ratio<br />
Total Equity Total Assets<br />
Resilient greater than .60<br />
Caution .50 - .60<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Risk less than .50
Measures the ability of a firm to generate profits<br />
over a period of time!<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Rate of Return on Assets<br />
(NFIFO + Interest - OUL) Avg. Farm Assets<br />
Resilient greater than 6 percent<br />
Caution 3-6 percent<br />
Risk less than 3 percent<br />
Rate of Return on Equity<br />
(NFIFO - OUL) Average Farm Equity<br />
Resilient greater than 15 percent<br />
Caution 5 to 15 percent<br />
Risk less than 5 percent<br />
Net Farm Income<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Measures whether or not the physical resources<br />
of the farm business are being utilized and<br />
combined in a profitable manner.<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Asset Turnover Ratio<br />
Gross Revenue Average Farm Assets<br />
Resilient greater than .25<br />
Caution .10 to .25<br />
Risk less than .10<br />
Operating Expense Ratio<br />
Operating Expenses Gross Revenues<br />
Resilient less than .65<br />
Caution .65 to .80<br />
Risk greater than .80
Interest Expense Ratio<br />
Interest Expense Gross Revenues<br />
Resilient less than .10<br />
Caution .10 to .20<br />
Risk greater than .20<br />
Net Farm Income From Operations Ratio<br />
NFIFO Gross Revenues<br />
Resilient greater than .15<br />
Caution .05 to .15<br />
Risk less than .05<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
1. Farm profitability<br />
2. The ability of a business<br />
to generate enough cash<br />
to pay bills without<br />
disrupting the business.<br />
3. Long-term sustainability<br />
4. Investment profitability<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Farm profitability<br />
11%<br />
0% 0%<br />
The ability of a business...<br />
89%<br />
Long‐term sustainability<br />
Investment profitability
1. Cash flow is improving<br />
2. Cash flow is getting worse<br />
Remember: CA/CL<br />
Resilient: > 1.5<br />
Caution: 1.0-1.5<br />
Risk < 1.0<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Cash flow is improving<br />
10%<br />
Cash flow is getting worse<br />
90%
1. Farm profitability<br />
2. The ability of a business to<br />
generate enough cash to pay<br />
bills without disrupting the<br />
business.<br />
3. Long-term sustainability<br />
4. Investment profitability<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Farm profitability<br />
0% 0% 0%<br />
The ability of a business...<br />
Long‐term sustainability<br />
100%<br />
Investment profitability
1. Ratios are improving<br />
2. Ratios are getting worse<br />
Remember:<br />
Resilient: 0.50<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Ratios are improving<br />
70%<br />
Ratios are getting worse<br />
30%
1. Liquidity<br />
2. Solvency<br />
3. Profitability<br />
4. Financial efficiency<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Liquidity<br />
0%<br />
Solvency<br />
0%<br />
Profitability<br />
0%<br />
Financial efficiency<br />
100%
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Ag Survivor
• Definitions of Agricultural Enterprises<br />
• Common Traits<br />
• Alternative Enterprises<br />
• Factors for Success<br />
Section 1:<br />
<strong>Agriculture</strong> and Rural Enterprises<br />
48
Enterprise Relationships:<br />
One Relationship Can Impact the Other<br />
49
Strengths<br />
50
• Assessing Feasibility<br />
• Competitive Analysis<br />
• <strong>Business</strong> Planning<br />
Section 2: Selecting and Planning<br />
for Alternative Enterprises<br />
51
• Personal Assessment<br />
• Production Assessment<br />
• Market Assessment<br />
• Economic Assessment<br />
Assessing the Feasibility<br />
of Alternative Enterprises<br />
52
• Current Situation<br />
– Your business description<br />
– Description of target market<br />
• Competitive Analysis<br />
• Market Objectives<br />
• Market Strategies<br />
• Action Plans<br />
• Marketing Budget<br />
Marketing Plan<br />
53
• Risk Preferences<br />
• Sources of Risk<br />
• Risk <strong>Management</strong> Strategies<br />
• RightRisk Example<br />
Section 3:<br />
Assessing Risks<br />
54
• Risk Preferrers or Risk Takers<br />
Risk Preferences<br />
– More adventuresome individuals<br />
– Prefers more risky business alternatives<br />
– Willing to accept some probability of lower income or losses for the<br />
opportunity of higher income<br />
55
Authors:<br />
Trent Teegerstrom, <strong>University</strong> of Arizona<br />
John P. Hewlett, <strong>University</strong> of Wyoming<br />
Rodney L. Sharp, <strong>Colorado</strong> <strong>State</strong> <strong>University</strong><br />
Jeffrey E. Tranel, <strong>Colorado</strong> <strong>State</strong> <strong>University</strong><br />
Getting on Track:<br />
Better <strong>Management</strong> Through<br />
Basic Ag Records<br />
Why Keep Records?<br />
Basic Record Keeping: 5 Easy Steps<br />
Keeping Production Records<br />
Keeping Financial Records<br />
Schedule F<br />
Where Do I Go From Here?
Preserving the Tradition<br />
Meet the Burbanks…<br />
Family members:<br />
- Joe and Jane<br />
- Two children, David and Kath<br />
- Joe’s parents<br />
- Jane’s parents<br />
Joe and Jane both have off-ranch jobs<br />
in addition to the livestock enterprise.
Putting All Your Eggs in One Basket<br />
A Tale of Two Families<br />
The Wilsons<br />
• Expecting their first child<br />
• Dawn wants to stay home with the<br />
baby<br />
The Griffs<br />
• Have a three-year-old and one<br />
on the way<br />
• Jacob works in construction,<br />
Emily sells insurance
Putting All Your Eggs in One Basket<br />
Money Problems<br />
• Not enough income to offset operating<br />
expenses<br />
• Credit card balances are increasing<br />
• Lack of cash flow and increasing debt is<br />
a constant concern and causing stress<br />
in these marriages
Get the Max From Your Tax<br />
Meet the Family<br />
• Harlan and Lena Hoffstedtler live on 60<br />
acres about 20 minutes from town<br />
• Harlan commutes each day to his job in<br />
town<br />
• Lena cares for their three young<br />
children – ages 12, 9, and 8 – and<br />
manages their small farm
Get the Max From Your Tax<br />
Hoffstedtler Farm<br />
Counting Sheep:<br />
• Small flock of 25 white face ewes and one ram<br />
• Sheep graze on 50 acres<br />
Fresh from the Garden:<br />
• Five acres<br />
• Lena sells 3/4ths of the veggies and other crops<br />
at a roadside stand and the farmer’s market<br />
• The Hoffstedtler’s oldest daughter helps out<br />
selling the vegetables
4-H Gone Hog Wild<br />
How It All Began…<br />
The Family:<br />
• Dad works as a radiologist at a hospital in<br />
town<br />
• Mom works as a dental hygienist<br />
• The family works the farm in the evenings<br />
and on weekends<br />
• Juan showed an early interest in caring for<br />
the animals
Authors:<br />
Trent Teegerstrom, <strong>University</strong> of Arizona<br />
John P. Hewlett, <strong>University</strong> of Wyoming<br />
Rodney L. Sharp, <strong>Colorado</strong> <strong>State</strong> <strong>University</strong><br />
Jeffrey E. Tranel, <strong>Colorado</strong> <strong>State</strong> <strong>University</strong><br />
Getting on Track:<br />
Better <strong>Management</strong> Through<br />
Basic Ag Records
Section 1: Definition of a Farm<br />
Section 2: Importance of Records<br />
Section 3: Farm Income<br />
Section 4: Farm Expenses<br />
Section 5: Strategies for Managing Tax Liability
Form 1040 Schedule F Expenses<br />
65
Depreciation Calculation<br />
• What if you took a section 170 allowance?<br />
• Assume you purchase a machine, such as a tractor, for<br />
$125,000<br />
66
Increase Taxable Income<br />
• Here are some reasons why someone might want to increase<br />
taxable income:<br />
67
Authors:<br />
Rodney L. Sharp, <strong>Colorado</strong> <strong>State</strong> <strong>University</strong> Extension<br />
John P. Hewlett, <strong>University</strong> of Wyoming Extension<br />
Jeffrey E. Tranel, <strong>Colorado</strong> <strong>State</strong> <strong>University</strong> Extension
Learning Objectives<br />
In this section, you will:<br />
• Identify the five sources of<br />
agricultural risk<br />
• Review the different types of<br />
farm insurance programs<br />
69
History of Federal Crop Insurance<br />
70
Traditional Insurance Products<br />
71
The Claims Process<br />
72
Claims Processing Example<br />
73
www.coopext.colostate.edu/ABM/
www.coopext.colostate.edu/ABM/
www.coopext.colostate.edu/ABM/
www.coopext.colostate.edu/ABM/
Topics<br />
◦ Where am I? (Financial Risks)<br />
Financial statements<br />
Costs of production<br />
Sources of risk<br />
Risk preferences<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Topics<br />
◦ Where am I? (Financial Risks)<br />
◦ Where do I want to be?<br />
Goal setting – personal and business<br />
Succession planning (Lasting Legacy course)<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Topics<br />
◦ Where am I? (Financial Risks)<br />
◦ Where do I want to be?<br />
◦ Alternative management strategies<br />
Insurance products<br />
Record keeping<br />
Income tax issues<br />
<strong>Business</strong> planning<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong>
Format<br />
◦ Workshops<br />
◦ Adobe Connect<br />
Tools<br />
◦ Personal Response System (clickers)<br />
◦ RightRisk Ag Survivor<br />
◦ “Family” discussions<br />
◦ Worksheets (electronic and hardcopy)<br />
Team<br />
◦ Jeff Tranel, John Deering, Rod Sharp,<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
◦ John Hewlett, Rodney Jones<br />
$700 for<br />
each of two<br />
host<br />
counties
1. Phenomenal<br />
2. Great<br />
3. Outstanding<br />
4. Fabulous<br />
5. Awesome<br />
6. Terrific<br />
7. Beyond Belief<br />
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Phenomenal<br />
14% 14% 14% 14% 14% 14% 14%<br />
Great<br />
Outstanding<br />
Fabulous<br />
Awesome<br />
Terrific<br />
Beyond Belief
<strong>Agriculture</strong> &<br />
<strong>Business</strong><br />
<strong>Management</strong><br />
Rod Sharp<br />
Rod.Sharp@colostate.edu<br />
Rod Sharp<br />
Rod.Sharp@colostate.edu<br />
Jeffrey E. E. Tranel Tranel<br />
jtranel@colostate.edu<br />
jtranel@colostate.edu