Farm Finance Analysis Kit

Analysis Starts With Goals

An important first step in financial analysis is understanding your goals. Many people take their goals for granted, preferring to move into the "nuts and bolts" of their finances without a clear understanding of what they want to achieve.

True farm analysis begins with a map of what you are trying to do. Only then will the financial indicators you calculate be useful to analyse the situation and make decisions for your next course of action.

What is the goal of your operation? Only you can decide. There are many possibilities: expanding the existing operation, diversifying into a new profit centre, downsizing for more leisure time. There are personal and business elements of your goals too, which have to be considered and accommodated. The important thing is to understand where you are going and how you will know when you get there. A full discussion of goal setting and planning is beyond the scope of this analysis kit. Your FCC Relationship Manager or other farm finance professional can help. In addition, there are many excellent publications dealing with goal setting and business planning.

This kit is designed as an educational tool only. Please review the information below regarding the financial indicators in the kit, as well as the Legal Notices pertaining to the kit and this Website.

About the financial indicators in this kit.

Tips for using Farm Finance Analysis Kit

Go between steps using the "Step" buttons provided.
Our Farm Finance Analysis Kit allows you to compare your ratios to similar operations in your region by choosing your Region and Enterprise in Step 1. If you do not choose a Region or Enterprise, all ratios produced will still be correct based on the numbers you provide.
You may save the results of your calculations by printing each step after completing the calculations.
Click on links for definitions or additional information.

Step 1: Gathering The Important Information

If you have been keeping good records or have had an accountant do it for you, you likely have all of the information you need. Your up-to-date Balance Sheet and Income Statement is all that you require. If you are unsure your records are accurate, or if your books are in the right format to analyse, your FCC Relationship Manager or accountant can help.

The source of the Provincial and Enterprise averages that are used in this kit is: Farm Financial Survey, 2006 by Statistics Canada Agriculture Division

Step 2: Analyse your liquidity

When finance professionals look at your balance sheet, one key indicator they look for is liquidity. One measure used to indicate liquidity is the Current Ratio. A Current Ratio of 3.4 means that you have $ 3.40 of current assets for each $ 1.00 of current liabilities.

Average Current Ratio is for in

enterprises.

Below Average Average Above Average

Possible Improvement Strategies

Current Assets:
$

Current Liabilities:
$

Current Ratio:

Step 3: Analyse the solvency of your operation

The second important indicator from the balance sheet is called Solvency by financial professionals. Solvency measures the ability of a farm to pay off all its debts if liquidated.

You can get a good indication of your solvency by determining the amount of Equity you have in your operation. Equity is Total Assets minus Total Liabilities. To obtain a percentage, divide Equity by Total Assets.

Average Equity is for in

enterprises.

Below Average Average Above Average

Possible Improvement Strategies

Current Assets:
$

Long-Term Assets:
$

Current Liabilities:
$

Long-Term Liabilities:
$

Equity Percentage:

Step 4: Assess the profitability of your operation - return on assets Profitability measures use the balance sheet and the income statement. They reflect the ongoing ability of the business to generate income for the owner. Return on Assets is a measure of the ability of the operation to generate income from the assets it owns. For the measure to be comparable to other investment possibilities, it has to measure all of the income provided by the assets. For that reason, Interest Expense is added to the net income.
Calculate Your Net Income After Taxes:	Calculate Your Average Total Assets:	Calculate Your Return on Assets:
Gross Income: $ Variable Costs: $ Fixed Costs: $ Current Unpaid Family and Operator Labour: $ Income Tax Expense: $ Net Income After Taxes: $	Beginning Year Assets: $ Ending Year Assets: $ Average Total Assets: $	Net Income After Taxes: $ Average Total Assets: $ Return on Assets:

Step 5: Assess the efficiency of your operation

The Capital Turnover Ratio is another indicator of efficiency. It indicates the ability of the farm to generate income by using its assets.

Average Capital Turnover Ratio is: for

in enterprises.

Below Average Average Above Average

Possible Improvement Strategies

Gross Income:
$

Average Total Assets:
$

Capital Turnover Ratio:

Step 6: The profitability of your operation
Net Profit Margin

Capital turnover is only part of the profitability story. It measures volume of business. The other piece is profit margin, which measures how much of each dollar of revenue is retained as profit. When you have a low return on assets, the solution lies in increasing the volume (turnover) or the margin (or both).

Possible Improvement Strategies

Net Income After Taxes:
$

Gross Income:
$

Net Profit Margin:

Step 7: Assess your efficiency
Gross Margin Ratio

The Gross Margin Ratio is another way to check the financial efficiency of your operation. Net funds generated by the operation of the business are compared to the total revenue generated by operations.

Simply, it is the total value of the sales of the farm’s product less the variable costs spent to create that product. The larger the Gross Margin Ratio, the better.

Gross Income:
$

Variable Costs:
$

Gross Margin:

Gross Margin Ratio:

Step 8: Looking deeper

There are several more financial indicators that can be calculated to give you even more information about your operation. Generally speaking, more advanced ratios and indicators require more experience to apply and carry more limitations.

A good financial adviser can help you make the most of all of the indicators available to you. They can make sure that your analysis suits your operation and your goals.

Analysis is only the beginning – it gives you the information you need to set objectives and prepare an action plan so that your farm operation will provide you with the rewards you desire.

An FCC Relationship Manager Can Help

Making decisions to improve any area of your farm is a continuous process. In fact, good decision making is the foundation of successfully managing your farm. Good decision making requires good solid information, skillful analysis and a willingness to change.

Often a knowledgeable adviser can help the process along by adding skills, another viewpoint and knowledge gained from other operations.

At Farm Credit Canada, we have the people, the resources and the financial services to help you make sound financial decisions.

Because we are completely focused on agriculture, FCC Relationship Managers are among the most knowledgeable people in your community when it comes to farm business finances. They are a strategic resource you can use to help change your operation for the better.

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Farm Finance Kit