About the financial indicators in this kit
The financial indicators in this kit are basic financial ratios. They are enlightening, interesting, and can be very useful. However, you need to use caution when applying ratios. The indicators will be different for different types of operations. A feedlot and a cow/calf operation may be structured very differently financially. The numbers obtained by applying the ratios will differ. Ratios will vary through the business year. It is most helpful to do this analysis at the same time of year for a few years. The most helpful indications of ratios are the trends that develop over time. If in doubt about the use of ratios to examine your business, get professional help from a competent financial adviser.
Liquidity
Liquidity is the ability of the operation to meet its ongoing financial commitments without disrupting normal operations. Simply put, it is a measure of whether there is enough money available to pay the bills on time.
Balance Sheet
A current listing of your assets and liabilities.
Income Statement
A summary of the income and expenses for a full year
Current Ratio Calculation
Current Ratio = Current Assets ÷ Current Liabilities
Below Average (Current Ratio)
A below average Current Ratio indicates that you may find cash flow difficult, especially at key times during the year or business cycle. A below average Current Ratio is a clear signal of liquidity problems.
Average (Current Ratio)
An average Current Ratio indicates a workable condition, but flexibility in the operation may be limited to some degree.
Above Average (Current Ratio)
An above average Current Ratio indicates good liquidity. The operation has no trouble meeting routine obligations and has the financial flexibility to take advantage of opportunities that may arise. A word of caution: too high a ratio might indicate inefficient use of cash or liquid assets.
Possible Improvement Strategies (Current Ratio)
  • Ensure that debts are in the right category, ie. current assets (such as fertilizer) are being financed by current debt (such as operating credit or short-term loan), and long-term assets (such as land or buildings) are financed with term debt. Restructuring may be a useful tactic.
  • Sell an asset such as under-utilized machinery or land if absolutely necessary and use the money to pay off current debt.
  • Try to save a small portion of income for working capital over the next production cycle.
Equity
To calculate Equity, you basically list everything your business owns (current assets such as fertilizer and feed, along with long-term assets such as land, buildings and equipment), to obtain your Total Assets. Then list all your liabilities (everything your business owes), including the outstanding balance on mortgages, term loans, operating lines of credit, bills to be paid, etc., to obtain your Total Liabilities.
Below Average (Equity)
A below average percent Equity indicates a substantial level of debt financing. The operation may be vulnerable to high interest rates or prolonged periods of low commodity prices or unexpected occurrences such as fire or hail.
Average (Equity)
An average percent Equity indicates a workable situation. An average percent Equity can indicate that debt is being utilized to take advantage of growth opportunities. If the debt is well-placed for growth and is working to provide profitable opportunity, the owner’s equity is being utilized well. Risk is moderate; the operation can survive minor setbacks.
Above Average (Equity)
An above average percent Equity indicates a low risk situation. It may be that the owner’s equity is not positioned for optimum growth. However, the owner with high equity is in the most flexible position.
Possible Improvement Strategies (Equity)
  1. Curtail further expansion until equity increases.
  2. Sell an asset and use the money to reduce debt.
  3. Funnel income into reducing debt.
Operator Labour
The amount of income that is generated by the labour of the operator or the farm family must be deducted since that labour is in itself generating income.
Capital Turnover Ratio
This measure indicates the farm’s effectiveness at utilizing its capital to generate income. In general, the higher the number, the better. Again, the numbers will vary according to the type of enterprise. Consult your FCC Account Manager or other financial professional if you need help interpreting your financial results.
Below Average (Capital Turnover Ratio)
Indicates capital assets are being under-utilized.
Average (Capital Turnover Ratio)
Indicates that the farm is making good use of assets.
Above Average (Capital Turnover Ratio)
Indicates that the farm is making excellent use of farm assets.
Possible Improvement Strategies (Capital Turnover Ratio)
  1. Move capital to investments making more income.
  2. Expand the operation to generate more income.
  3. Buy more efficient machinery.
    4. Sell off unproductive assets.
Possible Improvement Strategies (Net Profit Margin)
  1. Reduce operating costs.
  2. Buy more efficient machinery.
Set Objectives and Prepare an Action Plan
FCC Account Managers can help you:
  • Gather the information you need to make decisions.
  • Help you analyze the information properly.
  • Help determine the best strategies to improve your farm business.
FCC Finances
  • Purchase of land, machinery, livestock
  • Construction of farm buildings, including houses
  • Improvements to land or facilities
  • On-farm diversification or farm-related business
  • Any purpose that will contribute to your business success
Variable Costs
Variable costs are expenses that vary directly with the volume of production or activity. They include such things as fuel, machinery repairs, crop inputs, feed, animal health, salaries, marketing and transportation costs, operating interest, etc.
Fixed Costs
Fixed costs are all other expenses that do not vary directly with the volume of production. They include such things as property taxes, land rental, depreciation, property insurance, term interest, etc.