Recommendations on Using

Financial Information
Dr. Barbara M. Wheeling
Montana State University Billings
 Financial Benchmarking

Process of comparing the performance of an enterprise

against the performance of other similar enterprises
through the use of comparable and reliable data
Trends

Farm benchmarks on the production side are common

Yields, weaning weights, pounds of milk, etc.
Increasing use of financial data in farm benchmarking
Benchmarking databases
Articles, webinars, worksheets
Consultant services, surveys
U. S. databases (examples)
CFFM, Purdue Extension, Illinois FBFM, Farm Credit Services
NPPC, NCBA, DHIA
International databases (examples)
UK, New Zealand, Canada, Australia, South Africa, France
Comparability

Comparability requires
Reliable accounting information
Similar inputs
Similar systems of classifying income, expenses, assets and liabilities
Similar procedures for constructing financial statements
Similar procedures for calculating financial ratios and measures
Benchmarks

Previous years data

Comparative Analysis: Year-to-year comparisons for a farm over time
Common-size statements can also be compared from year to year
Base years data
Trends over multiple years may be more meaningful than current year compared to past year
Data from farm-to-farm comparisons
How is my neighbor doing?
Comparisons with averages of similar farms
Ratios

Financial ratios level the playing field:

Example: Farm A
Accrual Adjusted Net Income = $50,000, Total Assets = $400,000
Return on Assets = 12.5%
Example: Farm B
Accrual Adjusted Net Income = $100,000, Total Assets = $1,000,000
Return on Assets = 10.0%
 Issues to Consider
Comparability from an Accounting Perspective
SFAC #2: Common accounting methods are central to comparison of financial
information
Compromised by
incomplete or inaccurate information
inconsistency in accounting methods
Example:
Debt/Asset ratio
Balance sheet that includes deferred taxes
Debt = $555,339 Assets = $1,107,764 Debt/Asset = 50.1%
Balance sheet that excludes deferred taxes
Debt = $338,596 Assets = $1,107,764 Debt/Asset = 30.6%

(Data from Appendix A, Financial Guidelines for Agricultural Producers, 2011.)

Accounting factors affecting comparability (a partial list)
Farm organization, entity mix
Cash vs accrual or accrual-adjusted accounting
Valuation methods
Treatments for owner withdrawals, investments, wages, income taxes
Financial statement dates
Non-farm activities
Example of cash-basis vs accrual-adjusted accounting:
Net Farm Income From Operations Ratio

Cash-basis: $26,000 175,000 = 14.86%

Accrual-adjusted: $70,000 200,000 = 35%

(Data from Appendix E, Financial Guidelines for Agricultural Producers, 2011.)

Comparability from a Business Perspective
Variability in farm characteristics is ultimately reflected in financial statements
Benchmarking against similar farms can help identify and explain how producers
decisions are affecting financial performance
Farm characteristics affecting comparability (a partial list)
Farm size
Farm type
Farm location
Ownership of land
Management and financing decisions
 Group exercise (Handout)
 Further Analysis
Comparisons are the beginning of more in-depth analysis.
Explanations of the differences between a farms data and the benchmarks
are necessary to truly understand what can be controlled by the farm
manager.
Variance analysis becomes a useful tool.
Examine the components of the ratios.
Example:
Years Ended December 31,
'X8 'X7

Gross Revenues $304,699 $304,699

Net Income from Operations 54,306 57,205
Total Assets $ 753,147 $ 748,509
 Question to ask: Gross Revenues maintained at the same level in X8 as in
X7. Is that a good result? Answer: It depends!
If Gross Revenues did not change, what caused the decline in Net Farm
Income from Operations?
Total Assets increasedwhy? Buildup of inventory? Purchase of new
machinery or other assets? Was this a good business decision?
What does it mean if Total Assets decrease?