HotSpots for Farm Financials Date: 8/21/2018 12:16:10 PM Author: Dr. David Kohl Educational Opportunities: Videos Home > Education & Events > August 2018 > HotSpots for Farm Financials Share: Hi, I'm Dr. Dave Kohl, Professor Emeritus and Academic Hall of Famer from Virginia Tech, Blacksburg, Virginia. Today's subject matter is hotspots on the farm financials. Oftentimes, agriculture lenders will have me look at agricultural customers' financials, that being the balance sheet and the income statement. Where do I go? One of the first ratios that I'll look at is operating expense/revenue ratio, excluding the interest and depreciation. In other words, how much does it cost to generate a dollar's worth of income? One of the things that we found during the strong economic times, 2006, 2012, the top producers were generating a dollar's worth of income under 65 cents. Even those top producers today are finance costing 75 to 78 cents to generate a dollar's worth of income, and for our bottom third producers, oftentimes, it's 95 cents to a dollar. Closely monitoring this ratio and the trend in this ratio is very critical. The second element, of course, I go to the top half of the balance sheet and look at working capital, and working capital direction. I like to divide working capital into expenses. One thing that I find is once it's above 33 percent, you're pretty strong, but once that ratio starts getting less than 10 percent of your expenses, you're going to have to be very careful that you don't burn through your secondary reserve. Particularly, if you do a refinance to replenish working capital, make sure that you don't burn through that working capital too fast. Another key area that I look at is to take your term debt and divide EBITAD into it. EBITADs are Earnings Before Interest, Taxes, And Depreciation. One thing that I find is when this ratio is under 3:1, you're in a pretty solid situation, but boy, when it starts getting above six to one, you're getting into a heavy debt situation in your ability to repay that debt. Of course, a couple of other areas that I look for is: Are you building up accounts payable? Also, on the personal financials, are we seeing an increase in credit card debt? Then of course, one of the things we're really going to have to watch for is what is your CAPEX, or Capital Replacement Strategy. We're now six years into the downturn, many people have postponed it. We are about to have to see some kind of critical decision coming up over the next one or two years. That's some of the things that I look at. Hotspots on the financials, and as you get your farm financials together this fall and this winter, those might be some areas that you and your Ag lender could look at. Comments There are no comments. Leave comment Name: Email: Comments: Enter security code: Dr. David Kohl - Professor of Agriculture Four Challenges Skilled Nursing Facility Leaders are Facing Articles A Letter to Every Farmer Under the Age of 35 Factors You Can Control on Your Dairy Operation Videos Purchasing Recreational Land? Find a Lending Specialist.