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Critical Data Points

Date: 
Author: 
Dr. David Kohl
Educational Opportunities: 
Articles
Interests: 
Grain, Dairy, Swine, Beef, Timber, Young, Beginning Farmers, Women in Ag
Home > Education & Events > December 2017 > Critical Data Points
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Hi, I'm Dr. Dave Kohl, College of Agriculture Life Science hall of famer from Blacksburg, Virginia at Virginia Tech. Today, I would like to talk about critical data points. A number of producers and agriculture lenders are asking me, what are the critical data points you're watching for on the balance sheet and income statement? Let's start out with number one. I like to look at the operating expense revenue ratio, which is very simple. You take the operating expenses, excluding interest and appreciation, and divide it into your revenue. One of the things that we find is if the agriculture producers are keeping this down below about $0.75 to produce a dollar's worth of income, they're in a much stronger position than the inefficient management, very critical data point.

Second, let's go to the balance sheet and of course we constantly have to observe the debt to asset ratio, which direction it's going, which direction is net worth going and is it earned net worth that's going onto the balance sheet. One of the things that we find is, that when that debt to asset ratio goes less than 50%, you have to have a conservative family living, you got to be good in production, you got to be financially efficient, and that combination allows you to carry higher degrees of financial leverage. Of course, when examining my old friend working capital, one of the things that we're finding is when that working capital becomes less than 10%, it puts the business in a very vulnerable position, particularly if financial adversity should come.

Another element that we're keeping a close eye on is accounts payable. Oftentimes, when financial stress occurs in the business, the number one thing to happen is that accounts payable increase dramatically. If they start going above about 10 to 15% of revenue, then we have a problem. The final indicator that we watch is what we call term debt to EBIDA. EBIDA, is net farm income before interest and depreciation and you divide it into their term debt. If that ratio starts going above 6:1, we've got problems. However, if it's below 3:1, oftentimes the business is poised for opportunity and growth and expansion. Those are just a few of the critical data points that as you look at your financials this fall and this winter, you may want to zone in on.

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