AgriSolutions’ flagship financial analysis and benchmark offering is the Historical Performance Analysis™ (HPA) report. This report has been successfully used with hundreds of producers over the past 40 years to provide management insight, raise critical issue awareness, benchmark performance and look forward based on mathematical trends.
The HPA offers a comprehensive, high-level, simple to understand look at the overall ag-business from a financial perspective. By combining Balance Sheet and Income Statement information from all pertinent entities the HPA is comprehensive enough to give the management team confidence in where they stand, and which implemented initiatives are finding success. However, the HPA is also simple enough to be viewed on a single sheet of paper and presented, discussed and understood in a single afternoon.
The simplicity extends to the preparation of the analysis. The HPA only requires ten readily available numbers each year, across six years of data which will be cross-analyzed to give you 54 different insights for your ag-business (4*6+6*5=54). Depending on your record keeping, these numbers can be sourced from a tax return, a lender’s trend sheet, or your year-end accounting system’s reports.
How 10 Numbers Turn into 54 Ag-Business Solutions
Here are those 10 numbers, and what they mean to your farm:
1. Gross Revenue
All revenue associated with the operating results of the combined entities. Intercompany revenue needs to be eliminated as well as any gain or loss from the sale of assets. Revenue should be properly accrued in the calendar year that generated it. This is accomplished by the perfectly acceptable accounting practice at year-end of coding the market value of the change in on-hand grain inventories as revenue.
2. Adjustments to Gross Revenue
For management and benchmarking purposes, several adjustments are made to the gross revenue number. Some of these are typical and could be considered the cost of goods sold. Yet, stated more appropriately, they are adjusted in accordance with Farm Financial Standards to achieve a Value of Farm Production (VFP). VFP can be thought of as the revenue resulting from operating effort in the period for the business. For example, the cost of live animals purchased to finish to marketable weight is included here, and for benchmarking purposes feed costs for all livestock is also included here. At AgriSolutions we even go a step further and include all land rent expense here, instead of as Production Expense. Thus the total number of items in this category can be subtracted from Gross Revenue to get a proper Adjusted Revenue metric (a benchmarkable baseline).
3. Production Expense
Seed, chemical, fertilizer, fuel, repairs, employees, and other similar expenses are what make up this ag-business magic number category. All production, handling, and administrative expenses are included in one lump sum, with the following notable exceptions:
- Land rent (as it was moved up and netted against revenue)
- Interest expense
- Income tax,
- Any owner compensation (any expense, salary, burden or purchase that was deemed compensation to the owner is pulled out of Production Expense and moved down to the Capital area of Owner Compensation & Tax). And an adjustment should be included if compensation was hidden in the form of something like rents paid that were above (or below) market rate, for example.
The sum of all the remaining expenses is termed the Production Expense. When subtracted from the Adjusted Revenue, the result is termed Operating Profit. For those familiar, this result can be thought of as EBITDA (earnings before interest, tax, depreciation, owner compensation, and amortization). Those familiar with EBITDA will recognize the widespread and useful convention of separating operating results from the capital and financial decisions. These items include things like the use of debt(s), the employment of accelerated depreciation opportunities, the management of the tax number, and the payment of dividends among others. This concept is employed under the Production Expense. However, the adjustment is more fitting for closely-held, private (even sole-proprietor) companies.
4. Net Interest
All interest is moved here. Interest Expense minus Interest Income gives you the net number. Separating it out in this way allows for one contributing data point in answer to the question, “am I over-leveraged?”
5. Owner Compensation & Tax
As described above, all owner compensation and tax are moved to here. Separating it out in this way helps answer of the question, “is my compensation over-burdening my ag-business based on its size?”
6. Current Assets
Current assets are all assets that can be reasonably converted to cash within one year and include receivables, cash, and cash equivalents. The most notable item here is the inventory of grain and livestock to be marketed (not the breeding or lactating herd). These should be marked to market, which is valued on the balance sheet at the market price as of the end of the accounting period.
7. Current Liabilities
Current Liabilities include the non-term debt (operating line of credit used) and the current portion of the term debt. When combined with Current Assets, several measures of Liquidity can be calculated (Current Ratio, Working Capital, and Working Capital as a percent of Revenue). These measures are used to assess the business’s ability to handle inevitable risks based on the availability (or lack) of ready funds.
8. Non-Current Assets
The difference between Total Assets and Current Assets or, in other words, the sum of intermediate assets and long-term assets. Assets are valued at market. This means that grain inventories are marked to market, as well as land. Equipment can also be at market value, but here it means the lesser of cost or market.
9. Non-Current Liabilities
The difference between Total Liabilities and Current Liabilities or, in other words, the sum of intermediate liabilities and long-term liabilities.
10. Credit Limit Guideline™
The Credit Limit Guideline™ is a proprietary assessment of the credit capacity of the ag-business. It is also simply a guideline to help alert producers to the risks of over-leverage. It is NOT a recommendation in any sense for a producer to take on additional debt. Many factors contribute to the ability of a company to service its debt without having to liquidate assets or draw down working capital. AgriSolutions recognized that debt is a legitimate and necessary tool that can be used strategically. However, debt carries a risk of insolvency with it. This is why the Credit Limit Guideline™ looks at a combination of certain assets and annual operating results to help expose, and hopefully mitigate those risks.
Help From the Experts at AgriSolutions
With these simple, understandable, and usually readily available numbers, AgriSolutions is able to assess trends, relative performance, strategic weaknesses, vulnerabilities, and potential strategic strengths. All easily possible through cross-analysis to determine the 54 magic numbers needed to leverage opportunities and growth in your ag-business. These are critical insights when managing in a highly competitive, rapidly changing and risk-filled industry as is today’s agriculture.