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Inventory of the Legacy:. Dr. Bart Eleveld Extension Economist, Farm & Ranch Management Agricultural & Resource Economics Department. Balance Sheet and other lists . Need to know what’s being transferred. Personal possessions of emotional value Where are possessions on “heirloom scale”?

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inventory of the legacy

Inventory of the Legacy:

Dr. Bart Eleveld

Extension Economist, Farm & Ranch Management

Agricultural & Resource Economics Department

Balance Sheet and other lists

need to know what s being transferred
Need to know what’s being transferred
  • Personal possessions of emotional value
    • Where are possessions on “heirloom scale”?
  • Values and traditions
    • Can’t be forced on next generation, but they can’t continue them if they don’t know what they are.
  • Human resources, management skills and capabilities
  • Titled property
    • Core of the business that’s being transferred
    • Partially determines strategies of transfer, ownership and future management plan for the business
    • Assets: What does the business/family own?
    • Liabilities: What are the claims by creditors?
    • Equity or Net Worth: What is left if assets are liquidated?
balance sheet is starting point for all business planning
Balance Sheet is starting point for all business planning
  • Gives an instantaneous or “snap shot” view of financial strengths and weaknesses.
  • Tells how vulnerable to risk or downturns the business may be.
  • Shows the liquidity and solvency of a business / family / individual
  • A convenient way to list titled property
what is liquidity
What is liquidity?
  • Ability to pay short-term debts and obligations of the business/family without major disruptions or liquidations of long-term (durable) capital.
    • Can you pay all claims that are expected during the next 12 months?
    • Can you “ride the waves” and stay afloat?
what is solvency
What is solvency?
  • Ability to pay ALL debts and obligations of the business/family by liquidating or selling of whatever assets might be necessary.
    • A more extreme measure of financial well-being.
    • Will you survive a catastrophe (liquidation) with something left over? Lifeboat, raft, or just floating debris?
    • In the context of today’s seminar, the catastrophe may come unexpectedly, or the liquidation may be planned, or the ship may continue to sail along, albeit with a new skipper, depending on the preparation and plan.
useful way to inventory physical and financial assets and liabilities
Current Assets

Cash, bank accounts and inventory items readily convertible to cash

Intermediate Assets

Machinery, breeding livestock

Long-Term Assets

Land, buildings and improvements to real estate

Personal

Separate or combine with business?

Current Liabilities

Notes and accounts payable within 12 months

Intermediate Liabilities

Loans payable over 2-10 years

Long-term Liabilities

Loans payable over 10+ years

Net Worth (+ or -)

Retained earnings

Change in market valuation

Useful way to inventory physical and financial assets and liabilities
how do they balance
How do they balance?

Liabilities

+ Net Worth

Liabilities

Assets

Assets

Current: Liquidity

Total (Long-Term): Solvency

Balance by definition:

Assets = Liabilities + Net Worth

Net Worth = Assets - Liabilities

example scenario max and marlene profit
Example Scenario: Max and Marlene Profit
  • 50-something couple with three kids they want to bring into the business
  • Complete case study is in binder
  • Will look at Balance Sheet today and in next workshop will look at the Income Statement and planning budgets
max marlene profit
Max & Marlene Profit
  • 3 children, oldest wants to farm with family
  • Marlene has full-time job, Max does custom work plus part-time job
  • 1500 ac. cropland in wheat-barley-fallow
  • 2500 ac. private rangeland
  • 50 ac. irrigated pasture
  • 80 cow-calf pairs
  • How to make it work ?
slide10

What, you can’t read this?

There’s a copy of it in your binder. And we’ll look at it a piece at a time.

Blank worksheet for FINPACK in binder

Excel spreadsheets on website:

http://arec.oregonstate.edu/succession.html

current assets
Current assets

Cash and bank accounts

Inventories of supplies

Inventories of marketable commodities

current liabilities
Current liabilities

Accrued interest (if loan payments were made on balance sheet date) and accrued taxes

Notes and accounts payable

This year’s principal on long-term loans

intermediate assets
Intermediate assets

Useful life of > 1 year and < 10 years.

Breeding livestock

Machinery and vehicles

what value to use
What value to use?
  • Cost or book value
    • Purchase price minus accumulated depreciation
    • What an accountant would use
  • Market value
    • What you could realistically expect to sell asset for
    • What a lender would use
  • Raised breeding livestock?
  • Both are useful to know
    • Cost: Net worth shows “retained earnings” due to income accumulation
    • Market: Net worth shows “actual market equity”
intermediate liabilities
Intermediate Liabilities

Notes and loans on intermediate assets (2-10 years)

long term assets
Long-term assets

Useful life of > 10 years

Real estate: land, buildings and other improvements to land.

Potential for large differences between cost and market value

long term liabilities
Long-term liabilities

Notes and loans on long-term assets: usually mortgages and contracts on real estate

Deferred or contingent liabilities: If you liquidate, who besides creditors do you have to pay?

deferred or contingent liabilities
Deferred or Contingent Liabilities
  • On current assets:
    • ordinary income and social security taxes
  • On intermediate and long-term assets
    • Capital gains taxes on gains or recaptured depreciation
    • Also allow for selling costs of durable assets
  • In succession/estate planning context it may be useful to include estate and inheritance taxes
slide19

Summary of

Balance Sheet

LIQUIDITY

SOLVENCY

NET WORTH

resources for balance sheet
Resources for Balance Sheet
  • FINPACK financial analysis software
    • Center for Farm Financial Management @ U. of MN.
    • Does balance sheet plus feasibility and cash-flow budgeting for whole farm/ranch management plans
    • Free trial download available:
      • http://www.cffm.umn.edu/
    • Can “rent” an annual license for ~ $100/yr.
  • 2 spreadsheet formats
    • Montana State University’s
    • OSU/WSU Integrated Financial Statements
    • Both on Succession Workshop website:
      • http://arec.oregonstate.edu/succession.html
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