Managing capital financial risk
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Managing Capital /Financial Risk. Craig Binkowski Southern Michigan Bank & Trust Coldwater . Topics in Financial Section. Financial Balance Sheet (What’s at risk?) Cost of Production / Revenue Requirements: Total Economic costs Cover Direct Cost To Maintain Equity

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Managing capital financial risk

Managing Capital/Financial Risk

Craig Binkowski

Southern Michigan Bank & Trust Coldwater


Topics in financial section

Topics in Financial Section

  • Financial Balance Sheet (What’s at risk?)

  • Cost of Production / Revenue Requirements:

    • Total Economic costs

    • Cover Direct Cost

    • To Maintain Equity

    • Meet Cash Flow Demands

  • “Cost of Production” Worksheet

  • Incorporating Financial Information into Risk Management / Control Decisions


Financial risk management

Financial Risk Management

  • Increase Equity through Farm Profit

    • Net Worth increase without inflation in asset values

  • Meet Cash Flow Demands

  • Monitor cost & availability of Debt Capital

    • Interest Rate Risk

    • Sources of Capital

  • Financial Information for measurement and monitoring is available and used


3 basic financial statements

3 Basic Financial Statements

1. BALANCE SHEET:

Assets, liabilities, and net worth

Annual Change in Net Worth

2. INCOME STATEMENT:

Inventory Adjusted (Accrual)

3. Projected CASH FLOW:

After Scheduled Term Debt Principal & Interest Payments, Family Living, Income Taxes


Example farms for the game designed to simulate today s market environment

Example Farms for the Game:Designed to Simulate Today’sMarket Environment

  • Green = Low Debt Farm (Sorry)

  • Yellow = Moderate Debt Farm

  • Red = High Debt Farm


Balance sheet

Balance Sheet

  • Current balance sheet tells you:

    • Financial position of your business/Self

    • Your capacity to withstand risk “Take a Hit” and remain solvent

  • Three-five years of balance sheets tell you:

    • Trends in equity of your business

    • Need Both Cost Basis (Book Value)

    • And Market Value

    • Dual Column Balance Sheet


Balance sheet debt levels

Balance Sheet Debt Levels

Page 4 FINLRB output


Income statement

Income Statement:

  • History:

    • Did your business make or lose money last year?

      • How much?

      • Was your neighbor’s experience similar?

    • What has been the past performance of your business? Relative to your neighbors?

  • Projections (pro-forma):

    • What will be different from the past? Why?

    • Do you “expect” the business to make a profit?

    • How much can revenue fall due to price and/or yield shortfalls before there is a loss?


Income statement1

Income Statement

Page 2 of FINLRB output


Liquidity cash flow statement

Liquidity - Cash Flow Statement

  • Ability of your business to meet its cash flow obligations

  • Accounts for all sources and uses of cash including debt and capital activity

  • Helps you assess how much room there is for “stuff going wrong” -- RISK!

  • Helps you assess if adjustments need to be made in the financial structure of your business.

  • Does NOT tell you if your business made a profit!


Liquidity cash flow statement1

Liquidity- Cash Flow Statement

Page 3 of FINLRB output


Change in net worth

Change In Net Worth:

  • Did Your Net Worth Increase last year? Or Decrease? Trend? Why?

    • From Retained Earnings out of Farm Profit?

    • From Asset Inflation? Machinery? Land?

    • From Contributed Capital? (Outside sources)

  • Do you expect your net worth to increase next year? Or, decrease?

  • How much room do you have for “stuff to go wrong” RISK!


Change in net worth1

Change in Net Worth

Hand calculate the % Change in Equity

Page 4 of FINLRB output


Understand the numbers for your farm business

Understand the Numbers for Your Farm Business!

  • Critical in today’s environment

  • Understand what the numbers mean and signal

  • Monitor Business EVERY year … routinely

  • Use professional assistance if needed


Cost of production

Cost of Production

Roger Betz

District Extension Farm Management Agent SW Michigan


Cost of production worksheet

Cost of Production Worksheet

  • Allocates Overhead cost to each acre and combines with Direct Cost to determine “Cost of Productions” for various crops

  • “Cost of Productions”?

    • Economic

    • Direct Cost

    • Maintain Net Worth

    • Meet Cash Flow Demands

  • Useful in Marketing and Crop Insurance Decisions


Managing capital

Cost of Production Worksheet - page 2


Cost of production overhead

Cost of Production - Overhead

Cost of Production Page 2- Medium Debt


Economic cost of production

Economic Cost of Production

Cost of Production Worksheet

Page 2 - Medium Debt Farm


Total direct cost

Total Direct Cost

Cost of Production Worksheet Page 2 Medium Debt Farm


Revenues to maintain net worth

Revenues to Maintain Net Worth

Cost of Production Worksheet Page 2 Medium Debt Farm


Revenues to meet cash flow

Revenues to Meet Cash Flow

Cost of Production Worksheet Page 2 Medium Debt Farm


Break even income prices cost of production

Break Even Income & Prices “Cost of Production”


Break even incomes prices cost of production

Break Even Incomes & Prices“Cost of Production”


What percent of equity are you willing to risk

What Percent of Equity are You Willing to Risk?


Can i use risk management tools to minimize equity loss

Can I use Risk Management Tools to Minimize Equity Loss?

Lines 49 and 50 Cost of Prod. Worksheet


Key questions for your farm business

Key Questions for Your Farm Business :

1. Appropriate Financial Information Available? Historical, Current, and Future

2. Adequate Understanding of Financial Conditions and Risk Positions?

3. Realistic Plans & Underlying Assumptions?

4. What level of Equity Protection can Risk tools provide?

5. Should you utilize Financial Risk Management Strategies?


Managing capital

STOP!

  • What is the key financial information for your farm?

  • What are the revenues required to:

  • Meet Economic Cost

  • Cover Direct Cost

  • Maintain Net Worth

  • Meet Cash Flow Demands

  • Start to think through your crop insurance and marketing plans


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