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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


Assets, liabilities, and net worth

Annual Change in Net Worth


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
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

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?

  • 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