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DuPont Model

DuPont Model - DuPont Financial Analysis Model A Process...

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DuPont Financial Analysis Model A Process For Knowing Where to Spend My Management Time Tomorrow Morning After Breakfast By Kevin Bernhardt, UW-Extension, UW-Platteville, and UW Center for Dairy Profitability Our computer technology today provides wonderful opportunities to collect, manipulate, and process data including financial analysis data. Sure, it gives a manager lots of numbers, but what do they mean in terms of where to spend my creative management time tomorrow morning after breakfast? There is no lack of ratios to calculate from financial data, each of which is a valuable piece of information to the manager. The Farm Financial Standard Council’s sweet 16 ratios (recently expanded) have been a standard for years in helping farm managers evaluate their financials. However over several years of teaching undergraduate students and Extension clientele I often found it difficult for people to wrap their arms around what the ratios were indicating and ultimately where to spend their valuable management time. The challenge often led to indifference by the undergraduate students and a lack of seeing any value to go further by Extension clientele. The DuPont system for financial analysis is a means to fairly quickly and easily assess where the business strengths and weaknesses potentially lie and thus where management time may optimally be spent. It is not the only nor the most thorough, but it is a fairly straight-forward and systematic means to drill back into the financial numbers to determine the source or lack thereof for financial performance. A colleague, Gregg Hadley (UW-River Falls), summed up well the DuPont system in a recent article on E-Extension (The DuPont Analysis: Making Benchmarking Easier and More Meaningful, Updated June 10, 2009, http://www.extension.org/pages/The_DuPont_Analysis:_Making_Benchmarking_Easier _and_More_Meaningful ): If we are lucky enough to have the minimum number of financial documents needed to conduct a meaningful financial analysis (both beginning and ending balance sheets, either an actual accrual or accrual adjusted income statement, and a statement of cash flows), we are then inundated with pages and pages of intimidating numbers to sort through. This gives many managers and advisers a justification not to give their financial records anything more than a passing glance. This is unfortunate. A good financial performance analysis should do more than inform about how a farm performed in the past. More important, it should
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provide the manager and adviser with insight regarding how to prioritize activities that will enable the farm to improve its financial performance. The DuPont system has disadvantages as does any financial analysis system. However, its advantage beyond simplicity of use is that it takes into account the major
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