fm6e-chapter18

fm6e-chapter18 - Farm Management Chapter 18 Farm Business...

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Farm Management Chapter 18 Farm Business Analysis
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farm management chapter 18 2 Chapter Outline Types of Analysis Standards of Comparison Diagnosing a Farm Business Problem Measures of Profitability Measures of Size Efficiency Measures Financial Measures Enterprise Analysis Farm Business Analysis and Accounting
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farm management chapter 18 3 Chapter Objectives 1. To show how farm business analysis contributes to the control function of management 2. To suggest standards of comparison to use 3. To outline a procedure for locating economic or financial problem areas 4. To review measures that can be used to analyze solvency, liquidity, and profitability 5. To identify measures of business size 6. To illustrate the concept of economic efficiency 7. To demonstrate the use of enterprise analysis
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farm management chapter 18 4 Table 18-1 Returns to Management per Farm by Level of Gross Sales Source: Iowa Farm Business Association Gross sales ($) Low Third Middle Third High Third 40,000 to 100,000 -$35,478 -$10,537 $1,938 100,000 to 250,000 -50,194 -9,766 23,702 Over 250,000 -37,944 23,988 127,628 Returns to Management per Farm ($)
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farm management chapter 18 5 Types of Analysis 1. Profitability 2. Farm Size 3. Efficiency 4. Financial 5. Enterprise
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farm management chapter 18 6 Standards of Comparison Once a measure has been calculated, the problem becomes one of evaluating the result. Is the value good, bad, or average? Compared with what? Can it be improved?
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farm management chapter 18 7 Three Basic Standards Budgets: measures are compared against budgeted goals or objectives identified during planning Comparative farms: measures are compared against actual results from similar farms Historical trends: the manager looks for improvement over time
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farm management chapter 18 8 Diagnosing a Farm Business Problem A complete whole-farm business analysis can be carried out using a systematic procedure to identify the source of the problem.
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farm management chapter 18 9 Figure 18-1 Procedures for diagnosing a farm business problem
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farm management chapter 18 10 Measures of Profitability Net farm income Return to labor and management Return to management Rate of return on farm assets Rate of return on farm equity Operating profit margin ratio
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farm management chapter 18 11 Table 18-2 Measures of Farm Profitability Comparison group based on Illinois Farm Business Farm Management Association data for dairy farms Average of comparison Item group Our farm Comments 1. Net farm income $83,822 $39,857 much lower 2. Return to labor and management $39,144 $6,643 much lower 3. Return to management $3,144 -$23,357 much lower 4. Rate of return on farm assets (ROA) 5.2% 2.8% lower 5. Rate of return on farm equity (ROE) 5.3% 0.6% much lower 6. Operating profit margin ratio 20.8% 11.6% much lower
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farm management chapter 18 12 Figure 18-2 How is the total revenue pie divided?
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fm6e-chapter18 - Farm Management Chapter 18 Farm Business...

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