business cally happened,” Betker says. “But when you start looking at ratios, and at building a strategic plan and setting goals and benchmarks — many of them likely aren’t going to be as comfortable with that.” Over in Regina, a leading farm lender says he has always encouraged farmers to get more comfortable with their numbers and look for the story behind the numbers. Rémi Lemoine, Farm Credit Canada’s chief operating officer, said that ultimately it’s the farmer’s business that’s going to benefit from this better information, and it’s easier now than ever before. “There is the ability now to analyze financial information in ways we’ve never been able to previously,” Lemoine says. “With spreadsheets and databases you can run scenarios and examine trends like never before.” While Lemoine says there are a number of farmers who have an excellent grasp of financial matters, for others it’s not necessarily an area of interest. They may instead have excellent production or marketing skills, for example. But as a finance person himself, he’s quick to say that these are skills that can be learned, and not everyone needs to be at the same level of knowledge as their accountant or financial adviser. Instead they need the basic knowledge that will allow them to speak the same language and make the most of that adviser. “This is not something that is so complex the average person can’t learn it,” Lemoine says. “And good basic accounting and finance courses are available just about everywhere from local community colleges to distance and online options from universities, and farmers will even find some on our website (www.fcc-fac.ca) that we sponsor. Where they get this training isn’t as important as having this knowledge so they can have that discussion.” Betker echoes the importance of this, saying it’s not important that farmers be able to lecture on accounting standards or have intimate knowledge of the tax code. “I tell clients they need enough knowledge that they can have that discussion ‘in the now,’ when they’re sitting in their accountant or adviser’s office,” Betker says. “They don’t need to be able to pull the strategic document out and explain every detail of it to their partner or spouse a couple of months later.” Liquidity: The ability of a business to meet financial obligations as they come due in the ordinary course of business. Liquidity relates to cash flow and short-term risk. Ratio Formula Explanation Current Ratio Current assets / Current liabilities Can the farm meet current <2:1 obligations as they come due? Good 1.5 : 1 Working Capital Current assets / Current liabilities If current liabilities are retired as they come due what > 50% current assets will be left? (% of annual expense) 20 – 30% < 10 % Debt Structure Current debt / Total debt What % of total debt is due within the next 12 months? 25% < 20% Average Poor >1:1 > 35% Solvency: Measure the amount of business debt relative to the amount of owner’s capital invested in the business. Solvency relates to longer-term risk and how the business is financed. Ratio Formula Explanation Good Average Poor Leverage Ratio* Total liabilities / Total equity For every $1 in equity, how many dollars of debt are there? <4:1 0.65 : 1 Equity Ratio* Total equity / Total assets What proportion of farm assets are financed by the owners? > 70% 50 – 70% < 50% Debt Servicing (Net income + Amortization + Can the farm come up Interest – Family Wages**) with enough income to pay / (Annual Principal & the debt requirements? Interest Paid) >2:1 1.5 : 1 >1:1 < 1.1: 1 * Industry standards based on assets at market value. ** If not already included in expenses (i.e. non-corporate farms). Profitability: The extent to which a business is able to generate profit (income) from the utilization of business assets. Profitability rates investment decisions based on their ability to generate net income. Ratio Formula Explanation Good Average Poor Return on Assets* Net income / Total assets What return is the farm generating as a % of capital assets? > 4% 2% < 0% Return on Equity* Net income / Owners equity What return is the farm generating as a % of equity? > 10% 6% < 2% Capital Turnover* Gross income / Capital assets How efficiently are assets (capital) being utilized? > 40% 20% < 10% * Industry standards based on assets at market value. Financial Efficiency: The extent to which a business is able to utilize its resources (inputs) efficiently. Financial efficiency rates the annual operating cost decisions on their ability to generate gross revenue. Ratio Formula Explanation Good Average Poor Gross Margin Gross margin / Total revenue Is the farm generating acceptable margin as a % of revenue? > 65% 55% < 50% Contribution Margin Contribution margin / Total revenue Is the farm generating acceptable margin as a % of revenue? > 50% 45% <40% Net Profit Margin Net profit / Total revenue Is the farm generating acceptable margin as a % of revenue? > 20% 10% <5% Interest Expense Interest / Gross revenue How much of the gross revenue generated by the farm going to pay interest? <10% 15% >20% Amortization Expense Amortization / Gross revenue How much of the gross revenue generated by the farm going to pay interest? <10% 15% >20% Source: Backswath Management Inc. Continued on page 28 October 2013 country-guide.ca 27

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