- DTN Headline News
By the Numbers
Wednesday, June 21, 2017 8:00AM CDT
By Danny Klinefelter
DTN Farm Business Adviser

Most farmers that do look at their financial ratios analyze either their trends over time or relative to benchmarks; e.g., their own history, published numbers, other farmers or their lender's standards. All of these are useful, but it's also helpful to dig into what is driving their bottom line and to do "what if" analysis to see the impact different changes would have, i.e., where they would get the biggest bang for their buck. It is also useful to take a deeper dive to determine causes rather than treating symptoms when they review their results.

What I'm really talking about is the DuPont Financial Analysis Model. Because of the limited space, this will be a fairly brief summary. The model was originally developed as a tool for analyzing the rate of return on assets (ROA), but with a simple step, it can also be used to analyze the rate of return on equity (ROE).

At the heart of the analysis are two financial measures: your operating profit margin (OPM) and your asset turnover ratio (ATR), or "earns" and "turns," as Mike Boehlje often refers to them.

OPM measures the businesses before tax returns in relation to total revenue and is calculated: (net income from operations + interest expense - family living withdrawals) / gross farm revenue.

The ATR measures how efficiently the business' assets are being used to generate revenue and is calculated: gross farm revenue / average farm assets.

The ROA measures the business before tax returns in relation to the business' total assets and is calculated: (net income from operations + interest expense - family living withdrawals) / average farm assets.

Because the numerator in the OPM is the same as the denominator in the ATR, when the two are multiplied, gross revenue cancels out and you are left with the ROA.

In order to increase OPM, the business needs to increase the average price received through better marketing and/or decrease operating costs or lower family living costs.

In looking for ways to decrease costs, it is insightful to first look at the percent of total operating costs made up by each expense category. Options some farmers have used include auto-steer; variable rate applications of seed, fertilizer and chemicals based on site-specific performance records; selling unproductive assets; double shifting; leasing versus purchasing some assets; or having some work custom done when the asset required is very underutilized on the farm. Others collaborate and jointly share some assets, people or equipment in order to spread the costs.

Centrec Consulting and Wittman Consulting both have downloadable spreadsheets to do the calculations:

http://www.centrec.com/…

http://www.wittmanconsulting.com/…

Using the DuPont Financial Analysis Model, net farm income from operations can be analyzed in more depth by breaking costs into categories as a ratio of the individual costs relative to net farm income from operations. This can help you analyze what effect cutting back specific costs would have on ROA or ROE. Furthermore, you could look at the effect of changing interest rates on specific loans or reducing assets by getting rid of unproductive assets. The same could be said for looking at a reduction in living costs.

I just think it is a good tool for analyzing causes and doing "what if" analysis. It gets away from looking at symptoms and guessing what caused the result.

Danny Klinefelter can be reached at Talk@dtn.com

(AG/BAS)


blog iconDTN Blogs & Forums
DTN Market Matters Blog
Editorial Staff
Friday, June 23, 2017 10:04AM CDT
Monday, June 12, 2017 11:08AM CDT
Friday, June 9, 2017 10:53AM CDT
Technically Speaking
Darin Newsom
DTN Senior Analyst
Sunday, June 18, 2017 9:13AM CDT
Sunday, June 18, 2017 9:11AM CDT
Sunday, June 18, 2017 9:09AM CDT
Fundamentally Speaking
Joel Karlin
DTN Contributing Analyst
Friday, June 16, 2017 7:43AM CDT
Wednesday, June 14, 2017 12:43PM CDT
Friday, June 9, 2017 8:44AM CDT
DTN Ag Policy Blog
Chris Clayton
DTN Ag Policy Editor
Tuesday, June 20, 2017 9:37AM CDT
Friday, June 16, 2017 6:52AM CDT
Tuesday, June 13, 2017 10:04PM CDT
Minding Ag's Business
Marcia Taylor
DTN Executive Editor
Wednesday, June 21, 2017 2:00PM CDT
Friday, June 2, 2017 10:41AM CDT
Tuesday, May 16, 2017 3:05PM CDT
DTN Ag Weather Forum
Bryce Anderson
DTN Ag Meteorologist and DTN Analyst
Tuesday, June 20, 2017 1:48PM CDT
Friday, June 16, 2017 2:51PM CDT
Wednesday, June 14, 2017 1:11PM CDT
DTN Production Blog
Pam Smith
Crops Technology Editor
Friday, June 9, 2017 3:34PM CDT
Thursday, May 25, 2017 2:12PM CDT
Wednesday, May 17, 2017 9:48AM CDT
Harrington's Sort & Cull
John Harrington
DTN Livestock Analyst
Friday, June 16, 2017 3:29PM CDT
Friday, June 2, 2017 4:33PM CDT
Friday, May 19, 2017 2:42PM CDT
South America Calling
Alastair Stewart
South America Correspondent
Thursday, June 22, 2017 5:47PM CDT
Friday, June 2, 2017 5:27PM CDT
Thursday, May 18, 2017 11:11AM CDT
An Urban’s Rural View
Urban Lehner
Editor Emeritus
Saturday, June 24, 2017 8:59PM CDT
Monday, June 19, 2017 10:33AM CDT
Monday, June 12, 2017 9:03AM CDT
Machinery Chatter
Jim Patrico
Progressive Farmer Senior Editor
Wednesday, June 21, 2017 1:33PM CDT
Tuesday, June 20, 2017 12:39PM CDT
Wednesday, June 7, 2017 3:47PM CDT
Canadian Markets
Cliff Jamieson
Canadian Grains Analyst
Friday, June 23, 2017 4:32PM CDT
Thursday, June 22, 2017 5:28PM CDT
Wednesday, June 21, 2017 4:59PM CDT
Editor’s Notebook
Greg D. Horstmeier
DTN Editor-in-Chief
Friday, June 2, 2017 9:41AM CDT
Thursday, May 25, 2017 12:09PM CDT
Thursday, April 27, 2017 8:28AM CDT
 
Copyright DTN. All rights reserved. Disclaimer.
Powered By DTN