Financial Scorecard (older version)

The terms and associated calculations found here are essential to understanding the financial status of your business. Complete the formulas and insert your calculations into the ranges to evaluate your financial well-being.

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LIQUIDITY is the ability of your farm business to meet financial obligations as they come due – to generate enough cash to pay your family living expenses and taxes, and make debt payments on time.

Current Ratio

= Total Current Farm Assets / Total Current Farm Liabilities

Comfort > 2
Caution 1.3 – 2
Danger < 1.3
CURRENT RATIO measures the extent to which current farm assets, if sold tomorrow, would pay off current farm liabilities.
Total Current Farm Assets
Total Current Farm Liabilities
Current Ratio
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Working Capital

= Total Current Farm Assets – Total Current Farm Liabilities

WORKING CAPITAL tells us the operating capital available in the short term from within the business.
Working Capital
Total Current Farm Assets
Total Current Farm Liabilities
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Working Capital to Gross Revenues

= Working Capital / Gross Farm Income

Comfort > 30%
Caution 10% – 30%
Danger < 10%
WORKING CAPITAL TO GROSS REVENUES measures operating capital available against the size of the business.
Gross Farm Income
Working Capital to Gross Revenues
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SOLVENCY is the ability of your business to pay all its debts if it were sold tomorrow. Solvency is important in evaluating the financial risk and borrowing capacity of the business.

Farm Debt-to-Asset Ratio

= Total Farm Liabilities / Total Farm Assets

Comfort < 30%
Caution 30% – 60%
Danger > 60%
FARM DEBT-TO-ASSET RATIO is the bank’s share of the business. It compares total farm debt to total farm assets. A higher ratio is an indicator of greater financial risk and lower borrowing capacity.
Total Farm Liabilities
Total Farm Assets
Debt-to-Asset Ratio
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Farm Equity-to-Asset Ratio

= Farm Net Worth / Total Farm Assets

Comfort > 70%
Caution 40% – 70%
Danger < 40%
FARM EQUITY-TO-ASSET RATIO is your share of the business. It compares farm equity to total farm assets. If you add the debt-to-asset ratio and the equity-to-asset ratio you must get 100%.
Farm Net Worth
Total Farm Assets
Equity-to-Asset Ratio
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Farm Debt-to-Equity Ratio

= Total Farm Liabilities / Farm Net Worth

Comfort > 1.5
Caution .43 – 1.5
Danger < .43
FARM DEBT-TO-EQUITY RATIO compares the bank’s ownership to your ownership. It also indicates how much the owners have leveraged (i.e., multiplied) their equity in the business.
Total Farm Liabilities
Farm Net Worth
Debt-to-Equity Ratio
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PROFITABILITY is the difference between the value of goods produced and the cost of the resources used in their production. It is the ability of a farm to earn a profit and is a relative measure of success.

Net Farm Income

= Gross Cash Farm Income – Total Cash Farm Expense + OR – Inventory Changes – Depreciation

NET FARM INCOME represents return to 3 things (labor, management and equity) that you have invested in the business. It is the reward for investing your unpaid family labor, management and money in the business instead of elsewhere. Anything left in the business, i.e., not taken out for family living and taxes, will increase your farm net worth.
Net Farm Income
Gross Cash Farm Income
Total Cash Farm Expense
Operating Revenue
Inventory Changes
Depreciation
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Rate of Return on Farm Assets

= Return on Farm Assets (Net Farm Income + Farm Interest – Value of Operator Labor & Management) / Average Farm Assets

Comfort > 8%
Caution 4% – 8%
Danger < 4%
RATE OF RETURN ON FARM ASSETS can be thought of as the average interest rate being earned on all (yours and creditors’) investments in the farm. Unpaid labor and management are assigned a return before return on farm assets is calculated.
Return on Farm Assets
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Farm Interest
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Value of Operator Labor & Management
Average Farm Assets
Rate of Return on Farm Assets
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Rate of Return on Farm Equity

= Return on Farm Equity (Net Farm Income – Value of Operator Labor & Management) / Average Farm Net Worth

Comfort > 10%
Caution 3% – 10%
Danger < 3%
RATE OF RETURN ON FARM EQUITY represents the interest rate being earned by your investment in the farm. This return can be compared to returns available if your equity were invested somewhere else, such as a certificate of deposit.
Return on Farm Equity
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Value of Operator Labor & Management
Average Farm Net Worth
Rate of Return on Farm Equity
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Operating Profit Margin

= Return on Farm Assets/ Value of Farm Production (Gross Cash Farm Income + OR – Inventory Change of Crops, Mkt Lvst, Brdg Lvst & Other Income Items – Feeder Livestock Purchased – Purchased Feed)

Comfort > 25%
Caution 15% – 25%
Danger < 15%
OPERATING PROFIT MARGIN shows the operating efficiency of the business. If expenses are low relative to the value of farm production, the business will have a healthy operating profit margin. A low profit margin can be caused by low product prices, high operating expenses, or inefficient production.
Return on Farm Assets
Value of Farm Production
Operating Profit Margin
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Gross Cash Farm Income
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Operating Revenue
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Inventory Change of Crops, Mkt Lvst, Brdg Lvst & Other Income Items
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Feeder Livestock Purchased
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Purchased Feed
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Earnings Before Interest Taxes Depreciation and Amortization

= Net Farm Income + Interest Expense + Depreciation and Amortization Expense

E.B.I.T.D.A. measures earnings available for debt repayment.
EBITDA
Interest Expense
Depreciation and Amortization Expense
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REPAYMENT CAPACITY shows the borrower’s (i.e., your) ability to repay term debts on time. It includes non-farm income and so is not a measure of business performance alone.

Capital Debt Repayment Capacity

= Net Farm Income + Depreciation + Net Non-Farm Income – Family Living & Income Taxes + Interest Expense on Term Loans

CAPITAL DEBT REPAYMENT CAPACITY measures the amount generated from farm and non-farm sources, to cover debt repayment and capital replacement.
Capital Debt Repayment Capacity
Depreciation
Net Non-Farm Income
Family Living & Income Taxes
Interest Expense on Term Loans
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Capital Debt Repayment Margin

= Capital Debt Repayment Capacity – Scheduled Principal & Interest on Term Loans

CAPITAL DEBT REPAYMENT MARGIN is the amount of money remaining after all operating expenses, taxes, family living costs, and scheduled debt payments have been made. It’s really the money left, after paying all bills, that is available for purchasing or financing new machinery, equipment, land or livestock.
Capital Debt Repayment Margin
Capital Debt Repayment Capacity
Click here to Calculate CDRC
Scheduled Principal & Interest on Term Loans
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Replacement Margin

= Capital Debt Repayment Margin – Unfunded (cash) capital replacement allowance

REPLACEMENT MARGIN the amount of income remaining after paying principal and interest on term loans and unfunded (cash) capital purchases.
Replacement Margin
Capital Debt Repayment Margin
Click here to Calculate CDRM
Unfunded (cash) capital replacement allowance
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Term Debt Coverage Ratio

= Capital Debt Replacement Capacity / Scheduled Principal & Interest on Term Loans

Comfort > 1.75
Caution 1.25 – 1.75
Danger < 1.25
TERM-DEBT COVERAGE RATIO tells whether your business produced enough income to cover all intermediate and long-term debt payments. A ratio of less than 1.0 indicates that the business had to liquidate inventories, run up open accounts, borrow money, or sell assets to make scheduled payments.
Capital Debt Repayment Capacity
Click here to Calculate CDRC
Scheduled Principal & Interest on Term Loans
Term-Debt Coverage Ratio
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Replacement Margin Coverage Ratio

= Capital Debt Replacement Capacity / Scheduled Principal & Interest on Term Loans + Unfunded Capital Replacement Allowance

Comfort > 1.50
Caution 1.10 – 1.50
Danger < 1.10
REPLACEMENT MARGIN COVERAGE RATIO A ratio under 1.0 indicates that you did not generate enough income to cover term debt payments and unfunded capital purchases.
Capital Debt Repayment Capacity
Click here to Calculate CDRC
Scheduled Principal & Interest on Term Loans
Unfunded (cash) capital replacement allowance
Replacement Margin Coverage Ratio
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FINANCIAL EFFICIENCY shows how effectively your business uses assets to generate income. Past performance of the business could well indicate potential future accomplishments.

It also answers the questions:
  • Are you using every available asset to its fullest potential?
  • What are the effects of production, purchasing, pricing, financing and marketing decisions on gross income?

Asset-Turnover Rate

= Value of Farm Production / Average Farm Assets

Comfort > 45%
Caution 30% – 45%
Danger < 30%
ASSET-TURNOVER RATE measures efficiency in using capital. You could think of it as capital productivity. Generating a high level of production with a low level of capital investment will give a high asset-turnover rate. If, on the other hand, the turnover is low you will want to explore methods to use the capital invested much more efficiently or sell some low-return investments. (It could mean getting rid of that swamp and ledge on the back 40 and getting something that produces income.) The last four ratios show how Gross Farm Income is used. The sum of the four equals 100% (of Gross Farm Income).
Value of Farm Production
Average Farm Assets
Asset-Turnover Rate
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Operating-Expense Ratio

= Total Farm Operating Expense Excluding Interest – Depreciation / Gross Farm Income

Comfort < 60%
Caution 60% – 80%
Danger > 80%
OPERATING-EXPENSE RATIO shows the proportion of farm income that is used to pay operating expenses, not including principal or interest.
Total Farm Operating Expense Excluding Interest
Depreciation
Gross Farm Income
Operating-Expense Ratio
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Depreciation-Expense Ratio

= Depreciation / Gross Farm Income

Comfort < 5%
Caution 5% – 10%
Danger > 10%
DEPRECIATION-EXPENSE RATIO indicates how fast the business wears out capital. It tells what proportion of farm income is needed to maintain the capital used by the business.
Depreciation
Gross Farm Income
Depreciation-Expense Ratio
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Interest-Expense Ratio

= Total Farm Operating Expense Excluding Interest – Depreciation / Gross Farm Income

Comfort < 5%
Caution 5% – 10%
Danger > 10%
INTEREST-EXPENSE RATIO shows how much of gross farm income is used to pay for interest on borrowed capital.
Total Farm Operating Expense Excluding Interest
Depreciation
Gross Farm Income
Interest-Expense Ratio
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Net Farm Income Ratio

= Net Farm Income / Gross Farm Income

Comfort > 20%
Caution 10% – 20%
Danger < 10%
NET FARM INCOME RATIO compares profit to gross farm income. It shows how much is left after all farm expenses, except for unpaid labor and management, are paid.
Gross Farm Income
Net Farm Income Ratio