Financial health on the farm can be diagnosed by using a set of financial ratios that determine health and compare performance.
The analysis involves ratios outlining debt, expenses and exposure to debt.
Farm analysts recommend using three to five years of farm operating data to get a clearer picture of what’s happening.
A ratio called debt service coverage shows how cash flow from operations is used to cover debt.
The minimum expected for agriculture is $1.25 cash flow for every dollar of debt. If cash flow is $1 or below, debt service isn’t covered,
Another important ratio is the operating expense ratio which shows expenses as a percentage of revenues.
The lower the rate the better financial health of the farm operations. A ratio that is too high indicates possibility of losses, especially if a sudden unexpected expense comes.
A 60 per cent ratio means 60 per cent of revenue goes to variable expenses.
The leverage ratio — debt divided by equity — associates’ debt and equity as ways of financing farm operations.
Higher ratios put the farm in a vulnerable position should a sudden shock such as lower commodity prices or lost markets arise.
Manitoba Agriculture suggests a ratio of .4 — 40 cents debt to $1 of equity — is strong.
Ron Walter can be reached at ronjoy@sasktel.net
