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2 loans if the Debt to Asset ratio exceeds 0.5, meaning the farm already owes 50 cents for each dollar of farm asset value. Liquidity There are two measures of “ liquidity” or the availability of funds to operate the farm: 4. Current Ratio 5. Working Capital The Current Ratio measures the relationship between the value of farm assets that are easily convertible to cash within the next 12 months ( current assets) and the farm liabilities that come due within the same period. Examples of current assets are cash on hand and crops in storage and available for sale. Examples of current liabilities include accounts payable and loan payments that are due during the next 12 months. A ratio of current assets to current liabilities of at least 1.2: 1 is desirable and suggests the farm can meet its shortterm obligations. Working Capital is the amount of money available for running the farm. It is calculated as the difference between the value of current assets and current liabilities. Profitability This is the foundation of a successful business and measures how effectively you have been using the resources at your disposal. In other words, what did your farm really earn by using these resources? Profitability can be measured in four ways: 6. Net Farm Income— This measures the combined returns to the unpaid contributions made by your family, including your labor, your investment ( equity capital), your management skill, and your willingness to accept financial risk. 7. Rate of Return on Farm Equity ( Net Worth)— This is calculated from Net Farm Income by deducting the value of your work, then dividing the result by the value of your equity in the farm, which yields a Rate of Return. If your farm operation is healthy, the Rate of Return should be higher than the interest rate charged by lenders. 8. Rate of Return on Farm Assets ( Investment)— This is calculated in a similar manner as Net Farm Income, i. e., by deducting the value of your work, but you also add back any interest you actually paid. The resulting amount is divided by the total value of the farm assets to get a Rate of Return. If your farm is healthy, this rate also should be higher than the interest rate charged by lenders. 9. Operating Profit Margin Ratio— This shows Net Farm Income From Operations as a percentage of farm income, in effect, showing how many cents on the dollar you managed to hold on to. Repayment capacity As the trend to larger farms continues, farmers increasingly rely on debt financing. In some cases, long term leases are used as a substitute for buying equipment or breeding livestock with borrowed funds. Repayment Capacity measures the ability of the business to repay loans and long term capital leases. This is important because a farmer may borrow from several sources or have several different loans with one lender, and it can be difficult to keep track of overall loan and lease activity. Two measures are used to describe the ability of your farm to meet its debt and capital lease obligations: 10. Term Debt and Capital Lease Coverage Ratio 11. Capital Replacement and Term Debt Repayment Margin The Coverage Ratio looks at the amount of money available to make payments relative to the size of those payments. Unlike the other measures, this one considers nonfarm income and withdrawals for family living, in addition to business contributions. A 1: 1 ratio means there is exactly enough money available. A higher ratio shows there is a safety margin above current obligations or that payments on some additional debt could be covered. A high ratio is desirable. The Repayment Margin shows the dollar amount of the difference between payments and available cash. It can be used to gauge the impact of changes in farm prices or costs on debt repayment capacity and to measure the ability of the business to repay additional debt. Financial efficiency “ Financial efficiency” measures farm performance in broad financial terms. Farmers are accustomed to production efficiency measures like crop yields per acre and average daily gain in livestock. Financial efficiency looks at various aspects of the performance of investments or expenses in producing revenue. There are five important ratios: 12. Asset Turnover Ratio 13. Operating Expense Ratio 14. Depreciation Expense Ratio 15. Interest Expense Ratio 16. Net Farm Income From Operations Ratio Asset Turnover Ratio measures how hard your investment in farm assets is working for you. This ratio Farmers increasingly rely on debt financing as the trend to larger farms continues.
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Title  Planning the longterm recovery of your farm.  Page 16 
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Full Text  2 loans if the Debt to Asset ratio exceeds 0.5, meaning the farm already owes 50 cents for each dollar of farm asset value. Liquidity There are two measures of “ liquidity” or the availability of funds to operate the farm: 4. Current Ratio 5. Working Capital The Current Ratio measures the relationship between the value of farm assets that are easily convertible to cash within the next 12 months ( current assets) and the farm liabilities that come due within the same period. Examples of current assets are cash on hand and crops in storage and available for sale. Examples of current liabilities include accounts payable and loan payments that are due during the next 12 months. A ratio of current assets to current liabilities of at least 1.2: 1 is desirable and suggests the farm can meet its shortterm obligations. Working Capital is the amount of money available for running the farm. It is calculated as the difference between the value of current assets and current liabilities. Profitability This is the foundation of a successful business and measures how effectively you have been using the resources at your disposal. In other words, what did your farm really earn by using these resources? Profitability can be measured in four ways: 6. Net Farm Income— This measures the combined returns to the unpaid contributions made by your family, including your labor, your investment ( equity capital), your management skill, and your willingness to accept financial risk. 7. Rate of Return on Farm Equity ( Net Worth)— This is calculated from Net Farm Income by deducting the value of your work, then dividing the result by the value of your equity in the farm, which yields a Rate of Return. If your farm operation is healthy, the Rate of Return should be higher than the interest rate charged by lenders. 8. Rate of Return on Farm Assets ( Investment)— This is calculated in a similar manner as Net Farm Income, i. e., by deducting the value of your work, but you also add back any interest you actually paid. The resulting amount is divided by the total value of the farm assets to get a Rate of Return. If your farm is healthy, this rate also should be higher than the interest rate charged by lenders. 9. Operating Profit Margin Ratio— This shows Net Farm Income From Operations as a percentage of farm income, in effect, showing how many cents on the dollar you managed to hold on to. Repayment capacity As the trend to larger farms continues, farmers increasingly rely on debt financing. In some cases, long term leases are used as a substitute for buying equipment or breeding livestock with borrowed funds. Repayment Capacity measures the ability of the business to repay loans and long term capital leases. This is important because a farmer may borrow from several sources or have several different loans with one lender, and it can be difficult to keep track of overall loan and lease activity. Two measures are used to describe the ability of your farm to meet its debt and capital lease obligations: 10. Term Debt and Capital Lease Coverage Ratio 11. Capital Replacement and Term Debt Repayment Margin The Coverage Ratio looks at the amount of money available to make payments relative to the size of those payments. Unlike the other measures, this one considers nonfarm income and withdrawals for family living, in addition to business contributions. A 1: 1 ratio means there is exactly enough money available. A higher ratio shows there is a safety margin above current obligations or that payments on some additional debt could be covered. A high ratio is desirable. The Repayment Margin shows the dollar amount of the difference between payments and available cash. It can be used to gauge the impact of changes in farm prices or costs on debt repayment capacity and to measure the ability of the business to repay additional debt. Financial efficiency “ Financial efficiency” measures farm performance in broad financial terms. Farmers are accustomed to production efficiency measures like crop yields per acre and average daily gain in livestock. Financial efficiency looks at various aspects of the performance of investments or expenses in producing revenue. There are five important ratios: 12. Asset Turnover Ratio 13. Operating Expense Ratio 14. Depreciation Expense Ratio 15. Interest Expense Ratio 16. Net Farm Income From Operations Ratio Asset Turnover Ratio measures how hard your investment in farm assets is working for you. This ratio Farmers increasingly rely on debt financing as the trend to larger farms continues. 