Financial Ratios part 7 of 21: Net farm income
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Financial ratios and indicators can assist in determining the health of a business. There is a minimum of 21 different ratios and indicators that can be looked at by many financial institutions. You cannot look at a single ratio and determine the overall health of a business or farming operation. Multiple ratios and indicators must be used along with other information to determine the total and overall health of a farming operation and business. This series of articles will look at 21 commonly used ratios and indicators.
Net farm income is a measure of profitability and is determined based on information derived from a business’ or farm operations income statement. The term “profitability” is the difference between the value of what is produced or service provided and the cost of producing that product or providing that service. The net farm income specifically provides the amount of money that has been returned to the owner of the farm or business for their investment of labor, management and equity.
The following equation will determine your net farm income:
Net Farm Income = Gross Cash Income – Total Cash Expenses +/- Inventory Changes - Depreciation
Net farm income is measure in a dollar value. This is one of those measures that is easy to understand and see – the larger the number, the more return on the owners investment into the business. The question that must be answered by the owner when looking at this number is was the net farm income value worth the investment of labor, management and equity?
If you have any further questions, please feel free to contact your local farm management educator or the author, Adam Kantrovich.
Information for this article has been gathered using material created by the University of Minnesota Center for Farm Financial Management (CFFM).
You can read the other articles in this series:
Part 1: The current ratio
Part 2: Working capital.
Part 3: Working capital to gross revenues
Part 4: Debt-to-asset ratio
Part 5: Equity-to-asset ratio
Part 6: Debt-to-equity ratio
Part 8: Rate of return on assets
Part 9: Rate of return
Part 10: Operating profit margin
Part 11: The EBITDA measurement of profitability
Part 12: Operating profit margin
Part 13: Capital debt repayment margin
Part 14: Replacement margin
Part 15: Term debt coverage
Part 16: Replacement margin coverage ratio
Part 17: Asset turnover rate
Part 18: Operating-expense ratio
Part 19: Depreciation-expense ratio
Part 20: Interest-expense ratio
Part 21: Net income ratio
