The Financial Troubleshooting of Farm Businesses: A Diagnostic and Evaluation System (DES)

The financial troubleshooting of a farm business can be an intricate and time-consuming task. Identifying a financial problem and its cause(s) can be complicated by incomplete and inaccurate production and financial information as well as the interrelationships that exist among production, financing and marketing decisions. Often financial troubleshooting is further complicated by family and emotional considerations that are unique to each situation.These complications can result in an incorrect diagnosis as well as the treatment of symptoms rather than the causes of a financial problem. The family and emotional aspects of financial troubleshooting alluded to above are not addressed in this paper. However, an analytical framework—the Diagnostic and Evaluation System (DES), which can be used to assist in the identification of financial problems and their causes and in the evaluation of alternative management responses to those problems—is discussed. The discussion will proceed as follows. First, the financial reporting and analysis criteria recommended by the Farm Financial Standards Council (FFSC) are briefly reviewed.Then, an overview of DES is presented. Selected FFSC financial measures are discussed in conjunction with the diagnostic component of DES.The DuPont Financial Analysis System is then discussed as a procedure to evaluate the effectiveness of different responses to resolve financial problems. Finally, a case study is used to illustrate the DES. FFSC Reporting and Analysis Criteria The approach to financial reporting and analysis used in DES complies with the recommendations of the FFSC, so a brief review of those recommendations is presented in this section of the paper. The Farm Financial Standards Task Force (FFSTF) was formed in 1989 to provide standardization to financial reporting and analysis as related to agricultural businesses.The FFSTF had two major goals—to promote uniformity in financial reporting and to present standardized definitions and methods for calculating financial measures. The FFSTF issued a report in 1991 that provides guidelines for reporting and analyzing information for agricultural producers. In 1994, members of the FFSTF updated the report and changed the name of the organization to FFSC, which will be used throughout the remainder of this paper. In 1995 and 1997, the FFSC updated the report by clarifying and refining procedures for reporting and valuing inventories, raised breeding livestock and capital leases, and added a glossary and section on disclosure by notes.