Integrated Farm Financial Statements (IFFS): A Farm Business Planning Tool

Journal of Agricultural and Applied Economics, Aug 2005 by Doye, Damona

Integrated Farm Financial Statements (IFFS) software was developed as an M.S. thesis project in the mid-1980s and was immediately put to use as a tool for business planning in one-on-one work with Oklahoma producers through the Intensive Financial Management and Planning Support project. An updated IFFS continues to be used with producers to project financial statements for 1-3 years. Strengths and weaknesses in the software and extension program are noted, along with components that might serve as a model for other programs. Links with research are discussed, as are prospects for future farm financial management programs.

Key Words: business planning, farm management extension, financial statements

JEL Classifications: Q12, Q14, Q16

In the 1980s, many farms were financially vulnerable due to high leverage positions and tenuous cash flow. The farm financial crisis precipitated development of new educational efforts and analysis tools to help producers and lenders evaluate the feasibility of alternative farm financial plans. At the same time, personal computers were becoming more prevalent and software was becoming more affordable and easy to use. In an informal survey at the Oklahoma Bankers Association Ag Conference in October 1983, approximately half of the participants indicated that banks had computer equipment and personnel to operate them. Ninety-five percent of the bankers responded that they would use computerized financial statements in their credit programs if they were made available (Love, Bonnett, and Hyer).

This article describes the development and application of a farm business planning tool, Oklahoma State University's (OSU) Integrated Farm Financial Statements (IFFS) software. In addition, features of the extension program, Intensive Financial Management and Planning Support (IFMAPS), which utilized the software, and the evolution of the extension program are described. Table 1 provides a timeline for significant events associated with the projects. Strengths and weaknesses in the software and extension program are noted, along with components that might serve as a model for other programs. Links with research are discussed, as are prospects for future farm financial management programs.

Software Development and Evolution

In an M.S. thesis project, Ruth Egbert set out to develop an integrated financial program on a microcomputer and use it to illustrate how financial management on farms could be improved (1984). The resulting software (based on VisiCalc) consisted of crop and livestock enterprise budgets, a cash-flow statement, networth statement and supporting schedules, income statement, financial ratios, and a monitor worksheet to compare actual to projected cash flow. Egbert used IFFS to analyze financial conditions of five Oklahoma farm situations with varying levels of equity, cash flow, and debt, illustrating how these variables impacted credit allocation and showing how variations in the financial structure within a year could affect credit allocation.

The application of IFFS from the beginning was on planning features and what-if analyses. Projected statements provided insights into anticipated credit needs, cash flow, income levels, and changes in the balance sheet and financial ratios, all of which are important information for producers seeking to build financially sustainable operations. Because enterprise budgets served as building blocks for whole-farm financial statements, projecting financial repercussions associated with altering the size of enterprises and even adding or removing enterprises from plans was easy. Analysts-producers, lenders, and educators-gained a keen awareness of the cash flow associated with components of the business. The financial statements were created through a combination of direct keyboard entry and automatic movement of data between statements. Although structured for use with enterprise budgets, initially there were no direct links with OSU enterprise budget software.

In 1988, a new version of IFFS was released that used three independent Lotus 1-2-3 worksheet files to build integrated financial statements: Crop and Livestock Budget Management (CLBUD), Additional Information (AI) Worksheet, and Multiple Year Integrated Statements (MULTSTAT) (Figure 1). Features were added to facilitate development of multiyear business financial plans, and CLBUD facilitated development of enterprise budgets. The budgets showed expected per-acre or per-head monthly receipts based on average yields and prices, along with monthly expenses required to produce crops or livestock. Budget templates for crops, forages, vegetables, fruits, nuts, and livestock used representative Oklahoma production systems and data, but templates could easily be customized to match an individual producer's situation.

The AI Worksheet supplemented the CLBUD files to list farm receipts and expenses not directly attributed to a particular crop or livestock enterprise; for instance, insurance, utilities, and real-estate taxes. Capital sales and purchases were entered in AI along with outflows such as family living and income taxes in consolidated statements for farm and family. CLBUD and AI data were combined in the Monthly Cash Flow Statement in MULTSTAT.