Purdue Pork Page Archive

Risk Awareness Checklist: Financial Risk

1. Have you had a recent insurance check-up for health, life, casualty, property, disability, long-term care, and Medicare/Medicaid? Yes or No

Question 1: The correct answer is Yes.
Periodic insurance check-ups are important to ensure you have the proper amount of coverage for your home, business, life, and medical expenses. Insufficient coverage could leave you with large expenses in the event of a disaster or lawsuit. It is also important to be sure that you understand exactly what is covered under your insurance policies. (ex: the barn is covered but not equipment stored inside) Having regular preventative health check-ups is also important for essential personnel. Preventative medical and early intervention is usually cheaper than treating catastrophic health problems and results in fewer days away from work.

2. Is your disaster insurance coverage sufficient to replace losses in the event of a disaster? Yes or No

Question 2: The correct answer is Yes.
If you are not carrying enough disaster insurance, you will not recover the full value of items lost in a disaster. This could mean great financial losses to you.

3. Does your marketing plan cover your cash flow needs? Yes or No

Question 3: The correct answer is Yes.
If you cannot meet cash flow needs, you should adjust your marketing plan before you get into a cash flow bind and are unable to cover expenses when they are due.

4. Do you use up-to-date financial accounting and control methods? Yes or No

Question 4: The correct answer is Yes.
Using current accounting methods (GAAP accounting principles) will keep your farm records consistent and up-to-date. Current records make it easier to use financial control methods and improve the financial condition of your farm. Without using these methods, you could unknowingly enter serious financial trouble.

5. Are your financial ratios comparable to those of similar operations? (For example, is your current ratio [assets divided by liabilities] at or above 1.5?) Yes or No

Question 5: The correct answer is Yes.
A list of benchmark financial ratios is available on page 10 in the Purdue University Extension Publication EC-712, "Measuring & Analyzing Farm Financial Performance". If your farm does not meet or exceed the benchmarks in each area, then you need to find ways to improve your farm's performance in those areas. For example, your current ratio (current assets divided by current liabilities), should be above 1.5 (or the standard level for your farm size) to ensure that you can cover short-term debts with short-term assets. If this ratio is less than 1 you need to reduce your current liabilities, or you will have to sell some long-term assets in order to cover short-term debt.

6. Is your asset turnover ratio above the average for your farm size? Yes or No

Question 6: The correct answer is Yes.
If your Asset Turnover Ratio is too low, then you should look for ways to use your assets more efficiently to improve your profit margin.

7. Do you contact your lender at least once a month? Yes or No

Question 7: The correct answer is Yes.
Frequent contact with your lender will help you to develop a positive lender-borrower relationship, which will make it more likely that your lender will assist in improving your financial status. It is important to keep your lender updated on your business activities and outcomes (both good and bad).

8. Have you calculated your breakeven cost of production in the last month? Yes or No

Question 8: The correct answer is Yes.
Because of fluctuating prices and input costs, you should reevaluate your breakeven cost of production monthly. If your margins are narrowing due to rising input costs or falling prices, you can look for ways to cut costs or increase revenue before you begin to lose money. This will also help you to set future breeding targets, adjust market weights, adjust diet formulations, and develop successful marketing plans.

9. Are your financial projections based on accurate historical data? Yes or No

Question 9: The correct answer is Yes.
Using past financial statements to base financial projections on can improve the accuracy of your financial projections. However, when major changes are being contemplated, care should be taken since the future may differ from the past.

10. Do you have a long-term plan for capital expenditures? Yes or No

Question 10: The correct answer is Yes.
A long-term plan for capital expenditures will help you accumulate equity, so that you can afford to purchase new equipment when it is needed. Planning ahead also gives you some control over or planning opportunities with respect to interest expense and payment plans.

11. Do you estimate the probability of success or failure of a new venture? Yes or No

Question 11: The correct answer is Yes.
Using an economic profitability analysis method such as Net Present Value or Internal Rate of Return to calculate the benefits or losses of a project prevents you from making unprofitable investments. You should always analyze multiple scenarios. One of the scenarios should be "the worst case" outcome.

12. Do you have a contingency plan to deal with future risks? Yes or No

Question 12: The correct answer is Yes.
Looking ahead to future risks and devising ways to deal with them can help you prevent those risks from occurring or reduce their effect on your business.


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