ANALYZING FINANCIAL STATEMENTS
The financial statements of any agribusiness provide a wealth of information for
managers, owners, lending institutions, and the government. Some of this information
requires little interpretation, but much of it is meaningless unless it is put into proper
perspective. Many managers who look at a financial statement are like the explorer who
sees an iceberg for the first time and fails to realize that what is seen is only the tip and
that 90 percent of the iceberg is hidden under water. Highly useful information can be
found in financial statements, but this is not always apparent to the casual observer.
Without proper analysis, financial statements can be meaningless scraps of paper.
Financial analysis might be compared to a person’s medical checkup, where much
more is expected than a superficial glance from the physician. For physicians to
understand if or where a problem may exist, a series of tests must be performed, and
many questions must be asked. Those who are interested in the financial well-being and
progress of the business must follow the same procedure. Agribusiness fi rms that
survive and prosper must have managers who use the tools of financial analysis to check
the vital financial functions and health of the fi rm and then prescribe the changes
needed to keep the business on course to meet its goals and remain viable and
competitive in the future. Tools which allow those who are interested in the business to
use financial analysis in determining how successful the business performance has
been, what problems or opportunities exist, and what alternative or remedial courses of
action might improve performance in the future are discussed in this chapter.
Because they can be interpreted from differing points of view, a company’s financial
statements should provide enough perspectives to satisfy all interested parties. The
community looks at what the agribusiness is spending on being a good citizen. Members
of a cooperative are interested in the efficiency and savings that result from patronage.
Suppliers are interested in the fi rm’s ability to market and pay for products. Customers
are interested in the long-term viability of the fi rm and its ability to provide products at a
reasonable price and in a timely manner. Employees are interested in reaching fi rm goals
which, in turn, should increase their compensation, while the board of directors is
interested in the effectiveness of the management team in using the fi rm’s fi nancial
resources in the most profitable manner.
A manager such as Barry Meade, president of Meade Food Brokerage, is inclined to
approach the business financial statements primarily from two points of view. First, to
evaluate how the business has performed, and to determine ways financial information
can be used to improve decision-making in the future. Profit is the primary gauge for
success or failure. Some fi rms will organize the fi rm into separate “profit centers” to
facilitate this analysis. Second, the manager must also keep in mind that the financial
statements and their analysis should provide complete, accurate, and timely information
for lenders, investors, and the government, since success requires the satisfaction of
these interested parties.
Governmental units are interested in financial statements from several points of
view, depending on their particular needs. For example, the Internal Revenue Service is
interested in profits, the tax assessor is interested in asset valuation, and the Labor
Department is interested in wages and employee information. Each of the many
governmental units will require certain kinds of information and supplying it in proper
form is mandatory for the business.
The agribusiness manager must be aware of each of the perspectives in designing
and analyzing the financial statements of the business. Construction of these
statements in a format useful to the agribusiness fi rm is the first important step. This
chapter outlines how these statements may be used to evaluate agribusiness
performance — the second important step in effective financial management.
