At multiple-day sessions, producers frequently offer me their financials for review and quick analysis. To provide feedback, I rely on some key focal points and simple calculations. While all operations are different, these critical data points concisely and accurately summarize a business’ financial status.

In regard to the balance sheet, I glance through the top half of the sheet first, or the current assets and current liabilities. One of the first numbers to calculate is the net working capital (current assets minus current liabilities). It is most important to determine the trend and direction of the numbers, as well as the reasons behind the change.

Next, divide net working capital into total expenses. If net working capital is less than 10 percent of the total expenses, the business is vulnerable to profit and cash flow shocks. Any number above 30 percent indicates agility and resilience, and the ability to handle macro shocks such as weather or market disruption. Maintaining a higher percentage of net working capital to expenses can also provide the flexibility to grow the business.

Next, I glance at the accounts payable. In the economic downturn, this area should be watched closely as it can be one of the first signs of financial distress. Remember that accounts payable is defined as any debt over 30 days.

Thumbing through the inventory and accounts receivable, I look to see if their total is greater than the amount owed on operating lines of credit. Often, a business in financial difficulty is not able to pay down lines of credit, which then becomes carryover debt. Of course, this commonly leads to refinancing into intermediate- or long-term debt. When used every two to three years, this type of restructuring strategy is a sign of a business in real difficulties. And normally, businesses that repeatedly employ this strategy face management or other outside financial issues.

I also scan the income statement to determine one of my favorite ratios:  operating expenses to revenue. To calculate this indicator, divide operating expenses (excluding interest and depreciation) into total revenue. Again, the trend and direction are the first things to consider and I encourage producers to think critically about the reasons for the fluctuations. If the operating expense to revenue ratio is 70 percent or less, that is a good sign. Over 90 percent indicates the business may have profitability issues and be dependent on off-farm income.

Normally, after this quick snapshot analysis, I conclude my review. It is interesting that while farm and ranch businesses struggle with many of the same issues, each operation is unique with its own set of dynamics. Yet, regardless of size, scope or situation, these financial data points reliably provide insight into the financial direction of a business.