Life on the farm can be busy, but having up-to-date and organized financial statements on hand are beneficial when looking at new opportunities for the farm. At DFA Financing, provided by Agri-Max Financial Services, we want to ensure our members have the knowledge needed to understand the importance of financial documents on the farm. In this blog series, we will feature three different financial documents, this blog will feature balance sheets, one of the most important statements in financial accounting.
A balance sheet is one of the critical financial statements that provides information about a farm business. A balance sheet provides a clear picture of what your farm’s financial position is on a specified date. The picture is created by looking at the farm’s assets and liabilities. The balance sheet is also known as the statement of net worth. A well-prepared balance sheet can provide critical insight to the farm’s business growth, liquidity and risk-bearing capacity.
What is a balance sheet?
As stated, the balance sheet looks at assets and liabilities, so what is an asset? What is a liability? Assets are items owned by the farm that hold value. They include items that the farm uses to produce the products they sell or to take care of the animals they own.
Assets are broken into three sections: current, intermediate and long-term. Current assets are assets that can be liquidated the fastest and usually consist of cash on hand and in bank accounts, accounts receivable (milk check), pre-paid expenses and crops and/or other inventories. Intermediate assets are assets that can be liquidated, but not as quickly as current assets, and usually include livestock, machinery/equipment, retirement accounts and equity you hold in your cooperative. Long-term assets are assets that have the least amount of liquidity and usually consists of real estate.
Liabilities on the other hand, are debts owed to lenders, vendors and/or private individuals. Liabilities are also broken into the same three sections: current, intermediate and long-term.
Current liabilities (12 months or less) can be credit cards, operating lines of credit and accounts payable. Intermediate liabilities (1-7 years) can be livestock loans, machinery/equipment loans, revolving capital loans and vehicle loans. Long-term liabilities (10+ years) are usually mortgage loans secured by the real estate assets.
Taking the total assets and subtracting total liabilities on the balance sheet is how a farm’s net worth is determined. A farm’s net worth is anything that would be left after selling all the assets and paying off all of its’ liabilities. Net worth is usually converted to a percentage and is what is known as a farm’s equity.
Net worth = total assets - total liabilities
Equity = net worth/total assets
Example of an “average” balance sheet for a small dairy:
Keys to completing the balance sheet:
The DFA Financing website hosts an easy-to-download balance sheet that is available to you anytime. This is the balance sheet we ask members to fill out during the loan application process. Some important things to keep in mind when filling this out are:
- Complete the balance sheet on the same date each year, usually as of Dec. 31
- Make an inventory of all assets using standard weights and measurements
- Utilize current market prices for crop, machinery/equipment livestock inventories
- It will help a lender if a detailed list is created for the items mentioned above
- Value growing crops at the cost of inputs
- Include any government payments or other income yet to be received as accounts receivable
The beginning of the new year means it is time to review the previous year and begin tax preparation. There is no better time to update your balance sheet than before the ground thaws and planting season begins. Don’t forget that the balance sheet provides a full financial picture of your farm. Updating the balance sheet annually will provide insight on how your farm stands at a certain point in time, can serve as a communication tool with others who manage the farm and allows your existing, or potentially a new lender to understand your current situation in an easy and organized fashion.
Click here to download our easy-to-use balance sheet.