Our 2018 Farm Financial Management School began on Monday evening, January 15 and this first session focused on the farm balance sheet. The farm balance sheet is a core financial document. The balance sheet provides a snapshot of what the farm business owns as well as what it owes. Generally, a farm balance sheet is put together to reflect the farm’s position as of January 1 of the New Year. The farther along we get into the year the more difficult it becomes to look back and remember with accuracy what that early January financial picture looked like. Farms involved in comprehensive financial analyses typically put together a beginning balance sheet in January and then an ending balance sheet in December.
A balance sheet consists of assets, liabilities, and equity. Assets are the things you own. That includes things like your checkbook balance, tractors, equipment, machinery, cattle, buildings and land. Assign a realistic and conservative value to those assets. Liabilities are debt, the money you owe. Liabilities include things like a feed or vet bill, an operating loan, a mortgage payment for land, the loan for a new milking parlor, or a loan for some piece of equipment or machinery. You can start a farm balance sheet by sitting down and making a list, but I also encourage a walk around the farm with the balance sheet in mind. You might be surprised at what you have missed. Now, subtract your total liabilities from your total assets. The result is farm net worth or equity.
Most balance sheets organize assets and liabilities into current, intermediate, or long-term categories. A current debt is one that is due within 12 months. A current asset is one that can be or will be, converted to cash in the next year or will be used up within the next 12 months. Some examples include the checkbook balance, a bin full of grain or milking parlor supplies like teat dip. Intermediate assets and debts have a longer lifespan. These are items that last 1-10 years. This would include assets like tractors, breeding livestock, machinery or equipment and the debt incurred to pay for them. Long-term debts and assets last more than ten years. A land contract (mortgage payment) would be an example of a long-term debt, while land and buildings are types of long-term assets.
Comparisons between balance sheets over a period of years will show if the farm business is growing or declining. There are five ratios calculated from a balance sheet. The current ratio and the working capital both help to answer the question; can the farm meet current debt obligations and payments? Within the past 1-2 years, we have heard more about the importance of working capital, essentially cash reserves, as a measure of farm financial health. Three other ratios calculated from the balance sheet answer the question of solvency, that is, can the farm business pay off all its debts if it were sold tomorrow? Solvency measures evaluate the financial risk of the farm business and potential borrowing capacity. Those specific ratios are farm debt to asset, farm equity to asset, and farm debt to equity.
For more information about farm balance sheets or to obtain a form to help you complete a farm balance sheet, contact the Wayne County Extension office at 330-264-8722.