Something that should be on every farm’s “to do” list in this New Year is the completion of a farm balance sheet. The farm balance sheet, also known as the net worth statement, is considered one of the core farm financial documents. The balance sheet is a snapshot of the farm’s financial position at one point in time. For many farm financial analysis programs, the recommendation is to fill out a balance sheet reflecting the farm’s financial position on a specific date each year, typically December 31 or January 1. The farm balance sheet, when done correctly and accurately, provides information about the ability of the farm business to meet financial obligations and the ability of the farm business to pay off all of its debts if the farm ceased operation tomorrow. It provides a picture, when compared against a previous year or years, of the financial direction of the farm.
Current assets are either cash or items easily converted to cash in a year or less. An example might be hay or grain in storage that could be sold quickly. A current liability is a financial obligation that is payable within a 12 month period. Examples include things such as a feed or veterinary bill or an operating loan. Intermediate assets have a useful life of greater than one year, but generally less than ten years. Examples include breeding livestock, machinery and equipment. Intermediate liabilities are debts with terms between 13 months and ten years, things like a machinery or equipment loan. Long-term assets have a useful life of more than 10 years. Examples include buildings, land and field tiling. Long-term liabilities are debts with repayment terms of greater than ten years. Examples include land mortgages and building payments.
The farm balance sheet provides several important measures or indicators of the farm’s financial health. One of the more commonly known and used measures from the balance sheet is the farm debt to asset ratio. The debt to asset ratio essentially measures what percentage of the farm business is “owned” by lenders. Dividing total farm liabilities by total farm assets provides the debt to asset ratio. That percentage or ratio is measured against a farm finance scorecard that rates various farm financial measures with a vulnerable, caution or strong financial position designation. For example, if I have $700,000 of total liabilities and $1,000,000 in assets, my debt to asset ratio is 70%. That is high debt percentage, and places the farm in the vulnerable category on the farm financial scorecard. At this level, it will be difficult to secure additional farm lending. Other measures provided by the balance sheet are farm net worth, working capital, and current ratio. An important aspect of filling out a balance sheet each year is that it provides information about whether or not the farm business is growing net worth. Net worth is defined as owner equity or how much of the farm business is owned free and clear by the farm. Ideally, this number should be growing over time, trending upward.
The usefulness and reliability of a farm balance sheet depends upon accurate information. Most farms have a good handle on their liabilities but may not always account for all farm assets. Don’t rely on your memory as you fill out the balance sheet. Take a walk around the farm and make notes. Write down bushels, tons, number of bales, number of head, lists of equipment and machinery, etc. Use conservative values in estimating worth and value. Separate farm and personal assets. If you need help, check in with your Ag lender.
For those who are interested in learning more, the Wayne County Extension is offering a six-session farm financial management school (FFMS) beginning in January of 2019 that will teach participants how to put together and use a balance sheet. The school begins the evening of January 16 and runs consecutively on Wednesday evenings through February 20. The school will use presentations, class discussion, group work, case farm examples and hands-on activities to teach participants how to assemble and use essential farm financial documents. Registration cost is $50/person for up to three people from the same farm business. Sponsorships provided by Farm Credit Mid-America, Farmers National Bank, Wayne Savings Community Bank and Farmers State Bank are helping to cover some of the program expenses. Pre-register by calling the Wayne County Extension office at 330-264-8722 by Friday, January 11. More information is available at http://go.osu.edu/2019FFMS.
Rory Lewandowski is an OSU Extension Agriculture & Natural Resources Educator and may be reached at 330-264-8722.
CFAES provides research and related educational programs to clientele on a nondiscriminatory basis. For more information, visit cfaesdiversity.osu.edu.