10 Tips on Preparing Your Farm Financial Statements
You’ve taken the plunge and have approached a lender about starting (or growing) the farm you’ve dreamed about for years. They’ve requested financial statements, and now you aren’t sure where to start. Preparing financial statements for the first time (or the fiftieth) can be challenging, but they are essential. Lenders rely on these statements to assess creditworthiness before approving loans. Check out our top ten tips on preparing your financial statements for your lender.
Keep accurate records.
Keep track of all income, expenses, and purchases as soon as they happen. This will help you build a solid record of your farm's financial health. Maintain separate records for your farm's transactions and your personal financials to streamline the accounting process. Also, keep accurate records of your farm’s annual production – crop yield, pregnancy rates, production, etc. These records can support your financial records and build a case for your farm’s viability to your lender.
Get organized.
Gather all the financial documents you will need to create your statements. This includes tax returns, profit and loss statements, balance sheets, and other relevant documentation. Having everything in one place will make the process much easier.
Know your numbers.
This may seem like a no-brainer, but it's important to understand your farm's financial situation clearly. Know your income, expenses, debts, and assets. This will give you a good starting point for creating and justifying your financial statements when your lender asks questions.
Prepare a business plan.
A business plan is a document that outlines your business goals, strategies, and financial projections. A business plan will help you secure financing from lenders as it will show them you have a well-thought-out plan for your business.
Understand your cash flow.
Cash flow is the lifeblood of your farm. Cash flow helps to provide an accurate picture of your farm’s liquidity and enables you to plan better. Keep a close eye on your cash inflows and outflows, so you can predict cash crunches and prevent them before they happen.
Prepare an accurate balance sheet.
Your balance sheet gives a snapshot of your farm's financial situation at a single point in time. It shows what your farm owns and owes and provides insight into your farm’s long-term financial stability. A balance sheet also helps lenders assess creditworthiness when providing loans. A well-prepared balance sheet includes accurate figures for assets (such as land, buildings, and equipment), liabilities (outstanding debt), and owner’s equity.
Provide detailed income statements.
Lenders also want to know about your farm's revenue and expenses so that they can ensure that you have a stable income stream to repay their loans. Your income statement provides this picture by detailing your farm's income, expenses, and profits or losses for a specific period. This statement must be prepared in a simple format. It should include overhead expenses, taxes, salaries, depreciation, the cost of goods sold, and any other expenses incurred during the period.
Include financial projections and a budget.
Lenders like to see farmers have a business plan and are thinking about the future. Include projected income and expense figures for a few years in your financial statements. Prepare an accurate and realistic budget for the coming year. A lender will rely on a budget to establish loan amounts for an operating line.
Seek help from experts.
Preparing your financial statements for a lender can be complex and time-consuming. Financial advisors and accountants can help you prepare your statements and provide guidance on presenting them to lenders. If you are unsure how to proceed, don't hesitate to seek help from experienced professionals.
Be your own advocate.
Know your options and shop around for the best loan option. There are a variety of lenders and financing options available to farmers. Researching these options will help you to choose the best for your needs – some ag lenders only do operating loans, some do real estate loans, and some focus on equipment financing. Know what you need and then compare offers from multiple lenders.
