Understanding the Farm Balance Sheet
Farming can be profitable, but like any other enterprise, it requires sound financial management and the guide of farm financial statements. And one of the essential tools for managing finance is the balance sheet. A balance sheet is a picture of a farm’s financial health at a single point in time. You can think of it like a snapshot. It reflects the past transactions but not how they were obtained. It overviews a farm's assets, liabilities, and equity. There are three main parts to a balance sheet: 1) assets, 2) liabilities, and 3) owner equity.
Components of the Farm Balance Sheet
Assets:
Assets refer to everything the farm owns that has value. It includes land, buildings, equipment, livestock, feed, and other inventories. Accounting practices will value assets on the balance sheet at either fair market value, considering age and condition, or at historical cost minus accumulated depreciation. Assets are further divided into two categories – current assets and non-current assets.
Current Assets: Current assets are assets that can be converted into cash quickly without disrupting the function of the business or assets that will be used up in one year. Current assets include cash, accounts receivable, marketable inventories, prepaid expenses, and supplies.
Non-current Assets: Non-current assets are assets that are not meant for sale or consumption but contribute to the farming operation's productivity. It includes land, buildings, breeding livestock, machinery, and equipment.
Liabilities:
Liabilities refer to everything the farm owes. This includes loans, accounts payable, taxes payable, and other obligations. Just like assets, liabilities can be further categorized as current and non-current.
Current Liabilities: Current liabilities are liabilities due within a year, such as accounts payable, the balance of the operating line, accrued taxes, the annual principal and interest due on term loans, credit card debt, and other current bills.
Non-current Liabilities: Non-current liabilities are the amount the farm owes that are not due within one year. It is generally the loan balance on long-term loans for the purchase of land, buildings, equipment, or livestock.
Owner Equity:
Owner Equity refers to the net worth of the farm. Equity represents the farm owner's investment and retained earnings generated over time. Equity is calculated by subtracting the farm's total liabilities from its total assets.
Ratios Calculated from the Balance Sheet:
Using the data from your balance sheet, your lender will calculate a series of ratios to determine the financial health of your operation. Ratios can help assess the farm's performance, compare it to industry norms, and identify areas that need improvement.
Debt to Asset: Measures the farm's dependence on debt financing.
Total liabilities/Total assets
Current Ratio: Measures the farm’s liquidity (ability to pay off short-term debts).
Current assets/current liabilities
