Understanding the Farm Income Statement
As a farmer, it is crucial to keep track of your farm's financial health, and one of the most important tools in your financial toolbox is the farm income statement. An income statement also called a profit and loss statement, is used to measure revenue and expenses. Unlike a balance sheet, which is a snapshot of the farm at a specific point, an income statement reflects a period of time, generally one year.
Understanding your farm's income statement can help you make informed decisions about your farm's future, determine income tax payments, analyze a business’ expansion potential, evaluate the profitability of an enterprise, and assist in loan repayment analysis.
Components of the Income Statement
The farm income statement comprises several components that provide an overview of your farm's financial performance, including revenue, expenses, and net income.
Revenue: Revenue refers to the money your farm generates from selling products or services. Revenue from farming operations includes sales of livestock, crops, and other products and income from custom work performed on other farms.
Expenses: Expenses refer to all costs associated with operating your farm. It includes expenses directly tied to the production of farm products, including feed, fertilizer, and seed – often called variable costs because they will vary depending on the products you sell and how much you produce. Other expenses include all the costs of running your farm, such as employee wages, utilities, interest, and repairs.
Cash vs. Accrual? Income statements can be prepared in two ways. A cash income statement measures revenues only when received and expenses only when paid. An accrual income statement measures revenues when generated and expenses when incurred, even if cash doesn’t change hands. The cash income statement is the easiest to prepare but doesn’t measure true profitability well because it fails to match the timing of income and expenses.
Depreciation? Depreciation is a non-cash expense that expenses out the cost of equipment or other capital improvements over their useful life. An accountant might calculate deprecation in an accelerated schedule for tax purposes, but a typical deprecation should be used for the income statement to properly asses income.
Net Income: Net income is the revenue left over after your farm's expenses have been paid. This is an essential metric for assessing the overall financial health and profitability of your farm.
