Understanding the Types of Farm Financial Statements
Running a farm is not an easy feat. It requires knowledge, experience, and excellent business skills. One of the essential parts of farming is keeping track of your finances. It’s crucial to know your farm's financial position to make sound business decisions and ensure your farm operations' sustainability. That’s where financial statements come in.
Financial statements provide an overview of your farm's financial performance. If you borrow money to run your farm, your lender will require financial statements prepared annually. If your total loan amount is above a certain threshold, they may require these statements to be prepared by an accountant. But generally, for small to medium-sized operations, lenders will use financial statements you’ve prepared with some adjustments. This guide will look at the different types of farm financial statements and their significance in managing your farm’s finances.
Basic Farm Financial Statements:
These are the basic financial statements a lender requires and will use for loan evaluation.
A balance sheet is a snapshot of your farm’s financial position at a particular date. Balance sheets are usually taken at year-end, so you will often see them dated December 31st. A balance summarizes your farm’s assets, liabilities, and equity. Assets are everything that your farm owns, including cash, livestock, equipment, land, and buildings. Liabilities are amounts you owe, such as loans and accounts payable. Equity, also called net worth, is total assets minus total liabilities and is the most basic ratio a lender will consider from your balance sheet. Equity or net worth is the amount you “own” of your operation.
The income statement, also known as the profit and loss statement, shows your farm’s revenue and expenses over a particular period, usually one year. Revenue includes sales of your farm products, government subsidies, or other income sources. Expenses include the cost of production, salaries, maintenance, input, taxes, and other related costs. The income statement provides valuable information on your farm’s profitability and expenses and helps you adjust and improve your farm's financial performance. Ideally, your balance sheet and income statement correlate – your starting balance sheet will be the starting date for your income statement period, and the ending balance sheet will be at the end of your income statement period. If a balance sheet is dated December 31, your income statement will start on January 1.
Cash Flow Budget or Projection
The balance sheet and income statement provide current and historical financial information. While that is important data on how the farm has performed, a lender is often more concerned about how a farm will perform in the future – especially if the loan application under analysis is for a farm expansion. The lender will be concerned about whether the new purchase meets its debt obligation. Since the historic statement won’t show this, a borrower and lender must prepare an accurate cash flow projection. A cash flow projection summarizes the expected cash inflows and outflows over a given period – generally a year. A cash flow projection or budget can also be used to prepare an operating line budget – a lender can see when the operating line will peak and when they can expect it to pay off.
Other Financial Statements:
These are additional financial statements included in financial statements prepared by an accountant. They may or may not be required by a lender for loan approval.
Cash Flow Statement
Like this projected cash flow, the cash flow statement tracks the cash inflows and outflows from your farm’s operations, investments, and financing activities. However, unlike the projection, this is the cash flow that occurred in a historical period. This statement highlights your farm’s liquidity and helps you manage and anticipate your cash flow needs. It is essential in planning for capital expenditures, debt repayment, and other farm-related expenses.
Statement of Owner’s Equity
The statement of owner’s equity highlights the changes in equity in your farm between two dates. It shows how much equity has increased or decreased and why. It summarizes all the transactions affecting equity, such as net income or loss, capital contributions, and drawings. This statement helps evaluate the sustainability of your farm’s equity and can help you plan for the future.
Notes to Financial Statements
Notes to financial statements provide additional information on your farm's financial position. The notes can explain specific transactions, accounting policies, and significant events that affect your financial statements. This information is essential in understanding the financial statements and making informed decisions.
