Year End Financial Review
We are getting down to the end of the year. Producers are starting to think about how things have gone this year, doing some income tax management, and planning for next year. This would be a great time to start doing some analysis of the financial performance and position of their farm business.
They should start summarizing financial records and examining how the business performed over the year. Two financial statements needed to look at the situation are the Income Statement and Balance Sheet. A farm business should prepare these two basic financial statements annually!
An accrual adjusted income statement will provide a more accurate estimate of the income earned by the farm business. It simply starts with the cash income earned by the farm business and then adjusts this cash income figure by taking into account changes in inventories and prepaid accounts. This accrual adjusted income figure is a more accurate reflection of the income earning performance of the farm business than the estimate provided by "Internal Revenue Service's Schedule F." It accurately reflects the income earned by the farm business during the year.
The second financial statement that should be prepared annually is the Balance Sheet. It is simply a listing of all assets owned and all liabilities owed by the farm business. The difference between assets and liabilities is Net Worth or Equity. Change in Net Worth is one of the best measures of financial progress by the farm business. If your farm's Net Worth has increased over the past year that implies that the farm business has made financial progress. The only question that remains involves the source of the increase.
Did the increase in Net Worth result from operation of the business? Was it simply a result of increases in the value of owned assets? If the increase in Net Worth was exclusively the result of an increase in asset values, this implies that your farm business was not profitable. If asset values fall, your Net Worth will decrease! You need to look for changes to help make the business more profitable.
Preparation of an Income Statement and Balance Sheet will help you analyze the financial performance of your farm business. This should help to insure a more successful and sustainable farm business into the future. Example Income Statement and Balance Sheet forms are contained in the Kentucky Farm Record Book, available from your County Extension Office.
For More Information
For additional information, please contact Richard Trimble.