The Use of Financial Statements in the Farm Business
This is the time of year that farmers should prepare some financial statements to determine the financial progress of their operations. The three financial statements that one should prepare are:
- the net worth or balance sheet (they're the same thing),
- the income statement, and
- the cash flow statement.
These statements will assist the farmer in determining what financial impact his management had on the business in the previous year.
Let's look in to some more detail about these statements. First, the balance sheet. It expresses the solvency and liquidity of the farm business. Solvency means that the value of the farm assets are greater than the value of the liabilities. A farm that is fifty percent owned by the lending institution and fifty percent owned by the farmer is a stable operation. If the lender's percentage increases, it may become increasingly difficult for the farmer to have enough in net income to service debt and to provide a withdrawal for family living expenses.
Liquidity is the other important factor that is calculated from the balance sheets. This factor is
Current Assets divided by Current Liabilities.
A ratio of one-to-one is adequate while a ratio of 1.5 to one is preferred. A current ration of less than one says the farm will experience some difficulty in paying bills.
The income statement displays the revenue expenses generated by the farm business. The bottom line of the income statement is net income. This net income is the yardstick to see if the farm business made any money. Farm's typically should net twenty to thirty percent of the farm sales. The net income is a tool that measures the performance of the assets involved in the farm business.
Preparation of these financial statements each year will allow the producer to compare one year with the next. These comparisons can be very valuable in trouble shooting financial challenges.
If you need assistance in preparing these statements, please contact your county Extension agricultural agent.