It’s the beginning of the year, and we all should be thinking about balance sheets. Well, we’re probably thinking more about keeping the livestock water unfrozen, but when you have a few moments after supper you might want to turn your thoughts to balance sheets.
A balance sheet is a report, generally created annually, that helps you understand what you own and what you owe on your farm. It is the most basic financial statement and very helpful, when compared year-to-year, for creating ratios that help you understand trends in your operation, or when preparing for a loan. Ideally, you will want to see what you own (assets) increase—over time and in comparison to what you owe (liabilities).
Assets are categorized in three ways:
- Current assets are cash or anything that you can easily turn into cash, such as growing crops, or anything that will be used up within a year, such as stored feed, seeds or fuel.
- Intermediate assets are things that have a useful life of more than one year, but less than 10. Most equipment, breeding livestock and perennial crops are intermediate assets.
- Long-term or “fixed” assets are things like buildings and land that won’t be going anywhere for a long time.
A balance sheet is a snapshot of your financial situation at one point in time. Given that current assets contain things used up within a year, your balance sheet might fluctuate a lot throughout the year. To be useful in making comparisons, you want to create the balance sheet at the same time every year. Most farmers develop their balance sheet in January each year.
In order to get a good handle on what your current assets are, you not only need to know what you have in your checking and savings accounts (which you can get from your bank, checkbook or bookkeeping program), but also need to take a physical inventory of all other assets.
When I say inventory, I mean going outside and counting things. Counting (or make an educated estimate) how many hogs you have, how many big rounds of hay, how many pounds of oats are in the bin, how much stored calcium you have, or how many boxes of potatoes are left in storage. These are all current assets.
You’ll also want to figure out how your intermediate and long-term assets have changed. Did you sell or buy any equipment this year? Pick up a new piece of property, or put up a shed?
Once you have a current count, you estimate the value of those assets and put them into your balance sheet. Most farmers value their assets at what they could sell the item for at the time of the assessment—the current cost of hay or corn, or the going price for that John Deere 4430. A website such as Tractor House (www.tractorhouse.com) can help you estimate equipment values.
So, if you haven’t done it yet, you need to get out there in the snow to get that counting done. If you don’t do it in January, you won’t be able to make a beginning-of-the year balance sheet, as inventories aren’t things that you can just make up, and it can be hard to go back and estimate.
For more information on creating a balance sheet, check out pages 89-100 of Fearless Farm Finances.
Jody Padgham is the Financial Director for MOSES, and Editor of Fearless Farm Finances.
January 22, 2014