By: Eric Richer, OSUE Fulton County & Diane Shoemaker, OSUE Field Specialist, Dairy Production Economics
It is never too late to complete your farm’s balance sheet. The balance sheet is a “snap shot” in time of your farm’s financial position, including what assets you own and how they are financed. The balance sheet is also known as the net worth statement. When completed accurately and in a timely manner, the balance sheet and corresponding ratios are a very valuable tool to evaluate farm financial health. The balance sheet objectively measures farm business growth, liquidity, solvency, and risk-bearing capacity.
Categorizing Balance Sheet Items
The assets and liabilities on the balance sheet (including the financing of the assets) are used to determine the equity, or net worth, of the farm owner. The owner’s equity is used by lenders and insurers to determine a farm business’ value. Calculation of owner’s equity, or net worth is simple. Simply subtract the total liabilities from the total assets:
Assets – Liabilities = Owner’s Equity
Terms of Assets and Liabilities
Assets – Current assets can be converted to cash in one year or less. Common current assets are cash, growing crops, harvested crop inventory, market livestock, accounts receivable, and other similar items. Intermediate assets have an assumed useful life or depreciable value of one to ten years. Common intermediate assets are breeding livestock, machinery and equipment, titled vehicles, and not-readily-marketable bonds and securities. Long term, or fixed, assets are typically permanent items with value—depreciable or not—for more than ten years and include farmland, buildings, farmsteads, and other similar items.
Liabilities – Current liabilities are obligations that are due and payable in the next twelve months. Most common current liabilities include accounts payable (bills), credit card bills, operating lines of credit, accrued interest, and the current portion of principal on loans due in the coming year. Intermediate liabilities are obligations that are due to be paid back within two to ten years and are usually associated with intermediate farm assets on the left side of the balance sheet. Common intermediate liabilities are the principal remaining on machinery and equipment loans or breeding livestock purchases. Finally, long term, or fixed, liabilities are debts with terms greater than ten years like the principal balance remaining on a farmland or building mortgage.
Assets: Market Value vs. Cost Value
Market value – Today’s market values minus selling costs are used to determine market value. For example, a fully depreciated 15-year-old tractor certainly has a current market value greater than zero. A realistic current market value for this tractor can be obtained with an appraisal, or by looking at current sales of similar tractors online. Similarly, farmland bought 30 years ago likely has a different current market value today. In general, lenders prefer the use of current market values in a balance sheet for asset valuation.
Cost value – The net book value, or the cost of the item minus accumulated depreciation, is the cost value. For example, a fully depreciated 15-year-old tractor may have a cost value of $0 in a cost-based balance sheet. No appraisal is needed; only record the cost minus accumulated depreciation. Farmland (a non-depreciable, long term asset) purchased 30 years ago has a balance sheet value of the purchase cost. In general, accountants prefer cost value balance sheets as a more clear reflection of business success, based on business decisions rather than inflation, depreciation, or appreciation of investments.
In an accurately completed balance sheet, the cost value and the market value columns usually produce different total asset values.
Keys to Completing the Balance Sheet
Several keys can help farmer improve their accuracy, effectiveness, and efficiency when completing year-end balance sheets.
- Complete the balance sheet on the same date each year, usually as of December 31st. The information will never be more accurate than immediately after the end of the year.
- Inventory all assets, including standard weight and measure units (ie. lbs, head, bushels, bales, etc).
- Utilize current market prices for crop and livestock inventories.
- Calculate cost value for growing crops such as wheat, new hay seedings or cover crops.
- Include government payments and insurance indemnities yet to be received in accounts receivable.
- Apply conservative breeding livestock values, avoiding large year-to-year changes.
- Maintain a separate, easy-to-update depreciation schedule for depreciable assets.
Balance Sheet Tools
Balance Sheet Ratios to Evaluate Financial Health
A balance sheet is an accounting statement needed by a farmer to evaluate his or her financial health. An income statement and a statement of cashflows are also needed to provide the entire financial picture. These three statements can be used with the Farm Finance Scorecard available from the University of Minnesota’s Center for Farm Financial Health at https://www.cffm.umn.edu/Publications/pubs/FarmMgtTopics/FarmFinanceScorecard.pdf.
The scorecard uses these three accounting statements to determine financial ratios and measurements to benchmark a farm operation against acceptable industry standards.
An annual comparison of the same farm, referred to as a vertical analysis, can be used to evaluate the health of a balance sheet. With vertical analysis, one year’s balance sheet totals can be added to a spreadsheet with entries from previous years for comparison. Additionally, the spreadsheet would be used for upcoming years to continue the vertical analysis. This analysis does not benchmark a farm against the industry but, instead, shows the growth achieved and trends developed by the farm over time. This analysis is one of the features provided for farms that participate in the Ohio Farm Business Analysis and Benchmarking Program. Contact Dianne Shoemaker at firstname.lastname@example.org for more information about this program.
Hachfeld, G. A., D.B. Bau, C.R. Holcomb. 2016. Balance Sheet. Farm Financial Series, #1, University of Minnesota Extension.
Langemeier, M. R. 2011. Balance Sheet—A Financial Management Tool. MF-291, Department of Agricultural Economics, Kansas State University Extension. Available online at: www.agmanager.info