Understanding Your Farm Financials

Most people who get into farming do so because they want to farm, not because they want to think about numbers. The fact is, though, that farms are businesses, and in order to be able to keep farming, the operation must remain financially viable. And that means paying attention to your finances.

A good understanding of your financials and accompanying financial reports helps when it comes time to borrow money or make daily purchasing or sales decisions. That way, you can ensure that you have adequate working capital to continue operating. These reports also help when considering more long-term projects, such as diversifying crops or buying more land, and complying with income and payroll tax requirements. More generally, it can help guide your long-term business strategy so you can achieve the goals you’ve set. Let’s dive in for an explanation of common financial reports and a key financial indicator you should always be aware of.

Balance sheet

A balance sheet gives a summary of the assets, liabilities and equity of a business at a particular point in time. In other words, it details what you own, what you owe and how much you’ve invested. Common assets include things like cash on hand and savings, real estate including your home and farmland, equipment and inventory of livestock or harvested crops. Liabilities include debts for real estate, equipment and operating or longer-term loans, as well as open accounts you may have at your suppliers. The balance sheet should be generated at least annually and compared year-over-year to show your progress.

Income statement

Also called a profit and loss statement, the income statement details the operation’s income and expenses during a given period. By capturing what money has gone out and come in, it answers a very simple question: Did you make any money? If so, you then can decide what to do with your profits, like investing in your operation, making capital purchases or adding to your savings. If not, you can explore why and make any necessary operational changes. As with the balance sheet, the income statement should be generated at least annually.

Working capital

This is literally the amount of capital you have on hand to work with for paying bills, buying supplies and investing in equipment. Working capital is the difference between current assets and current liabilities. This is a critical number that shows how liquid you are and whether you’ll be able to continue operating. Will you have enough money to buy the inputs you need to generate the crop you projected? Can you pay your employees? Can you put fuel in your trucks? Farmers should always have a grasp of their working capital level.

Gaining the value of these financials requires good recordkeeping, first and foremost. The process used depends on the individual. More tech-savvy farmers use tools like Quicken, while others opt for a simpler approach like an Excel spreadsheet or even a notepad and calculator. The key is to be consistent and accurate in tracking income and expenses.

Generating financial reports using the records you’ve kept can be done by an accountant or bookkeeper, or, with a little financial education and the right tools, farmers can keep up with their own financial statements. Many beginning farmers find that using an outside resource relieves stress and enables them to focus on farm management, especially early in their operation. Later, once they’ve gained a financial foundation from their CPA or bookkeeper, they can take it on themselves. Educational workshops offered by Farm Credit organizations, extension services and others can also provide a strong foundation for learning about financials.

One way to tell how your farm business is doing is by comparing your results with industry-specific benchmarks, ideally as local as you can find to account for climate and soil variables. Specific benchmarks vary based on the ag sector. Dairy operators may look at cost and income per cow, while crop farmers will look at cost per acre. Farmers can find benchmarks through their state extension offices, and if they have an ag lender like Farm Credit, can ask their loan officer to evaluate how they compare with other farmers.

Beginning farmers often don’t give themselves enough credit for their capacity to learn and manage their financials. It can be intimidating, but the more you understand, the more productive your conversations will be with your lender and accountant, the better management decisions you’ll make – and the stronger your operation will become.

Sources:
Lisa Storm, Chief Credit Officer, AgGeorgia Farm Credit 
Chris Jacobs, Corporate Credit Manager, AgSouth