It is the first of February … and you may now realize that making New Year’s resolutions is a waste of time, energy and promotes mental anguish for those of us who do not have the self-discipline to change poor habits.
Taking inventory and creating the annual balance sheet, however, should put a gleam of excitement into every farm manager’s eye! (Don’t worry; I am fully aware that this perspective on both resolutions and balance sheets is not widely held.)
It is now past time to take inventories and prepare balance sheets. If you operate on a calendar year, your balance sheet should be dated Dec. 31 or Jan. 1. If your balance sheet is not done, set time aside and get it done now.
Every day that goes by makes creating a good Jan. 1 balance sheet more challenging.
Quick review: A balance sheet paints a picture of your business on one day in time. We choose the same day to paint this picture each year (such as Jan. 1), so when we compare changes from year to year, we are comparing similar points in time.
A dairy that raises a great deal of feed will have a very different balance sheet on May 1, when many feeds are used up or growing than they will on Jan. 1, when much of the year’s feed is in storage on the farm.
Assets
The farm’s assets (the stuff you own) include cash, accounts receivable, feed and supply inventories, a lot of cows, heifers and calves, machinery, equipment, buildings, land and perhaps stocks and shares in cooperatives.
Assets are categorized as short, intermediate or long-term, depending on how readily they are convertible to cash.
Liabilities
The farm’s liabilities represent what you owe to others. Debts are categorized by how soon they will be paid off. Current liabilities include accounts payable (such as feed and utility bills), lines of credit and principal and interest due in the next 12 months on longer-term debt.
Long-term debt typically includes mortgages on properties that are financed for more than 10 years. Nearly everything else is financed between current and long-term and is lumped together as intermediate term debt.
Items financed here typically include cows, tractors, trucks, skid loaders and other machinery and equipment.
Net Worth
A satisfying part of the balance sheet (we hope) is the net worth calculation. After completing an accurate listing of both assets and liabilities, the next step is to calculate the difference between the two.
In a happy world, the assets will be considerably greater than the liabilities. … that difference is labeled net worth or “owner’s equity.”
The objective of the business game is to increase net worth every year because your business is making money (as opposed to increasing because the value of your land theoretically increased four times because someone wants to build 30 houses on it. (Remember that you would have to sell it to benefit from this “increase” in value.)
Debt to assets
Another important figure to monitor is your percent debt or percent equity (opposite ways of looking at the same thing.) Divide total assets by total liabilities. That figure multiplied by 100 will tell you the total percent debt of your operation … or how much is owned by someone else.
This should be no higher than 40 percent. While some farms may carry debt at or higher than this level for short periods of time, it can be very stressful and leave the farm vulnerable in times of low product prices and/or high input prices. Like now.
Other farms cannot profitably operate at debt levels less than 30 percent.
We quickly reviewed only two key points to monitor on your balance sheet. Balance sheets provide additional valuable information, particularly if they are completed each year. Your time creating and monitoring the farm’s balance sheet is an important investment in the future of your farm.
Find more information about balance sheets and farm business analysis at farmprofitability.osu.edu. Good luck!
