The end of the year is when businesses take an inventory of what ‘stuff’ is on hand and what the value of it is. What are the balances on the loans? Did we pay off the repair bill? The vet? The neighbor for the hay? Oh, did that guy pay us for the baler that we sold back in July?
Here is a typical farm balance sheet FSA Balance Sheet – this financial statement is used to record what is Owned and what is Owed on a farm. Lenders require this of each and every borrower. They use it to measure risk. If you do not have a loan, it is still an important statement for you to prepare each year and compare to last year’s. It tells how much money you have invested in the farm and where it is invested. It can be used to calculate your return on assets or return on equity.
What you own minus what you owe equals net worth or equity. So once you have your Profit (from a 1040 Schedule F, or other statement), you can divide by your total assets or total equity to get an estimate of your return on assets or equity. (To do the exactly proper calculation, you must do a bit of adjusting)
How much is a cow worth? A bale of hay? A bred ewe? A 3 year old greenhouse? In agriculture, we use Market Values for assets. In most other businesses, they use Book Value, or Adjusted Tax Basis (Purchase price less accumulated depreciation). A conservative market value is best, and try to keep the value the same from year to year. This way, a change in equity is due to farm profitability, not due to changes in market value from one year to the next.
A balance sheet always has to have a date, it is a snapshot of all of the assets and debt on the farm as of that date. Balance sheets usually have the assets listed on the left, and debt listed on the right. And they are arranged top to bottom according to time. Current assets on the top, intermediate assets in the middle, and long term assets on the bottom. Cash is listed first because we know the value of that today. Other current assets are things that are on the farm today, will be gone in 12 months time, but will be replaced with things that look very similar. Accounts receivable (money owed to you), feed inventory, fuel and fertilizer inventories, and supplies. Intermediate assets are things that will be on the farm from 1-10 years. This includes livestock and machinery and equipment, including the greenhouse. Long term assets are the land and buildings. It is difficult to put a value on these things, and it would take some time and cost some money to convert them into cash. Then there is usually a ‘non-farm’ assets section also: household furnishings and appliances, vehicle, collections, maybe a retirement account and maybe a camp or a rental home.
The liability side is similar. With bills owed to vendors, farm credit cards, and operating debt listed as Current Liabilities. Debt for livestock and equipment listed as Intermediate Liabilities, and the mortgage listed as Long Term. Plus there would be a ‘non-farm’ section that might include personal credit cards, car loans, student loans and other such debt.
Balance sheets are like many things that people do: the first time is very difficult, the second time we begin to have an idea about it, and after that it gets easier.
Here is a balance sheet tied together with an income statement as a complex Excel spreadsheet, http://www.vhcb.org/viability.html#ffw look near the bottom of the list.
Finpack Lite is a standalone free program that you can download and use to create a balance sheet. I have used programs from these folks at U Minnesota for 20 years, http://www.cffm.umn.edu/FINPACKlite/FAQ.aspx