Financial reports are often seen by farmers as a burden, required by lenders and other strategic partners but less important than actually running their operations.
These three key reports, individually and in concert, can help guide short- and long-term decision making, and help target how to most effectively spend resources.
1. The balance sheet shows assets, liabilities and equity. Assets include the current market value of what you own, including current assets like inventory and cash, and long-term assets like facilities and land. Liabilities are what you owe, from current liabilities like loan payments and taxes, to long-term liabilities such as mortgages. Equity is your ownership of the business. One of the most important line items on the balance sheet is working capital, which is the difference between total current assets and total current liabilities. Effectively, working capital is the money you have available to spend; it is what carries you from planting to sale, and allows you to keep your operation going when margins are low.
2. The income and expense report shows your net income after debt servicing, detailing your earnings and operating expenses such as sales of inventories as income, and input costs as expenses. Income and expenses can be reported on a cash basis, when money actually changes hands, or on an accrual basis, when sales and purchase commitments have been made. Most producers report on a cash basis, however lenders typically prefer reviewing financials on an accrual basis as presenting a more accurate and complete assessment.
3. The projection report shows what you expect to produce in the coming year, based on the number of acres being farmed or the number of head being milked or raised. This is a best-guess calculation comprised from past performance, typically a five-year average, and adjusted for current market prices and costs. In short, the projection allows a producer to estimate their margin after their loan payments, foresee whether it is going to be a profitable year or not, and make adjustments to limit loss or achieve profitability.
Together, these three reports can provide guidance when making business decisions. They can also be immensely valuable to producers by illustrating how an operation is performing and drive informed business decisions for the future.
Reports like these are invaluable for our lending team at GreenStone Farm Credit Services. They help us work with customers, as partners in business, to tailor our services based on individual and unique needs.
Tamara Baker is a Credit Manager at GreenStone Farm Credit Services.