Introduction to the balance sheet
Tips and resources to organize the basic sections of a farm balance sheet.
The balance sheet is a necessary tool to perform a farm financial analysis. Balance sheets are also used for financing and transition planning purposes, among other things. The balance sheet – or net worth statement – is a snapshot of the financial position of the business at a given point in time, usually December 31.
As the business owner, you are the person best equipped to write your balance sheet. Even if you hire a financial advisor, or work with an MSU Extension farm business management educator, you will be the one providing the information to them. In this article, you will find tips and resources to organize your information in a format that allows you to accomplish your goals.
The three main areas on a balance sheet are assets (what you own), liabilities (what you owe), and net worth. Net worth or owner’s equity is the difference between your total assets and your total liabilities.
Farm assets are categorized as current, intermediate, and long-term.
Current Farm Assets are cash and other assets that you expect to receive, convert to cash, or consume in production during the next 12 months. Current assets include:
- Current cash, checking and saving accounts
- Prepaid expenses and supplies
- Growing crops
- Accounts receivable
- Inventory of crops for sale or feed in storage
- Livestock for sale
Intermediate Farm Assets are those resources intended to support production, rather than go for immediate sale. Such assets are expected to have a useful life of 1 to 10 years, and include:
- Breeding livestock
- Machinery and equipment
- Titled vehicles
- Other intermediate assets such as co-op equity, stock, and retains, or nursery plant materials
Remember that for machinery, equipment, and titled vehicles, you have to calculate depreciation and subtract it from your total cost value. An average value is around 7% of your total cost value.
Long-Term Farm Assets include items of a more permanent nature, usually with a useful life longer than 10 years. These include:
- Farm land
- Buildings and improvements
- Other long-term assets such as co-op long term shares
Remember that buildings and improvements must be depreciated too, usually at about 5% of the total cost value.
A Brief Note on Asset Valuation Methods: Cost Value versus Market Value
The cost value is the purchase price minus the depreciation taken to date. The market value, on the other hand, is the amount that would be received if the asset were sold on the open market.
Market and cost values are the same for current assets and liabilities. However, for intermediate and long-term assets, you need to choose which one to use. Market values are useful for borrowing purposes, and to plan for farm investment. Conversely, to analyze an existing business, using cost values is most meaningful. Having both cost and market values will allow you to see where equity is coming from; retained profits (shown by the cost value balance sheet) or inflation (shown by the market value balance sheet.)
Parallel to assets, liabilities are categorized as current, intermediate or long-term.
Current Farm Liabilities are those due and payable on demand or within the operating year. These include:
- Accounts payable and other accrued expenses
- Current loans, including operating loans, feeder livestock loans, credit cards, and other loans that are due within 12 months
Intermediate Farm Liabilities are against intermediate assets - machinery, breeding livestock and perhaps buildings. These typically are due within 7 or 10 years and include leases.
Long-term Farm Liabilities are against long term assets. They will usually include loans, land contracts or mortgages for the purchase of land, buildings, and permanent improvements. They are usually set up with 10 or more years to repay.
For listing your liabilities, you will need complete statements from your lending institutions. Some of the pieces of information you will need for each loan are the current interest rate, the total outstanding principal balance, when the loan is scheduled to be paid in full, the total amount of principal and interest to be paid within the next year, and the months payments are due.
For intermediate and long-term liabilities, you will have to separate the total principal balance due between what is due within 12 months, and what is scheduled to be paid beyond the next 12 months.
Although this list probably did not seem basic, these are the basic sections of a farm balance sheet. If you are considering tackling this task, Michigan State University Extension has worksheets that may help you include all the needed details. You may also contact your MSU Extension farm business management educator for guidance, or watch a webinar recording on the topic by searching for “How to Put Together a Balance Sheet - Florencia Colella” on YouTube.