Don’t Forget to Update Your Year-End Balance Sheet
We recently interviewed Kara McClure, Loan Officer with AgChoice Farm Credit. Knowing the financial position of your farm operation is critical to its future success. One of the most important tools in helping you to understand financials on your operation is the balance sheet. Today, Kara will explain balance sheets, and help us understand why a year-end balance sheet is especially important. To listen to the full podcast, click here:
Kara, for any of our listeners who might not be too familiar with a balance sheet, could you explain what it is?
A balance sheet is the financial statement that depicts your financial position at the specific time that you are filling out the balance sheet. Think of it as more of a snapshot of your finances at that point in time when completing the balance sheet. There are three main components of a balance sheet. These are assets, liabilities, and owner's equity. The standard accounting equation represented on the balance sheet is assets = liabilities + owner's equity. Another way to think about it is assets - liabilities = owner's equity, or what your business is worth to you.
Assets and liabilities are generally categorized as either current or non-current. A current asset is something that can be quickly turned into cash within a year. Some examples would include cash, accounts receivable, pre-paid expenses, or even market livestock. A current liability is a debt that is going to be due within the next 12 months. Those can be things such as accounts payable, cash rents, and operating loan balances.
You also have non-current assets and non-current liabilities. A non-current asset has a longer lifespan and is typically not something that's easily turned into cash within that year. Those examples can be breeding livestock, equipment, lands, and buildings. Non-current liabilities are a debt against any non-current asset with a term greater than one year. These can also be breeding livestock, equipment, land, and buildings.
A balance sheet will help you understand your business better and will allow you to make more informed business decisions on your farm operation for the future. Additionally, information on the balance sheet can be used to calculate key financial ratios for your farm operations. Lenders, like myself here at a AgChoice Farm Credit, need this information to assess your business. Balance sheets also help expedite any loan approvals when completed accurately and as of December 31st of each year.
Let’s talk a bit more about your final point. The end of the year is rapidly approaching. Why is compiling a year-end balance sheet so important?
It might not sound like the most exciting task in the world but creating a balance sheet with the year-end information is crucial. You should do this for both your farm and business. Creating a balance sheet on December 31st each year enables you to see how your farm operation has changed throughout that year. Did your net worth grow, or did it regress? If it grew, was it from your earnings or just asset validation? If equity is trending downward, how much is the business and how much is your family willing to lose?
There are lots of moving parts on a farm. Oftentimes, farmers try to make strategic decisions for tax planning close to the end of year. It's important to have an accurate depiction of your inventories, prepaid expenses, and more truly, to understand the financial performance of your business for that year. This information can be used to make adjustments on your income statement, to reflect accrual adjustments, and to be more helpful in making decisions for your business.
From a lender's standpoint, we want to have the most accurate information on you and your business. If you're going to need a loan in the upcoming year, we are going to want to have a balance sheet, and ideally, a December 31st balance sheet each year. This allows us to see the snapshots of your business from year-to-year.
What resources are available to help if one of our listeners has never completed a balance sheet before?
Completing a balance sheet for your first time can be quite intimidating, especially if you've never done it in the past. To be quite honest, the first balance sheet that you do is probably going to be the hardest. After you've done one, updating your balance sheet each year is certainly a much easier task. If you're an AgChoice customer, you could reach out to your Loan Officer, like myself. We may have gotten some information from you in the past and can certainly sit down with you and walk through helping you get all those numbers pulled together for the balance sheet. AgChoice also has a number of resources, including balance sheet forms and instruction guides, and they are available for our customers and non-customers as well. Those are on our AgChoice website. There are other industry professionals who can also help you, including accountants, local small business development centers, and there's some others out there as well that can help you.
Is there anything else you'd like to share with our listeners today as we wrap up?
Looking from a Loan Officer's perspective, one thing that does help is having a year-end balance sheet going into the new year. If you have a loan request, it definitely helps us speed up the loan process. If you are a current customer, make sure to try to get with your Loan Officer at the end of the year or first thing at the beginning of the year if you need a loan request. It will also help us out if you are able to get your balance sheets to us in a timely manner.
Whether this is your first time or not your first time creating a balance sheet, make sure that you're keeping a copy of the balance sheet for yourself. Having them on file can really help throughout the year if you need to update your balance sheet. This allows you to see how your business is growing throughout the year. It also will help you to create your December 31st balance sheet, because you will be able to compare sheets from year to year. Additionally, it can help to have those numbers so you're not starting from scratch each year.
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