Farm management starts with building some sound financial records. This starts with taking a detailed inventory of the farm’s assets and farm’s liabilities which when added up complete an updated balance sheet.
Some use the term “Net Worth statement” for this report as the net results gives you the equity or net worth of the farm. Without taking the time to do a detailed annual update, you are missing one of the foundational building blocks of monitoring your farm business. Whether you use the date of December 31, 2012 or January 1, 2013, your year-end balance sheet becomes your start-of-the-year balance sheet and you cover both with one report.
This report can take a little time to complete, but the time spent is well worth it. The financial information in this one report is the foundation from which so much more information can be developed about your farm, financially. Something that is as simple as a listing of all of the farm’s assets and all of the farm’s liabilities can give you so much information, especially when it is done every year on the same date each year.
From the Balance Sheet statement, you can find your current equity value, which then gives you the option to compare this value to last year’s equity value. By comparing these values you can then find your change in equity or net worth.
By completing a balance sheet, you can gather values that can be used in many different ways; from evaluating your farm’s ability to borrow money, to monitoring the growth or decline in the farm’s equity.
It is not necessary to have a computer generated statement and, as a Michigan State University Extension educator, I have worked with many people who do a very good job with paper and pencil statements. You can find a simple downloadable balance sheet on my website.
Most lenders ask for annual Balance Sheets that are updated with current farm inventories but some farms see little value in this process. Because we are moving through some very fast paced times in agriculture and are dealing with wild commodity price swings, farm input costs that are bouncing higher and farm land values that have changed by double digits over the past few years in some areas, every farm owner or manager needs to monitor their farm’s progress at least one time each year and January 1 is a great time to do just that.