Farm Management Minute: Balance sheet accuracy
It’s that time of year when most producers have just completed or are just putting the final touches on the year-end balance sheet. This document provides an important snapshot of your financial condition at the close of business on Dec. 31. For those farms operating on a fiscal year, this may be a different date depending on which 12-month period you have chosen but it should always be the last day of business for that year. This document is very important for not only acquiring financing but also for management decisions as you plan strategies to be successful in a market with very tight margins. Balance sheets need to be accurate as possible thru record keeping and contacting lenders for current asset and liability accounts to move forward with a clear picture of financial position.
I realize not all lenders require a year-end balance sheet, but it is critical to have this document to fully analyze the overall financial health of the farm. The accuracy of the numbers is equally important, especially when detailing the current assets and liabilities. Keep in mind that the textbook definition of a current asset is one that can be readily converted to cash. Detailed below are my top ten friendly reminders when compiling your numbers.
1. Don’t forget to add checks written in the prior year that may not have cleared on your year-end bank statement.
2. Keep track of all pre-paid crop expenses as they are considered liquid assets even though they may be not be easily sold for cash.
3. List all deferred grain and/or livestock checks.
4. Differentiate unpriced grain from contracted bushels and use the closing price from the grain terminal which you most likely will deliver those bushels. It might be tempting to use a higher price if the grain market has rallied since December 31st but that action is not advised unless you actually locked-in those prices.
5. Get as accurate as possible on estimating tonnage of feed on hand. There is quite a bit more variability in determining a value of these products due to quality issues so getting a good handle on the quantity is important.
6. Tally an accurate head count of market livestock, then use your best judgement to determine an average weight for the different groups. Use the best resources to calculate an estimated market price but, once again, be careful not to over-inflate values.
7. If you have open positions in your hedging account, make sure you include the market value of the account and not the book balance.
8. Remember to list outstanding receivables but only if you anticipate collecting them within the next month or so.
9. Verify outstanding current loan balances and accrued interest as of the year-end close of business.
10. Include any large bills that were not paid in the prior year.
Quite a few key financial ratios are calculated with current assets and current liabilities so accuracy in these numbers is especially important. Please contact the South Dakota Center for Farm/Ranch Management at 1-800-684-1969 if you are interested in joining our program. Once a year we compile a comprehensive whole farm analysis for our students along with assisting them throughout the year in various capacities.