As a producer, it is very likely you have had to borrow money from a bank at least once in your career. In addition to having the necessary collateral, farming experience, good credit and many other requirements, your banker probably told you that you have to produce “good” financial statements for their review at least once a year.
Anxious to get the money for your project, you undoubtedly nodded your head while maintaining a terribly serious expression. But most, including the most progressive dairy farmers who read this publication, would have a hard time defining what the banker is talking about when they say “good” financial statements.
Fortunately, everything your banker expects when they say good financial statements will also benefit you as well because financial statements are not the end; they are the means to managing a well-run operation. Too often, producers look upon their financial statements as something apart from their operation rather than an integral part of the management of their business.
Understanding the basic financial position of your farm is essential to being able to effectively make management decisions and to demonstrate to your banker that you are an acceptable risk. Most financial statements start with a balance sheet. These are usually completed at the end of your business’s operating cycle, and for most dairy producers that is usually the end of the calendar year.
If you can accurately answer the following questions (and have some documentation to support your claim), then you are well on your way to providing a good balance sheet. How much money do you owe? How many acres is your farm, and what is it worth? How many head of dairy cows do you own? How many youngstock? What is your current inventory of equipment? How much silage was in the pile at the same time? Any other feedstuffs on hand? The balance sheet is nothing more than an accurate listing of what you owe and what you own on a specific date, usually the end of the year. Is there a specific format you should use? Not really. Ask your banker if they have a format they would like you to use.
Once you have completed your date-specific balance sheet, you have one more document to produce: a farm operating statement. This single document has produced more sleepless nights for producers than anything other than maybe calving. In this document, you will summarize all of your receipts from all sources (non-farm income, too) and all of your expenses for a specific period of time, again usually for the 12 months that constitute your farm’s business cycle.
Your banker will likely ask you for your most recent tax return, but do not be confused – this is not your farm operating statement. Your farm operating statement is born from your record-keeping system. The inability to produce such a report is a tip-off to bankers that you keep lousy records. Nobody wants to lend money to someone who maintains lousy records.
Many producers struggle with creating a farm operating statement. Farming operations are large, complex things – and it isn’t easy to get everything done right the first time. And many producers hate preparing it, so you aren’t unique if you don’t like it. However, successful operators have mastered their farm operating statement preparation because it is the only way managers can see how much money came into the business and how much money went out.
Do you need to hire an accountant to create a farm operating statement? This depends on your operation. Are you or someone involved in the operation able to complete a farm operating statement? If so, then you don’t need an accountant or bookkeeper. If you don’t have someone who can do this work competently, then you need a bookkeeper or an accountant to help you complete this document. But even with their assistance, you need to have a system of record-keeping in place. The more complex the business entity structure, the more likely you would need some additional assistance. Keep in mind: A well-constructed farm operating statement will provide you with essential management information and will also serve as the basis for your annual tax filing statement.
Accountants typically look at farm financial information in order to lower your tax liability. Bankers look at your financial statements to see your financial leverage, what the true cash flow is and if there was a gain or loss to your net worth. Both are perfectly legitimate perspectives – and while it appears the two are in conflict, they are not. Start with an accurate balance sheet and an accurate farm operating statement, and the rest will follow.
