Farming is one of the most complex jobs someone can choose to undertake. Farmers are responsible for feeding the population and keeping the country operating, in ways that often go unseen, and sometimes underappreciated.
This guide discusses the importance of farm business financial statements, what’s included in them, and how to prepare them.
Why you need farm financial statements
Farm financial statements are a crucial set of documents for farmers to have for a variety of reasons. They:
- provide information to make important decisions regarding financing operating, and investment decisions for your farm
- are useful in generating the information needed for credit applications, and show financial solvency
- can provide benchmarking numbers for your financial position
- can be used to analyze the financial performance of your farm, including farm expenses and a net worth statement
- help you to create budgets
- can be a guide for the financial management of your farm
- can help you gather the information needed for your income tax returns
What are farm financial statements?
Farm financial statements are similar to the financial statements that most businesses produce. They are primarily produced at the end of the year as they can be helpful for tax purposes. However, depending on the financial needs of your business, you may need to produce them more frequently in order to help with making informed financial decisions.
Generally speaking, farm financial statements consist of the following four reports:
- balance sheet
- income statement
- cash flow statement
- statement of equity
What is included on your farm balance sheet?
A balance sheet is one of the most important documents that a business produces. It’s a financial report that provides an overview of the financial state of the farm at a specific point in time.
Its job is to document the value of what the business owns, as well as how much debt it has accrued. It also records any equity and retained earnings (for farms that are also corporations).
If prepared correctly, the balance sheet shows the farm’s assets. Balance sheets are split into three categories for reporting purposes:
- Assets: Farm assets can include equipment, land, livestock, and available crops.
- Liabilities: Liabilities can include a mortgage on the farm property, loans for equipment or livestock, accounts payable to suppliers, any other financial obligations that a farm may have.
- Equity: Equity is the difference between assets and liabilities.
Preparing your income statement
An income statement is also referred to as a profit and loss statement. The statement always covers a defined period of time such as monthly, quarterly or yearly. An income statement shows whether a farm was profitable or if it operated at a loss. It shows how the sale of crops or livestock compares to the cost of running the farm.
Your income statement may be prepared using one of the two primary methods of business accounting: cash basis or accrual basis. Essentially, cash basis accounting means that you record revenue whenever you receive money and expenses whenever you spend money. Accrual basis accounting means that you track revenue and expenses whenever you earn money or incur a cost, regardless of whether cash has changed hands. There are pros and cons to each method. Cash basis is simpler, but accrual basis may be required in some cases. Accrual accounting more accurately shows the state of your business but is also more labor-intensive.
When prepared correctly, your income statement gives you some valuable information. It shows how much money you made versus how much money you spent. This amount may be different depending on whether you do cash or accrual basis accounting. The income statement is helpful in preparing your income tax return each year as well.
Preparing your cash flow statement
A cash flow statement focuses solely on the liquidity of the business’s assets, in other words, what it has on hand in cash. It looks at where a business’s money is coming from, and where those funds will need to be allocated in order to pay debtors.
There are two cash flow methods: direct and indirect. In the US, indirect is almost always used.
- Cash flow from operations: This is the cash that was brought in from sales and the day-to-day operations of the business.
- Cash flow from investments: This is cash that either came in and out from large purchases or sales, such as of land or equipment.
- Cash flow from financing: This is cash that was received from investors or paid out to lenders.
Visibility into your farm’s financial performance is vital for long-term success. Ideally, a sustainable business is one that receives most of its income from its operations, as the other two options are not viable for long-term sustainability. A well-prepared statement of cash flows is helpful because it shows your cash inflows and outflows.
Creating your statement of equity
A statement of equity is a document that allows you to see how your investment in your farm has changed over the last year and why. There are a number of reasons that a farm’s net worth could change, which include, but are not limited to:
- earning more or less money
- having to spend more money on operating the business
- an increase or decrease in taxes
- having assets change value over time
Xero online accounting software for farmers
Xero is proud to provide online accounting software that can help simplify the accounting process for small business owners, including farmers. Xero’s world-class accounting software can help you keep track of your farm finances in a timely and efficient manner.
Learn more about managing farm finances
The University of Wisconsin-Madison has information on:
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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