Comprehensive year-end financials paint a clear picture of your farm operations, helping you make sound business decisions, gather essential reporting information, and plan for the future.
What Should a Year-End Financial Statement Include?
Some farmers and ranchers stick to the bare essentials of financial record-keeping, focusing mainly on tax reporting. However, your operation can benefit from financial reporting that goes beyond IRS requirements. A comprehensive year-end report can position you for growth with detailed information to guide financial, investment, and operational decisions. This is data you can use to inform discussions with your trusted advisors. Thinking about updating or expanding your operations? You’ll need this information to share with your experienced agricultural lending partners.
A complete end-of-year financial report should include:
An Income Statement
An income statement provides a summary of the farm or ranch’s revenue and expenses over an accounting period, for example, a fiscal quarter or calendar year. It also calculates the business’s profitability over that period.
Income statements can be made using the cash accounting or accrual method, depending on the accounting method you use for your farm or ranch. Most farmers and ranchers opt for the cash accounting method, which is sufficient to report taxable income. While the accrual method is more complex, it can more precisely calculate your farm’s net profit or loss during an accounting period.
- The cash accounting method records revenues and expenses during the period in which they’re paid or received.
- The accrual accounting method records revenues and expenses before they’re received or paid. It notes income when it’s earned and expenses when they’re incurred through accrual adjustments.
Accrual accounting offers greater accuracy when calculating your operation’s profitability in a specific period, allowing you to make more strategic decisions going forward.
A Net Worth Statement
Also known as a balance sheet, a net worth statement includes a farm’s assets (property and financial), liabilities, and net worth as of a specific date. This statement is an important tool to help you evaluate progress, identify trends, and pinpoint areas to pare down expenses. Simply put, it acts as a snapshot of the business at a point in time.
To calculate your farm’s net worth, determine the difference between the total farm assets and total farm liabilities. The net worth statement should include current and fixed assets and liabilities.
- Current farm assets can include bank accounts, cash, supplies to be used within a year, crops, and livestock.
- Fixed farm assets can include land, property, and any supplies used in farm production that aren’t to be sold or used within a year (breeding livestock to be culled is an exception).
- Current farm liabilities include debts that will be satisfied within the year, including taxes, unpaid wages, feed and livestock notes, machinery leases, and lines of credit.
- Fixed farm liabilities include debts that won’t be satisfied within the year, including farm loans and mortgages.
A Cash Flow Statement
A cash flow statement is a document that summarizes the cash coming in and out of a farming business over a specific period (usually a year). While the net worth statement typically focuses on the farm’s financial position, the cash flow statement helps determine your profitability.
Cash flow statements may be separated into operating, financing, and investing cash flows. Individually evaluating these distinct areas of your business can help with farm financial planning. Cash flow from:
- Operations includes most of a farm’s business activities, including crop sales. Income, social security payments, taxes, and family living expenses also fall under this category.
- Financing includes cash received from and given to investors, lenders, and shareholders.
- Investing includes cash inflow from selling land, livestock, or machinery. Cash outflow for this category includes cash used to purchase these assets.
A Statement of Owner’s Equity
A statement of owner’s equity goes a step further than a balance sheet by analyzing why a farm’s net worth changed over a set period. To create this statement for your end-of-year financials, you’ll first need accurate balance sheets for the beginning and end of the year, as well as an income statement with any accrual adjustments.
Owner’s equity statements are separated into three categories to evaluate different aspects of a farm’s financial standing. These categories include:
- Earnings, which lists the farm’s net income from the income statement, as well as any non-farm income. It deducts the amount spent on taxes and family living expenses, then adjusts for changes in non-farm assets and non-farm accounts payable. This shows the total change in retained earnings.
- Gifts, gifts given, inheritances, and forgiven debts may contribute to a net worth increase or decrease.
- Capital asset and deferred liability changes are included in a statement of owner’s equity to calculate the total change in market valuation. Market valuation and deferred tax liability changes can impact your farm’s net worth.
