What Do You Own and What Do You Owe?

What Do You Own and What Do You Owe?

Your balance sheet is one of your greatest managerial tools on the farm. It will help you assess the financial health of your farm and diagnose problems.

Notes:

______

Balance Sheet

What do you own and what do you owe?

A balance sheet is used to evaluate the value of what you ______compared to what you ______.

A balance sheet tells you:

  1. The ______of the business.
  2. The financial position of the business at a ______.

______= ______+ ______

Use the following information to fill out the balance sheet:

Combine valued at $250,000.

400 acres of winter wheat planted at a cost $45.00 per acre.

Line of credit at the local feed store of $16,425.

Checking account balance of $6,436.

Real estate loan of $535,275, plus an accrued payment of $69,700.

Breeding livestock worth $197,000.

Corrals and buildings appraised at $103,000.

Owners contributed $225,000 in capital to start the farm.

Land worth $1,450,000.

Balance Sheet for
Grant County Farms Co.
December 31, 2013
ASSETS / LIABILITIES
Current Assets / Current Liabilities
Checking Account / Accounts Payable
Investment in Growing Crops / Accrued Payment (Interest & Principle)
Total Current Assets / Total Current Liabilities
Noncurrent Assets / Noncurrent Liabilities
Equipment (Combine) / Real Estate Loan
Breeding Livestock
Corrals & Buildings / Total Noncurrent Liabilities
Land / Total Liabilities / ______
Total Noncurrent Assets / OWNER EQUITY
Total Assets / Contributed Capital
Retained Earnings
Total Equity
Total Liabilities and OE

The Farm Financial Standards Committee recommends using both market-basis and cost basis balance sheets. To do this:

  1. Complete market basis balance sheet with cost-basis values in foot notes or;
  2. Complete double column balance with market-basis and cost-basis columns.

Market-Basis v. Cost-Basis Balance Sheet

Cost-Basis Balance Sheet uses the cost or cost less ______to value assets.

Market-Basis Balance Sheet uses the ______market value less selling costs.

Which balance sheet method is best for your farm?

Pros / Cons
Cost-Basis /
  • Promotes conservatism
  • Conforms to GAAP
  • Equity changes only from retained earnings
/
  • Can misrepresent true value of the business

Market-Basis /
  • More accurate for determining collateral
  • More accurate measure of farm’s current financial health
  • Often used by lenders
/
  • Responds to inflation
  • Can hide management problems

Balance Sheet for
Grant County Farms Co.
December 31, 2013
ASSETS / LIABILITIES
Current Assets / Cost Basis / Market Basis / Current Liabilities / Cost Basis / Market Basis
Checking Account / $6,436 / $6,436 / Accounts Payable / $16,425 / $16,425
Investment in Growing Crops / $18,000 / $18,000 / Accrued Payment (Interest & Principle) / $69,700 / $69,700
Total Current Assets / $24,436 / $24,436 / Total Current Liabilities / $86,125 / $86,125
Noncurrent Assets / Noncurrent Liabilities
Equipment (Combine) / $250,000 / $255,000 / Real Estate Loan / $535,275 / $535,275
Breeding Livestock / $197,000 / $200,000
Corrals & Buildings / $103,000 / $150,000 / Total Noncurrent Liabilities / $535,275 / $535,275
Land / $1,450,000 / $2,900,000 / Total Liabilities / $621,400 / $621,400
Total Noncurrent Assets / $2,000,000 / $3,505,000 / OWNER EQUITY
TotalAssets / $2,024,436 / $3,529,436 / Contributed Capital / $225,000 / $225,000
Retained Earnings / $1,178,036 / $1,178,036
Market Valuation / - / $1,505,000
Total Equity / $1,403,036 / $2,908,036
Total Liabilities and Owner’s Equity / $2,024,436 / $3,529,436

“Knowing where you stand will help you make good decisions and use your leverage to help your operation thrive during what may be a more challenging time.”

~ Darren Frye

Water Street Solutions

Answer Key:

  • Own
  • Owe
  • Net Worth
  • Point in Time
  • Assets
  • Liabilities
  • Owner’s Equity
  • Depreciation
  • Current
  • Liquidity
  • Solvency

Balance Sheet Analysis

______focuses on current assets and current liabilities while ______focuses on total assets and total liabilities.

Measures of liquidity:

Current Ratio =

Goal: Current Ratio greater than 1.5.

Working Capital =

Goal: Working Capital of ______.

Measures of solvency:

Debt/Asset =

Goal: Ratio less than 0.3.

Debt/Equity =

Goal: Debt/Equity Ratio less than 0.42.

Net Capital Ratio =

Goal: Net Capital Ratio greater than 2.

Debt Structure Ratio =

Goal: Debt Structure Ratio of ______.

Homework:

Gather information for your balance sheet.

You will need the market and cost values of assets, depreciation values, and debt information. Delegate this task among those that have access to the farm’s financial information.

Construct a balance sheet.

Construct a balance sheet or make sure your current balance statement is thorough and correct using your financial software.

Calculate your financial ratios for liquidity and solvency.

Use these ratios to determine the financial health of your farm. What ratios are healthy and what ratios do you need to work on? How will you go about improving your ratios?

Discuss the financial condition of your business with your management team.

Brainstorm ways that you can improve or sustain the health of your farm business.

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