Financial Statements in
Agriculture
Mary Sobba
Agriculture Business Specialist
Accounting
Better Farming (Canada) asked farm financial advisors
and accountants about bookkeeping practices of farmers.
25-30% use accrual statements to track farm income and
expenses and account for 80% of farm production in
Ontario.
Why?
Using a simple cash system it is possible a farmer could
have expenses but no income because the crop was not
sold prior to December 31.
It makes it difficult to track crops and to know whether or
not the enterprise is profitable
Accrual
Simply means that a farmer is matching
expenses to revenue and also keeps an
inventory account for crops that are carried
to the next year.
Financial Statements and
Financial Ratios
The Balance Sheet(s), Income Statement,
Statement of Owner’s Equity, Statement of
Cash Flows, and Measures of Financial
Position and Performance
What is ahead……..
1. Financial statements … purpose and use
of the Balance Sheet(s), Income
Statement, Statement of Owner’s Equity,
and Statement of Cash Flows
2. Financial Ratios ……Define and
understand measures of financial position
and performance
Relationship between
Financial Statements
(Beginning of Year)
(End of Year)
Balance Sheet
Balance Sheet
P
L
U
S
Income
Statement
Statement
of Owner’s
Equity
Statement of Cash Flows
EQ
UA
L
S
Balance Sheet(s)
• Prepared at the beginning of each year or
business cycle
• A “snapshot” of what your business has and
owes
OR
• How funds are invested in your business
(assets) and how they are financed (liabilities
and equity) at a point in time
Balance Sheet(s) (cont’d)
• Assets – everything owned or payable to the
business as of the balance sheet date
– Current and Non-current (Intermediate and
– Valued at cost and market
Long Term)
• Liabilities – everything that is owed by the
business as of the balance sheet date
– Current and Non-current (Intermediate and
– Deferred liabilities
Long Term)
Income Statement
• Prepared at the end of the year or business
cycle
• Also referred to as a profit - loss statement
• Is a statement of earnings and
comprehensive income (FFSC)
• Required to do income taxes
Income Statement (cont’d)
• Revenues – income from sales, direct
payments, and other sources
• Expenses – outlays in order to conduct
business
• Inventory Changes (ending minus
beginning)
• Depreciation – changes in capital values
(ending minus beginning)
Statement of Owner’s
Equity
• Prepared at the end of the year or business
cycle with the Balance Sheet and Income
Statement
• Shows sources of earned and unearned
change in owner’s equity
• Combined with Income Statement,
reconciles Balance Sheets
Statement of Owner’s
Equity (cont’d)
• Beginning Net Worth
+ Earned changes (Retained Earnings)
+ Unearned changes (Market Value Changes)
• = Ending Net Worth
Statement of Owner’s
Equity (cont’d)
• Sources of earned change in owners equity
–
–
–
–
Net farm income
Non-farm income (+)
Family living withdrawals (-)
Income and Social Security Taxes (-)
• = Retained Earnings
Statement of Owner’s
Equity (cont’d)
• Sources of unearned change in owners equity
– Change in market value of assets (+)
– Change in deferred liabilities (-)
• = Change in Market Values
Cash Flow Projections
• Cash Flow Projections are a financial tool
that looks at the past and projects into a
future year.
• It serves as a guide or blueprint for the
coming year’s business operation.
Cash Flow Projections (cont’d)
• Cash Flows are commonly confused
with a profit & loss statement which
they are not.
• Cash Flows can be as simple or detailed
as you want but must provide what
information you need.
Cash Flow Projections (cont’d)
• Most cash flows are done on a month by
month basis but can be done on a
quarterly as well.
• The information you’ll need before you
start are your last couple of year’s records,
year end financial statement and
next year’s plans.
Cash Flow Projections (cont’d)
• All income sources
should be included,
including non-farm.
• Expenses may be
easier to figure by
looking over the last
year or 2.
• Don’t forget crops and • Look for trends over
livestock that were on
the years so that
hand the first of the
projections are a
year!
little easier to do.
Cash Flow Projections (cont’d)
• Once you’ve completed it, go over it once
more to be sure you haven’t missed
anything.
• Look it over a few times a year to see how
close you’re coming to your projection. If
you’re off a lot, figure out why.
Cash Flow Projections (cont’d)
• Remember that the
cash flow projection is
for your use first.
• However, it can also be
very helpful for your
lenders.
Cash Flow Projections (cont’d)
• Many lenders now require a cash flow
projection of their borrowers every year.
• Government (FSA - Ag Credit, etc.)
agencies will not loan money without it
anymore.
Cash Flow Projections (cont’d)
• While not an exact
science, cash flows
can assist you in
planning the next
year.
• It can help you
measure the financial
risk of your
operation.
Moving on…….to ratios
• While not an exact
science, cash flows
can assist you in
planning the next
year.
• It can help you
measure the financial
risk of your
operation.
Financial Ratios
• Measures of financial position and
performance
• Why? to anticipate and diagnose financial
problems and identify financial strengths
and or trends
• Used in a vacuum are ABSOLUTELY
meaningless ! ! !
Financial Ratios (cont’d)
• Financial ratios are most useful to:
– Compare past to present performance
– Compare present to anticipated performance
– Identify multi-year trends
• Also may be used to compare to
benchmarks or other farms
Financial Ratios (cont’d)
• Five categories of financial ratios:
– Liquidity – the ability to meet obligations as they
come due (from the Balance Sheet)
– Solvency – the ability to pay all debts (from the
Balance Sheet)
– Profitability – the difference between value and cost
of goods produced (from the Income Statement)
Financial Ratios (cont’d)
• Five categories of financial ratios (cont’d):
– Repayment Capacity – the ability to repay term debts
on time (from the Cash Flow Statement)
– Financial Efficiency – how effectively assets are
used to generate income (from all statements)
Financial Ratios (cont’d)
• Liquidity
Current ratio =
total current farm assets
.
total current farm liabilities
– The extent that current farm assets, if sold tomorrow,
would pay off current farm liabilities.
Financial Ratios (cont’d)
• Liquidity (cont’d)
Working capital = total current farm assets
– total current farm liabilities .
– Operating capital available in the short
term from within the business.
Financial Ratios (cont’d)
• Solvency
Debt to Asset ratio =
total farm liabilities .
total farm assets
– Measures the lenders’ share of the business.
Financial Ratios (cont’d)
• Solvency (cont’d)
Equity to Asset ratio =
total farm equity .
total farm assets
– Measures your share of the business.
Financial Ratios (cont’d)
• Solvency (cont’d)
Debt to Equity ratio =
total farm liabilities .
total farm equity
– Compares the lenders’ share of the business to your
share of the business. Measures how much you have
leveraged your equity.
Financial Ratios (cont’d)
• Profitability
Net Farm Income = Gross cash farm income
– total farm cash expenses
+ inventory changes
+ depreciation and other
capital adjustments
– Measures the return to your labor, management, and
equity.
Financial Ratios (cont’d)
• Profitability (cont’d)
Rate of return on = (Net farm income
farm assets
+ farm interest
– unpaid family labor)
Average farm assets
.
– Measures the average “interest rate” being earned on
all (yours and lenders’) investments in the farm
business.
Financial Ratios (cont’d)
• Profitability (cont’d)
Rate of return on = (Net farm income – unpaid
farm equity
family labor)
.
Average farm net worth
– Measures the average “interest rate” being earned on
all your investments in the farm business.
Financial Ratios (cont’d)
• Profitability (cont’d)
Operating profit =
margin
Return on farm assets
.
Gross farm income
– Shows the operating efficiency of the farm business
Financial Ratios (cont’d)
• Repayment Capacity
Term debt = (Net farm operating income + net non-farm
coverage
income + scheduled interest on term
ratio
debt – family living & taxes paid)
Scheduled P&I on term debt
.
– Did the farm business produce enough cash to cover
all (farm & non-farm) non-current debt payments?
Financial Ratios (cont’d)
• Repayment Capacity (cont’d)
Capital
Net farm operating income
replacement = + net non-farm income
margin
– family living & taxes paid
– scheduled principal payments
on term debt
– Is there money left to buy new capital?
Financial Ratios (cont’d)
• Financial Efficiency
Asset turnover =
ratio
Gross farm income .
Average farm assets
– Measures the efficiency of capital use.
Financial Ratios (cont’d)
• Financial Efficiency (cont’d)
Operating
expense
ratio
=
(Total farm operating
expense – farm interest)
Gross farm income
.
– Measures the portion of farm income used to pay
operating expenses.
Financial Ratios (cont’d)
• Financial Efficiency (cont’d)
Depreciation
expense
ratio
(Depreciation and other
=
capital adjustments)
.
Gross farm income
– Indicates how fast capital is worn out.
– What portion of farm income is needed to maintain
business capital?
Financial Ratios (cont’d)
• Financial Efficiency (cont’d)
Interest expense = Farm interest expense .
ratio
Gross farm income
– Indicates what portion of farm income is used to pay
for borrowed capital.
Financial Ratios (cont’d)
• Financial Efficiency (cont’d)
Net farm income ratio =
Net farm income
.
Gross farm income
– Indicates what portion of gross income is left after all
farm expenses, except unpaid labor and
management, are paid.
Farm Finance Scorecard
Developed by: Rick Wackernagel, Dennis Kauppila, and Glenn Rogers, Univ. of Vermont Extension
(handout)
Liquidity
Weak
. :1
1. Current ratio
2. Working capital
$
.
.
Stable
1.0
Strong
2.0
Farm Finance Scorecard (cont’d)
Solvency (market)
3. Farm debt-to-asset ratio
4. Farm equity-to-asset
ratio
5. Farm debt to equity ratio
Weak
Stable
Strong
%
60%
30%
%
40%
70%
%
150%
43%
Farm Finance Scorecard (cont’d)
Profitability
6. Net farm income
Weak
$
Stable
Strong
.
7. Rate of return on farm
assets
%
1%
5%
8. Rate of return on farm
equity
%
5%
10%
%
20%
35%
9. Operating profit margin
Farm Finance Scorecard (cont’d)
Repayment capacity
10. Term-debt cover-age
ratio
11. Capital replace-ment
margin
Weak
%
$
.
110%
Stable
Strong
135%
Farm Finance Scorecard (cont’d)
Financial efficiency
12. Asset turnover ratio
(market)
Weak
Stable
Strong
%
20%
40%
%
80%
60%
14. Depreciation-expense
ratio
%
20%
10%
15. Interest-expense ratio
%
20%
10%
16. Net farm income ratio
%
10%
20%
13. Operating expense ratio
Questions?
Mary Sobba
(573) 581-3231
sobbam@missouri.edu