The Four Major Financial Statements Your Farm Needs to Know
As the clock ticks down towards the end of the year, farmers are spending less time in the barn and more time completing the dreaded “P” word…paperwork. It comes as no surprise that compiling farm records and financial statements is extremely important, but it can also be a tedious task with its fair share of headaches.
According to Katie Wantock, Professor of Practice and Farm Management Outreach Specialist at the University of Wisconsin-Madison, today’s successful farm operators are using detailed financial statements to identify the most profitable farm enterprises for their operation, determine per unit production costs, track trends and financial progress in the business and to create comprehensive business plans.
However, if records are not kept up-to-date or accurate, sound business decisions cannot be made.
“Records and the management decisions made from prepared financial statements are only as good as the data entered,” Wantock adds. “The old adage, ‘Garbage in – Garbage out’ really does apply to financial records.”
The financial position and performance of a farm business can be summarized by four important financial statements, according to Wantock. The major statements and their purposes are as follows:
Net Worth Statement (also known as Balance Sheet) —summarizes the property and financial assets owned, the debts owed, and the net worth of the farm business at a point in time.
Net Income Statement (also known as Profit and Loss Statement) — summarizes the income generated, the expenses incurred, and the net income earned by the farm business during a period of time.
Statement of Cash Flows (also known as Cash Flow Projections) — summarizes all the sources and uses of cash by the business during a period of time.
Statement of Owner Equity — shows how net worth changed from the beginning to the end of the year.
While managing farm finances is no easy task, knowing these four financial statements will provide a better picture on the overall health and stability of your farm business.
By TAYLOR LEACH
December 2, 2022