As we head into the close of the year, the process of compiling year-end financial information for taxes and other financial purposes begins. While the outcome of the process is typically defined by the filing of tax records, we like to encourage farmers to look at their year-end financial gathering process as an opportunity to analyze their business performance.
Tax records will give you a point in time view of your financial standing, but they do not provide the necessary information needed to make business decisions and set goals without a more thorough understanding of what the numbers mean.
During these challenging times, accurate and thorough reporting becomes more critical as you work with lenders, suppliers and vendors to obtain financing and supplies for 2019.
We are providing the following tips to help you prepare more purposeful financial reports
Make it a Priority
In my earlier days as a loan officer, I had a farm customer who called me every year on the day after Thanksgiving to schedule our year-end meeting on the last business day of the year. On that day, we would spend time going over his current financials and discuss his plans for the following year. After lunch with his family, he would take me around his farm to show the progress he was making.
The commitment and time this farmer dedicated to our year-end meeting showed me his commitment to providing his lender clear and accurate information. While you may not have time to dedicate an entire day to meeting with your loan officer, being proactive in presenting a complete set of financial statements, as well as a projection describing the future of your operation, will allow your lenders to better meet your needs.
Record all Transactions
Recording all transactions in a computer software program like Quicken or other accounting program and reconciling them against your bank records each month helps keep you current in your reports. The accuracy of the reports generated from the accounting software will be dependent on the accuracy of the data entry, so be sure to categorize expenses and revenues correctly in the system. With an accurate history of transactions, you can build the reports to paint the picture of the financial state of your business
Create a balance sheet
A balance sheet describes what you own (assets) and what you owe (liabilities). For farming operations, common assets include land and buildings, equipment, crop inventory (for sale or feed), livestock, growing crops, pre-paid assets and accounts receivables. Enumerate other assets like houses, vehicles, retirement accounts and investment accounts in the personal section of the balance sheet.
On the liability side, account for any money borrowed, which includes open accounts held with vendors, unpaid taxes, accrued interest, credit card debt, and term loans financing equipment, breeding livestock, real estate and real estate improvements. It is important to include the terms of all liabilities including the scheduled payment, interest rate and maturity dates of all notes and accounts.
The production agricultural industry typically uses market values when preparing balance sheets. Rather than worry about a precise value for each asset, it is more important to provide precise descriptions of all of the assets including details about inventory, equipment and real estate owned and then a reasonable estimate of its market value.
Profit and loss road map
Keeping a detailed profit and loss statement creates a more complete picture of how the year turned out before tax returns are due. The accuracy of the profit and loss statement, typically generated through computer software, is dependent on the proper inputting of entries.
The most important consideration with your profit and loss statement is accuracy and completeness. End of the year tax preparation is a good time to review the entries for the year and be sure they are correct.
Although a lender will usually require your annual income tax return as part of annual reporting, often times a customer may have a credit need before the income tax return is available so a detailed profit and loss statement from the farm record keeping system is helpful.
A projection is an important part of financial reporting and necessary for a lender to properly analyze the customer’s repayment capacity. Unfortunately, it is often not provided or lacks sufficient detail to be useful.
A projection should detail items like the specific crops you will grow, the number of acres planted, size of your milking herd, anticipated production rates, etc. Fluctuating markets affect the prices paid for inputs and the prices gathered for the sale of crop.
While only those prices that have been “locked in” with vendors and markets are set in stone, using the prevailing market prices at a point in time to create your projection will help establish a budget for the coming year. The act of putting those details down on paper is what can be challenging for many – it takes time and discipline.
Additionally, today’s agricultural economy can make projections disheartening to complete. However, a projection can serve as a great management tool for you. When analyzing the details for the upcoming year, one may consider changes to suppliers, inputs, rental agreements or an overall shift in strategy to maximize returns.
Financial reporting and projecting can be an eye-opening activity, especially in a tough economy. However, accurate and timely reporting will help you navigate the tough times with informed decision making. Your financial reports are critical to your relationship with your lender and is where the conversation begins.