Usually there is more than one way to do any job or activity. It usually depends on how important the job is to us, or how much time and effort we want to invest getting it done.
Preparing financial statements is a job that most farmers don't find important and want to get done as quickly as possible, spending as little time as possible.
Producers and their lenders are usually just interested in a Market Value Net Worth based on the latest sale of farmland in their area, or what they want for grain next summer. The Financial Guidelines for Agriculture, prepared by the Farm Financial Standards Council, recommends that balance sheets be prepared using cost information for capital assets and the lower of cost or market for crop and market livestock inventories.
Since a market value balance sheet is important to the producer, a double-column balance sheet may be prepared. A properly prepared double-column balance sheet will show how much a business' net worth has increased over a period of time. It will also show how much of that net worth increase was earned by successful operation of the business versus the effects of changes in asset valuations.
A balance sheet prepared according to the Guidelines will require some changes to current liabilities, and that should include the amount of term debt that needs to be paid this year.
Let's say a business has $2 million of term debt that is amortized over 15 years. The portion of the debt that is due in the next year would be $133,000. This $133,000 would be added to the business's operating loans and accounts payable to determine current liabilities.
Why is this important? Working capital is a measure of a business' liquidity, or its ability to cash flow itself.
A balance sheet prepared using FFSC Guidelines will be a much more accurate indicator of the current financial position of a business. Since each balance sheet is prepared consistently, they can be used to show how much financial progress a business has made.
Brought to you by Farm Financial Standards Council. The opinions of Jim Kelm are not necessarily those of Farm Futures or the Penton Farm Progress Group. For more information on the Farm Financial Standards Council go to the website or email Carroll Merry at [email protected].Important information