This guide shows farmers and ranchers how to create a farm balance sheet. The balance sheet is an important tool that helps farmers, ranchers, analysts and other stakeholders understand the financial position of a company.
Creating a balance sheet is one of the most important things a farmer or rancher should do on an annual basis. In time, creating and tracking balance sheet performance will help make informed decisions that can lead to better business operations and profitability.
Many people are intimidated by what it takes to create their balance sheet, however, the process is relatively simple with a little knowledge and the right tools at your disposal!
Quick Explanation of Balance Sheets
A farm balance sheet measures the current financial situation of a farm, ranch or other business at a specific point in time.
There are three major sections of a balance sheet:
- Assets: Items owned by the farm business such as inventory, machinery and buildings.
- Liabilities: Financial obligations (debts) of the farm business that are owed to others.
- Owner’s equity: The total value of the farm business owned by the farmer once all debts are paid.
Behind these three sections are individual accounts. For example, Cash is a specific type of asset and has a unique account where the value of the cash
These are the areas of the balance sheet that need to be filled out to get a a full picture of the financial situation of the farm or ranch operation.
For more detail on the balance sheets, see our guide on The Basics of Farm Balance Sheets.
Steps to Create a Farm Balance Sheet
To create a balance sheet there are six (6) main steps to take:
In order, a farmer will need to 1) Gather Information, 2) Organize the Information, 3) List out the Assets, 4) List out Liabilities, 5) Calculate Net Worth and 6) Review the Results.
Each of these steps will be covered in further detail below.
If you haven’t done so already, download our Farm Balance Sheet Template. It’s free and saves a lot of time versus creating one from scratch. If you prefer to build your own balance sheet, we recommend using Excel or any basic type of spreadsheet software to assist.
Step 1: Gather Information
The first step to create a farm balance sheet is to gather the necessary information that you will ultimately enter when building the balance sheet.
Remember that you will need to gather all information related to your assets and liabilities. Below are some of the more common examples of documents that you will collect to build your balance sheet.
Asset Information
- Bank statements, cash on hand.
- Titles, deeds, and appraisals on real estate.
- Purchase receipts, invoices, or appraisals on farm equipment.
- Livestock inventory records and market values.
- Crops inventory records, market values and estimated yields for current growing crops.
- Accounts receivable records of money owed to the farm.
Liability Information
- Loan agreements, terms, and repayment schedules.
- Mortgage agreements, loan balances.
- Outstanding unpaid invoices for accounts payable.
- Unpaid bills or expenses such as utilities.
Other Documentation
- Income Statement (if you have one!)
- Previous Balance Sheets (again, if you have one!)
- Detailed records of inventory levels for crops or livestock.
- Contracts, leases, or agreements related to assets or liabilities.
- Any other relevant documents or records related to the farm’s finances.
- Tax Returns
Each type of farm or ranch operation may be a little different, so make sure that think about any other documents which may no be on the list above. It is important to make sure that your records are as complete as possible.
Record Keeping
While we are on the topic of collecting information, it is highly advised that you maintain a system of keeping financial records. This will dramatically reduce the time spent in maintaining and updating your financial statements. This includes a combination of physical paper records kept in a filing system or maintaining an electronic records management system – preferably both!
Step 2: Organize Information
The second step to create a farm balance sheet is organizing your information. Once you have all of your financial documents, you should take time to organize all of your files by account types. This step saves time and also keeps everything together. Think of this like a checklist to bring everything together in order before entering the values into the balance sheet.
For example, all of your Checking Account values will be consolidated into the Cash account. Outstanding loan balances will go to long term debt.
Below are the most common types of accounts you will find in each section of the farm balance sheet. It is best to organize your information into the following groups by account:
Assets
- Cash
- Marketable Bonds & Securities
- Accounts Receivable
- Crop Inventory
- Growing Crops
- Livestock Products
- Market Livestock
- Inventory
- Prepaid Expenses
- Machinery & Equipment
- Farm Vehicles
- Raised Breeding Livestock
- Purchased Breeding Livestock
- Notes Receivables
- Buildings & Improvements
- Real Estate & Farm Land
- Intangible assets
Liabilities
Accounts payable
Wages Payable
Income Taxes Payable
Real Estate Taxes Payable
Current Deferred Taxes
Notes Payable
Current Portion of Term debt
Current Portion of Capital Leases
Long-term Debt
Long-term Capital Leases
Non-Current Deferred Taxes
Owner’s Equity
Once all of your supporting information has been organized, it is time to start building the balance sheet by entering your assets.
Step 3: List Your Assets
The third step to create a farm balance sheet is to list your assets. In short, this means that for each account in the balance sheet, you sum up the total of the assets you own that fit into that account.
The key is taking your financial information you organized and gathered earlier and then match the information to the account.
Examples of Listing Assets in a Farm Balance Sheet
For example, assume that after collecting all of your bank checking and savings account information you have three bank accounts:
- A checking account at ABC Bank with $500.00 cash.
- A savings account at ABC Bank with $15,000 cash.
- A checking account at Bank of the Rockies with $750 cash.
You would simply sum these numbers up and enter $16,250 into your cash and cash equivalents account.
It’s that simple!
Let’s examine another example. Assume that you have three fields of 100 acres each. Assume that the market rate for that all these parcels is $4,500 per acre, based on an appraisal.
After summing multiplying the acres by the value per acre and summing these into the total, you arrive at a total value of $1,350,000 for your farm real estate.
Now, just plug that number into the Farm Real Estate account and you’re good!
You will repeat this process for each type of asset owned by the farm or ranch operation.
If you own an asset type which is not in one of the accounts above, simply add a line, give it a title and then add the value into the account.
Note that in some cases it may also be fine to include personal assets as well. This is fairly common for sole proprietorship farm operations where both the farm business and personal assets are owned by the farmer. Examples may include personal vehicles, a house or dwelling or other personal items of value such as jewelry.
Step 4: List Your Liabilities
The fourth step to create your farm balance sheet is to list your liabilities. These are the amounts you owe such as mortgages, unpaid bills or income taxes due.
Similar to listing out your assets, you will match each liability with its respective account in the liabilities section.
Examples of Listing Liabilities in a Farm Balance Sheet
To understand this process, consider the following examples:
Unpaid Suppliers Example
Assume that after reviewing your financial documents and invoices, you discover that you owe the local seed supply company $4,000. You also notice that there is an unpaid amount for fertilizer services in the amount of $15,000. These are two types of accounts payable.
Add these two up and enter the sum into the balance sheet. You’re done! (You still have to pay the bill).
Long Term Debt Example
It is very common to have long-term debt such as a mortgage or real estate term loan used to finance your farm.
Assume that after reviewing your bank statements, you see that you have a loan outstanding for $200,000. Of that, $15,000 is due this year – a current liability.
In this case, you would enter the $15,000 amount due in the coming year under Current Portion Long Term Debt and the remaining $185,000 in the long-term debt account.
Repeat this process for each liability you hold as of the balance sheet date. As always, if there are certain liabilities which don’t have a good account, feel free to add one into the balance sheet template.
Similar to assets, it may also be important to include personal liabilities such as credit cards, personal income tax liabilities or other amounts owed in your balance sheet.
Step 5: Calculating Your Net Worth
The fifth steps to create a farm balance sheet is to calculate your net worth. Owner’s equity represents the portion of the farm’s assets that belong to the owner(s) after deducting liabilities. Subtract total liabilities from total assets to calculate owner’s equity. In other words, net worth is the amount owned by owner once all bills are paid.
Another way of stating this is that:
Assets – Liabilities = Owners Equity
To do this, simply take the sum of all assets and subtract the sum of all liabilities.
In the example we have been using, the total assets for this farm balance sheet are $1,366,250. The total liabilities are a mere $219,000. When we deduct the liabilities from the assets, we see that total net worth of $1,147,250.
Net worth can be further broken down into:
- Owner’s investment – which is the money contributed to the farm by the farmer, possibly from savings or gifted.
- Retained earnings – which is money earned by the farm and kept or reinvested into the operation.
For simplicity, we will assume the net worth in our example is all owners investment.
Step 6: Review the Results
The sixth and final step to create a farm balance sheet is to review the results. At this point, all accounts should be entered and ready to finalize.
When reviewing the results, there are a few key things to keep in mind.
Ensure the Balance Sheet Balances!
The most important thing to do before going into deeper analysis or sharing with other is to ensure that the balance sheet balances.
If the total assets do not equal the sum of total assets and owner’s equity, there is a mistake! Check your entries and see where the issue may have occurred.
Review Performance Indicators
The balance sheet is more than numbers. Based on what has been entered, the ratios tell a story about how well the operation is being run.
Take a look at our article on Farm Performance Metrics to understand how to measure and improve your farm performance metrics.
Common Balance Sheet Metrics
When to Create a Balance Sheet
Balance sheets can be created at any point, however, most companies and farms create one at year end. However, each operation is different and when you create a balance sheet may depend on the type of operation you run.
For crop operations, post-harvest is a good time to update balance sheets because the information will be more accurate and provide more valuable insights.
A farmer should create a balance sheet at various stages throughout the business cycle and as part of regular financial management practices. Here are a number of common times that are best to create a farm balance sheet:
- Upon Creation of the Farm Business
- Annually, typically at Year End
- As Part of a Financial Planning Exercise
- When Taking Our a Loan or Financing
- Before Making a Major Strategic Decision
- Periods of Transition or Expansion
- During Financial Reviews and Audits
- In Preparation or Selling the Farm
Overall, creating a balance sheet is not a one-time task but an ongoing process integral to effective financial management in farming operations. Regularly updating and analyzing balance sheets help farmers make informed decisions, manage risks, and achieve long-term financial sustainability.
Seeking Professional Assistance
Seeking professional advice when creating a farm balance sheet can be beneficial, particularly in complex situations or for farmers who lack expertise in financial accounting.
Farmers should consider seeking professional advice when creating a farm balance sheet in situations where they lack expertise, face complex financial transactions, require assistance with tax planning or compliance, need financial analysis and interpretation, seek financing, engage in succession planning, or operate in specialized farming sectors. Working with experienced professionals can help farmers ensure accuracy, compliance, and strategic decision-making in financial management.
Professional advisors can assist farmers in preparing, analyzing and interpreting the financial information presented on the balance sheet. They can provide insights into the farm’s financial performance, identify areas for improvement, and offer recommendations for strategic decision-making.
Summary
In short, balance sheets serve as a valuable tool for gauging the robustness of your operation and your ability to manage risk. By maintaining consistency in recording assets and liabilities, you can readily track your operation’s financial evolution from year to year and surmount obstacles.
These balance sheets are not only beneficial to you as the proprietor but also to your financial team, including lenders and loan officers. Once your balance sheet is finalized, don’t hesitate to share it with these professionals. It will aid them in grasping your farm’s financial well-being and enable them to provide enhanced support for your financial endeavors.
Farm Financial Standards Council – https://ffsc.org/
Basics of a Farm Balance Sheet, Ohio State University – https://ohioline.osu.edu/factsheet/anr-64
Farm Financial Analysis Series: Balance Sheet, Mississippi State University Extension – https://farms.extension.wisc.edu/articles/preparing-a-balance-sheet/
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