Overview of Farm Income Statements
Farm income statements provide a detailed breakdown of farm income and expenses.
This is an essential tool for measuring the overall financial performance of a farm operation.
Farm income statements are one of the key farm financial statements and are often used in conjunction with farm balance sheets to measure and track financial performance.
These statements compile revenue and expenses related to farming operations, offering valuable insights into profitability and efficiency.
By breaking down income sources like crop sales, livestock revenue, and government payments, alongside expenses such as equipment maintenance, seed purchases, and labor costs, farmers can gain a clear understanding of their financial health.
Understanding the basics of agricultural income statements empowers farmers to make informed decisions, optimize resource allocation, and plan for future growth effectively.
Income Statement Formula
In its most basic sense, an agricultural income statement calculates net income of a farm operation. This is done by taking total sales and revenue and subtracting expenses. The remaining amount left over is known as net income, or net profit.
Sales – Expenses = Net Income
In other words, this is the total amount earned by the agricultural operation once all sales are made and expenses are paid.
Agricultural income statements contain similarities to traditional income statements (such as Gross Sales and Cost of Goods Sold), however, there are several key differences in how these income statements are traditionally built and designed compared to commercial counterparts.
This is due to the nature of agriculture operations and the depth of analysis and income and expense reporting specific to farm operations.
While there is no standard definition for agriculture income statements, most production operations will find the following six (6) major sections included:
- Farm Sales – The revenue from various farming and farm related operations. This can be further broken down into subsections for crop, livestock or dairy revenue.
- Gross Income – The calculated total sum of revenue from all sources.
- Farm Expenses – This includes the various expense components related to agriculture production such as feed, seed, chemicals and labor.
- Total Operating Expenses – The calculated sum of expenses related to the farm operation.
- Non-Operating Income – The income derived from non-farm operations, such as an individuals salary. Many farm operations combine business and personal income together.
- Net Income – The total income from all sources after all expenses have been paid.
For more information on each of these components of the farm income statement, please see the sections below.
Major Sections of a Farm Income Statement
Farm Sales on a Farm Income Statement
Farm sales refer to the revenue generated from selling products produced on a farm. This can include various items such as crops, livestock, dairy products, poultry, fruits, vegetables, grains, and any other agricultural products.
Farm sales are a primary source of income for agricultural operations and are typically recorded as revenue on the income statement. These sales can be made directly to consumers, wholesalers, retailers, or through agricultural cooperatives.
The farm sales section of an agricultural income statement provides a breakdown of the revenue sources related to farming or farm related activities.
The major categories of farm sales include:
- Crop Sales – revenue from row crops, citrus, timber, ornamental plants and more.
- Livestock & Poultry Sales – revenue from cattle, hogs, horses, poultry or any living animal sold.
- Milk Sales – revenue from milk or dairy related products such as cheese, whey, butter, etc
- Livestock Product Sales – revenue from leather, wool, honey, etc
- Ag Program Payments – government proceeds for farm programs aimed at incentivizing agriculture
- Crop Insurance Proceeds – payments from crop insurance programs
- Custom Hire Income – income derived from providing specialized agricultural services
- Other Income – each agriculture operation may have specific or nuanced income streams which can be added if one of the sales categories isn’t appropriate
Keeping track of farm sales is essential for assessing the financial performance of a farm and making informed decisions regarding production, marketing, and overall farm management.
Operating Expenses in a Farm Income Statement
Farm operating expenses are the costs incurred by a business or farm in its day-to-day operations to generate revenue. In agriculture, operating expenses encompass various expenditures necessary to maintain and run the farming operation.
On several income statements, expenses may be broken out as distinct Cost of Goods Sold and/or Selling, General & Administrative expenses. However, several agricultural income statements instead group these concepts together under the general Operating Expense category. Either approach is fine, however, this article will focus more on the latter approach.
The following are common types of agriculture related expense line items:
- Car & Truck
- Chemicals
- Conservation
- Custom Hire
- Depreciation Expense
- Employee Benefits
- Feed Supplements
- Feed, Grain & Roughage
- Fertilizers & Lime
- Freight and trucking
- Gasoline, fuel, and oil
- Insurance (other than health)
- Interest
- Labor hired
- Pension and profit-sharing plans
- Rent or lease (vehicles, machinery, equipment)
- Repairs and maintenance
- Seeds and plants
- Storage and warehousing
- Supplies
- Taxes
- Utilities
- Veterinary, breeding, and medicine
- Other expenses
Please Note: that these expense examples are derived from the United States IRS Schedule F tax form. Additional expenses can be broken out if not included in this list.
Operating expenses are subtracted from gross income to calculate the farm’s net income, which reflects the profitability of the farming operation after accounting for all necessary expenditures. Tracking and managing operating expenses are crucial for farmers to maintain financial stability and make informed decisions about resource allocation and profitability.
Total Farm Operating Expenses
Total operating expenses refer to the sum of all expenses incurred in the day-to-day operations of a business or farm.
Total operating expenses provide insight into the overall costs of running the farm and are subtracted from gross income to calculate the farm’s net income or profit.
Total Operating Expenses is usually found in the income statement under the Farm Expenses section (see example).
Monitoring and controlling total operating expenses are essential for managing the financial health and profitability of the farming operation.
Non-Farm Income & Expenses
Non-operating income and expenses are financial items that are not directly related to the primary business activities of a company or farm.
In agriculture, non-operating income and expenses typically include:
- Non-Farm Income
- Non-Farm Expenses
- Family Living Expenses
- Personal Income Taxes
- Capital Gain/Loss
Non-operating income and expenses are typically reported separately from operating income and expenses on the income statement to provide a clearer picture of the farm’s financial performance.
They may have a significant impact on the overall profitability of the farm but are not directly related to its core business operations.
Net Income in Agricultural Income Statements
Net income, also known as net profit or net earnings, is the amount of money that remains after subtracting all expenses from total revenue. In agriculture, net income represents the profitability of the farming operation after accounting for all operating expenses, non-operating expenses, taxes, interest, and any other deductions.
Net income is calculated as:
Net Income = Total Farm Sales – Total Operating Expenses + Total Non-Operating Income (Expense)
A positive net income indicates that the farm has generated more revenue than it has incurred in expenses, resulting in a profit. Conversely, a negative net income indicates that the farm’s expenses exceed its revenue, resulting in a loss.
Net income is a crucial financial metric as it provides insight into the overall financial health and profitability of the farm. It is used by farmers, lenders, investors, and other stakeholders to assess the farm’s performance, make financial decisions, and plan for future operations.