It’s that time of year again. For most farmers spring means calving and/or seeding time and income tax time. Some farmers may have already dealt with their corporate year ends, however not all farmers have financial statements prepared annually as it is not necessary for sole proprietors or many partnerships. While financial statements are the measuring stick for farm business analysis, many farmers do not use them to their full potential. The three main financial statements generated are the Income Statement, the Balance Sheet, and the Statement of Cash Flow.
The Income Statement is a summary of revenue and expenses over a given time period – usually one year. It can be calculated on a cash basis or accrual basis. Cash Income Statements are prepared by reporting revenue in the year it is received, and expenses in the year in which they were paid. This method is relatively simple, and provides a lot of flexibility for tax planning, however it is not a very good measure of profitability. Accrued Income Statements are used to record transactions when they occur, rather than when the cash was received or paid. They also take into account changes in inventory, as well as Accounts Receivable and Accounts Payable. Accrued Income Statements better reflect the true profit of the business by identifying revenue and expenses at the time they are incurred.
The Balance Sheet provides the base for Accrual basis accounting by summarizing what the business owns (Assets), what it owes to creditors (Liabilities) and what it owes to the owners (Owner’s Equity). It summarizes the information about the financial position of the business at a specific point in time. The Balance sheet must always be in balance according to the equation: Assets = Liabilities + Owners Equity. It measures the financial strength and position of the business and over a longer period and can indicate if financial progress is being made. A net worth statement is similar to a Balance Sheet, except that assets are valued at market value instead of original cost. Net Worth Statements are useful for obtaining financing because they provide a better idea of what the business would be worth if it was sold.
The Statement of Cash Flow provides information about the liquidity or solvency of a business at any point in time. It summarizes (on a cash basis) the operating, financing, and investing activities of a farm business for a specified time period. It shows why the cash position of the business has changed during the time period. The purpose is to provide information about the liquidity and solvency of the business.
Using financial analysis ratios can identify strengths and weaknesses in your farm when compared with benchmarks (industry standards). Comparing your business to itself over a period of years can be a valuable tool to identify trends unique to your business. Just keep in mind that to make decisions based on ratios, the information they are based on needs to be accurate. Using common sense and good judgment along with the financial statement analysis should allow for better decision making ability. All statements should be looked at in combination, as there are limitations when used alone.
The Ministry of Agriculture has a Comprehensive Guide to Financial Management available on the website (www.agriculture.gov.sk.ca). The guide is divided into five main sections:
1. Interests, Motivations, Goals and Purpose
2. Record Keeping and Accounting Fundamentals
3. Farm Financial Statements
4. Financial Analysis and Determining Farm Financial Health, and
5. Action Planning.
There are sub-sections within each of these main sections, identifying specific tools and sources of information to assist with education and comprehension of Financial Management. The guide outlines suggested processes and highlights some key resources that may be helpful, but it is not intended that a farm manager would use all resources in the guide at all times. Depending on the level of understanding the manager currently has, only some of the resources in the guide may apply. This guide is not intended to be a complete list of all available resources.
For more information contact Jenay Werle at (306) 786-1529 or by email at jenay.werle@gov.sk.ca; or call the Agriculture Knowledge Centre at 1-866-457-2377.
By: Kari Burnett PAg and Jenay Werle PAg
Regional Farm Business Management Specialists
Saskatchewan Ministry of Agriculture
