Financial statements are a measuring stick for farm business analysis, however, many times they are not used to their full potential. The three main financial statements typically 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 better reflect the true profit of the business by identifying revenue and expenses at the time they are incurred rather than when the cash was received or paid. They also take into account changes in inventory, accounts receivable and accounts payable.
The balance sheet provides a financial summary of the business at a specific point in time and 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 it 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.The net worth statement is useful for obtaining financing because it provides 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 period of time. It shows why the cash position of the business has changed during that time.
Using financial analysis ratios can identify strengths and weaknesses in your farm when compared with industry standard benchmarks. Monitoring ratios over a period of years can be a valuable tool to measure financial growth.Financial statement analysis along with common sense and good judgment allow for better farm decision making. 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 understanding farm financial management. The guide outlines suggested processes and highlights some key resources but is not intended to be a complete list of all available resources.
For more information contact your nearest Ministry of Agriculture office or contact the Agriculture Knowledge Centre at 1-866-457-2377.
