You really need to do a balance sheet

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Hey, it is the first of the year, and hopefully you realize that making new resolutions is a waste of time, energy and promotes mental anguish for those of us who do not have the self-discipline to change poor habits.

Taking inventory and creating the annual balance sheet, however, should put a gleam of excitement into every manager’s eye! (Don’t worry, I am fully aware that this perspective on both resolutions and balance sheets is not widely held.)

Inventories

Yes, it is time to take inventories and prepare balance sheets, whether these activities are perceived as a really good time or toothpicks under the fingernails sound more appealing.

It is easy to let this activity slide in flush years. Why? Because there is money in the checkbook, feed in storage and generally low levels of stress.

This is also the time when the balance sheet is most likely to look good. Which years is it more important to create balance sheets? All years, and this year, a perk of participating in the “Managing the Dairy of Tomorrow” workshops will be the opportunity to work with a technician after the workshop to develop your balance sheets and create an enterprise analysis for your farm business.

Balance sheets

Check with your county educator for workshop materials or check out http://dairy.osu.edu.

  • Quick review: A balance sheet paints a picture of your business on one day in time. We choose the same day to paint this picture each year (such as Jan. 1) so when we compare changes from year to year, we are comparing similar points in time.
  • A dairy that raises a great deal of feed will have a very different balance sheet May 1, when many feeds are used up, than they will Jan. 1, when much of the year’s feed is in storage on the farm.

  • Assets: The farm’s assets (the stuff you own) include cash, accounts receivable, feed and supply inventories, bunches of cows, heifers and calves, machinery, equipment, buildings, land and perhaps stocks and shares in cooperatives.
  • Assets are categorized as short, intermediate or long term depending on how readily they are convertible to cash. (Did you notice there is not a bull listed here? Sell him before you do a balance sheet and not only will you need one less line on the balance sheet, but none of your loved ones or employees will be killed by him before you do next years’ balance sheet.)

  • Liabilities: The farm’s liabilities represent what you owe to others. Debts are categorized by how soon they are due to be paid.
  • Current liabilities include accounts payable (such as the feed bill), lines of credit and principal and interest due in the next 12 months on longer-term debt.

    Long-term debt typically includes mortgages on properties that are financed for more than 10 years. Nearly everything else is financed between current and long term and is lumped together as intermediate-term debt.

    You will frequently find financed items such as cows, tractors, trucks, skid loaders and silos listed here.

  • Net worth: The satisfying part of the balance sheet (we hope) is the net worth calculation. After completing an accurate listing of both assets and liabilities, the next step is to calculate the difference between the two.
  • In a happy world, the assets will be considerably greater than the liabilities; that difference is termed your net worth.

    The objective of the business game is to increase net worth each and every year because your business is making money (as opposed to increasing because the value of your land theoretically increased four times because someone wants to build 30 houses on it. Remember that you would have to sell it to benefit from this increase in value.)

  • Debts to assets: Another important figure to monitor is your percent debt or percent equity (opposite ways of looking at the same thing.)
  • Take total assets and divide by total liabilities. That figure multiplied by 100 will tell you the percent total debt of your operation. We would like to see this no higher than 40 percent.

    While some farms may carry debt at or higher than this level for short periods of time, it can be very stressful and leave the farm vulnerable in times of low product prices and/or high input prices.

    Other farms cannot profitably operate even at debt levels less than 40 percent.

    Help

    If you made it this far, there is a chance you do or will try to create your farm’s balance sheet in the next week. If this is a new endeavor, your county agricultural Extension educator should have forms that can be used to pencil in a balance sheet (FINPACK forms work just fine for this).

    We quickly reviewed only two key points to monitor on your balance sheet. There is additional information that balance sheets can provide, particularly if they are done each year.

    Your time creating and monitoring the farm’s balance sheet is an important investment in the future of that farm.

    About the Author

    (Dianne Shoemaker is an OSU Extension dairy specialist located at the extension center in Wooster, Ohio.) More Stories by Dianne Shoemaker

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