Dairy Channel: Too much debt, not enough equity? Find out with farm balance sheet

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Hey, it is the first of the year … and hopefully you have lived long enough to 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.

Take inventory. 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.

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

It is easy to let this activity slide in flush years (years with average to above-average milk prices and decent weather patterns and good crops).

Why? Because there is money in the checkbook, feed in the barns and manure spread out where it belongs.

That is also the time when the balance sheet is most likely to look good.

No excitement. Since we didn’t have either average or above-average milk prices, decent weather or good crops, it is hard to get excited about putting together a balance sheet that will reflect smaller feed inventories and less cash.

It is probably more important than ever to commit to the task.

A 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 on May 1, when many feeds are used up, than they will on Jan. 1, when much of the years’ 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.

Percentages. 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 at debt levels less than 40 percent.

Give it a try. If you made it this far, there is a chance that 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 agent 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 valuable 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. Good luck!

(The author is the northeast Ohio district dairy specialist with OSU Extension. Send comments or questions in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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