Consistency is important to many aspects of the ag operation: cattle are fed at a consistent time of day to prevent acidosis problems, cows are milked at a consistent time of day to maintain production levels, and herbicide protocols are mixed in a consistent manner to ensure proper coverage. Consistency is just as important with regards to record keeping and the creation of financial records. In Part 3, the consistent valuation of assets on the balance sheet was covered. Many of the values off the balance sheet are components of the financial ratios, consistent valuation allows producers to do trend analysis on their operations. From the trends, producers can determine if there are changes needed to improve the profitability and sustainability of the operation. Additionally, the entity covered on the Balance Sheet needs to be consistent.
What entity and their “stuff” is included?
For example, if you are a farm family, farming without additional generations, are you placing only the “operation’s” assets and liabilities on the balance sheet or are you including personal assets as well? In addition, if you have personal assets listed, did you include personal liabilities as well? What did you include last year? Changing the items included on the Balance Sheet, and even how they are categorized (current vs. non-current), affects the ability to create meaningful ratios and trend charts from the data. Families farming together will need to define the entity they are including on their financial statements.
Are you including?
- Farm only assets & liabilities
- My farm + Mom & Dad farm
- The farm + my personal assets/liabilities + Brother’s farm
- The farm + Mom & Dad + Son
Multigenerational operations need to determine how and what to include on the balance sheet; they also need to make note of what is included and why, to ensure the same information is consistent year-to-year. This may be harder for operations that “farm together, separately”. In these operations, one operator may purchase equipment that will be used by both.
Example – Jim and Bill are brothers and farm together, separately. Jim has purchased a tractor that pulls the planter Bill purchased. They utilize both pieces of equipment on individually owned acres. Additionally, they each own half of the combine that is used on the total acres. When Jim and Bill create their balance sheets, they need to be consistent with the machinery items they include and the valuation placed on each piece. However, if Jim and Bill create a Limited Liability Company, LLC. and farm as a business, they need to determine the assets and liabilities of the LLC vs. their personal assets and liabilities.
Consistent record keeping will allow for accurate ratios and trend analysis. While operations will change and grow/contract, having a standard operating procedure will allow for analysis and decision-making.