Why a Balance Sheet is Important

3 Minute Read

Landowner talking to his overseer at a farm while checking the books and looking at bills
A balance sheet shows current and noncurrent assets listed on one side, and current and noncurrent liabilities listed on the other side. The difference in the totals is an operation’s equity, or the operation’s solvency.

Think of your farm’s balance sheet as a check-up on the health of your operation. Each year, it provides a point-in-time snapshot of your net worth and shows how your operation is doing financially. From one year to the next, it reveals trends, both good and bad. Used effectively, your balance sheet addresses the long-term viability of your operation.

What are the Uses of the Balance Sheet

Whether you are creating a balance sheet for your banker or for your own use, here are some measures of your financial position that your balance sheet will provide:

  • Solvency measures the relationships among assets, liabilities and equity to assess “health” of your operation.
  • Liquidity measures the operation’s ability to meet current financial obligations as they come due without disrupting normal business—the ability to generate cash in the short-term.
  • Trends: As you update your balance sheet from year to year, you can see whether your business is progressing—whether equity is growing or shrinking, and whether you are maintaining adequate liquidity.

The Difference Between Assets and Liabilities

Assets are everything owned by a business or individual and consist of both current assets and noncurrent assets:

  • Current assets are considered “liquid” such as cash or items that can be turned into cash promptly. Current assets can include checking and savings accounts, mutual funds, stored production (such as grain in the bin), market livestock, growing crops, feed on hand, paid-for but not yet used inputs or other supplies, and accounts receivable.
  • Noncurrent assets can’t be readily sold, such as machinery and equipment, vehicles, breeding livestock, co-op stock, farmland, your house, other buildings, or a retirement account that is subject to government withdrawal penalties.
Current liabilities are those that are due right away—usually within the next 12 months. These include accounts payable (such as for inputs, or land rent), farm taxes, current notes and credit lines, accrued interest on operating or term loans, the current portion of principal due in 12 months, credit card debt or loan payments to family members.

Noncurrent liabilities include loans used to purchase assets that have a lifespan of more than a year, such as vehicles, machinery, farm ground or a home.  They also could include an agreement to buy out a partner or a parent’s share of the business.

When Should You Update Your Balance Sheet?

Most businesses update their balance sheet at the end of the accounting period, such as the end of the tax year. Some check their numbers quarterly. For grain operators, post-harvest is a good time to update balance sheets because the information will be more accurate and provide more value. The best time to update a balance sheet for cow-calf operations is when calves are on the ground. Be sure to update your balance sheet at the same time every year.

The balance sheet is a tool to identify and determine the strength of your operation or your reserve risk-bearing capacity. It is easy to see your operation’s financial progression from one year to the next If you are consistent in how and when you capture your assets and liabilities. Be sure to have a conversation with your lender about the method you choose for tracking the value of your assets so there is a clear understanding of the financial health of your operation.

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