When managing a farm or agricultural business, keeping track of finances is essential to sustaining growth and ensuring long-term profitability. One of the most important documents you can use to assess your financial position is your operation’s balance sheet.

Below, we’ll break down the basics of a balance sheet, how it can help your operation, and why it’s crucial for making informed financial decisions.

What is a Balance Sheet?

A balance sheet is a financial statement providing a snapshot of the financial health of your business at a given moment in time. It lists your business’s assets, liabilities, and equity, showing what you own, what you owe, and what is left over. A balance sheet can help lenders, investors, and even you, as the business owner, understand the financial structure of your operation.

There is a simple formula behind a balance sheet: Assets = Liabilities + Owner Equity. Balance sheets were so named because both sides of this formula must always balance.

Key Components of a Balance Sheet

Let’s break down the three main components of a balance sheet:

1. Assets - These are everything your business owns that holds value. Assets are typically divided into the categories of current and noncurrent. Current assets are expected to be used or converted into cash within the next year. Some examples include cash, accounts receivable (money owed to your business), inventory, and short-term investments. Noncurrent assets are long-term assets that will be used for more than a year. Examples include land, equipment, machinery, and livestock. Regularly tracking your assets will help you assess whether your operation has the resources to meet short and long-term goals.
2. Liabilities - Liabilities represent the debts and financial obligations your business owes to others. These are also broken down into the two categories of current and noncurrent. Current liabilities are those that will be paid within one year, such as short-term loans, accounts payable (money you owe), and accrued expenses. Noncurrent liabilities are long-term debts such as mortgage loans, long-term leases, or bonds. Understanding the liabilities of your business is crucial because it helps you assess your ability to pay off debts as well as determine how much leverage your business has in terms of borrowing capacity.
3. Net Worth - Net Worth is the residual value of your business after subtracting liabilities from assets. In simpler terms, it’s what you, as the business owner, actually own in the operation. The equity portion of a balance sheet is important for understanding your personal stake in the business. This value can change over time based on the performance of your farm or operation and how well you manage your assets and liabilities.

Why a Balance Sheet is Important for Your Operation

Balance sheets are often required when applying for loans or seeking investment, but they also serve as a great tool to help you make better financial decisions for your business. Balance sheets are able to help you measure your financial health by clearly laying out your assets and liabilities.
Balance sheets collected over time can serve as a record of growth for your business, showing how your assets and equity have increased or decreased. This will help you measure the success of your business strategies and assess your progress toward long-term goals.
A strong balance sheet means you’re able to cover your liabilities with your assets and signals a stable financial position. If your liabilities outweigh your assets, it may be time to reevaluate your operations.

How to Create a Balance Sheet for Your Agricultural Operation

Creating a balance sheet may seem like a daunting task, but it doesn’t have to be complicated. Here is a simple outline of the process to get you started.

1. List Your Assets: Include everything that holds value, such as cash, land, equipment, and inventory. Don’t worry about categorizing them at first. They can be broken down into their appropriate categories after they’ve been listed.
2. List Your Liabilities: Detail all debts, including loans, accounts payable, and any other outstanding financial obligations. Again, don’t worry about categories to start. Just list everything first and organize it after.
3. Calculate Net Worth: Subtract your total liabilities from your total assets to determine your business’s equity.
4. Review and Update Regularly: Plan to review your balance sheet at least quarterly to stay on top of your financial situation. Regular updates will help you spot potential issues early and make necessary adjustments to your business’s operations.

Your balance sheet is much more than just a tool for tracking money, it’s a vital resource that helps you understand the financial landscape of your agricultural operation. Whether you’re applying for a loan, creating long-term growth goals, or managing day-to-day finances, knowing your balance sheet inside and out is essential for making informed business decisions.

By understanding the basics and regularly reviewing your balance sheet, you’ll be better equipped to navigate challenges, seize opportunities, and drive the financial success of your farming operation.

Have a question about what we look for when it comes to balance sheets and loans? Shoot our team an email, and we will be happy to chat with you or refer you to one of our partners for more specific questions.