Measuring the Health of a Business Farm Business Planning– Lesson 3

A Project Funded by: USDA BFRDP Grant # Development Partners Include: Mississippi State University National Association of Agricultural Educators Oklahoma State University Agricultural Economics Department Oklahoma Cooperative Extension Service

Balance Sheets Used to measure the financial position or “health” of an individual or business

A balance sheet is a systematic listing of everything ▫Owned (assets) ▫Owed to others (liabilities) ▫Owner’s equity (net worth) ▫Basic identity: Assets = Liabilities + Owner equity ▫Or, Assets – Liabilities = Owner equity A “snapshot” of the business’ financial health ▫Several years’ balance sheets measure long-term success of business Current and Non-current assets and liabilities What's in a balance sheet?

Current assets--“liquid” assets ▫Assets that can be sold without affecting long-term profit-generating capacity ▫Cash and near cash assets  Bank account balance, certificates of deposit ▫Owned and sold within one year  Feeder livestock, crops, assets held for sale ▫Assets to be used up in production process in less than one year  Inventories of fuel, chemicals, feed, parts,… ▫Other  Cash invested in growing crops and feeder livestock Current Assets

Cannot be sold (liquidated) without harming long-term profit-generation capacity ▫Land, breeding stock, machinery, buildings ▫Stock in agricultural cooperatives Difficult to sell quickly and realize full market value ▫How low would you need to price your prized possession to sell it TODAY? Non-current Assets

Financial obligations that are payable (due) within 12 months ▫Charge account balances (feed store, chemical dealer) ▫Operating note balance ▫Accrued property taxes ▫Accrued interest on long-term debt ▫Loan payments due in next 12 months  Current portion of long-term debt Current Liabilities

Portion of long-term debt due in 12+ months Note, need to calculate ▫Principal balance (i.e., total amount owed) – amount owed in next 12 months (current portion) Example: $100,000 note ▫Payment required in next 12 months = $8,000 ▫Current liability = $8,000 ▫Non-current liability = $92,000 Non-current Liabilities

Computed as ▫Owner’s equity = Total assets – Total liability Sources of Owner’s equity ▫Contributed capital  $s invested from outside the business ▫Retained earnings  Profit that has not been taken out of the business by the owner(s) ▫Change in market value of assets  Land value trends up over time Owner’s Equity or Net Worth

Cost-basis balance sheet ▫Non-current assets valued at  Cost – accumulated depreciation ▫All other assets at market value ▫Used to measure businesses performance over time Market-basis balance sheet ▫All assets valued at market value ▫Used to measure liquidation value of the business ▫Use for class assignments Two Types of Balance Sheets

Current assetsCurrent liabilities Cash, near-cash, supplies, accounts receivable, crops held for sale, livestock held for sale, cash invested in growing crops $Accounts payable, accrued taxes (property), operating note balance, accrued interest, current portion of long-term debt $ Non-current assetsNon-current liabilities Machinery, equipment, breeding livestock, fencing, land $Non-current portion of machinery and equipment notes, non- current portion of breeding stock notes, non-current portion of mortgages $ Total assets$Total liabilities$ Owner’s equity$ Total liabilities + Owner’s equity $ Balance Sheet Format

Special Thanks to: USDA BFRDP Grant Program Oklahoma State University ▫ Eric A. DeVuyst, Department of Agricultural Economics National Association of Agricultural Educators