Keeping your financial records in order

  Understand and utilize a balance including:  Understanding the purpose of a balance sheet  Be familiar with balance sheet terminology and structure  Be familiar with cost and market valuing of assets  Be able to use the balance sheet for strategic management purposes Objectives

 Bookkeeping Basics The Cliffs Notes to understanding financial management.

  Account Payable – Incurred expense that has not yet been paid  Account Receivable – Revenue for a product that has been sold or service that has been provided, but payment has not yet been received  Accrued Expense – Expense that accumulates, but has not yet been paid  Asset – Item of financial value or produces something of financial value  Credit – Accounting entry that records decrease in asset/increase in liability, owner’s equity, or an income account  Debit – Accounting entry that records increase in asset/decrease in liability or owner’s equity Accounting Terms

 Accounting Terms Cont’d  Expense – Cost incurred in production of revenue  Inventory - Physical quantity and value of stored products  Liability – Debt or financial obligation  Net Farm Income (Profit) – Revenue minus Expenses  Owner’s Equity – Assets minus Liabilities  Prepaid Expense – Payment for input prior to the accounting period it will be used  Revenue – Value of products produced and sold during an accounting period

 Bookkeeping Basics Bookkeeping is the compiling of financial records for mainly non-tax purposes.  Financial Reports:  Balance Sheet  Income Statement  Transaction Journal (check register)  General Ledger  Depreciation Schedule  Inventory Report  Enterprise Report  Employee Records  Income Tax Reports  Statement of Cash Flow  Statement of Owner Equity  Family Living Expense Report  Spreadsheet Programs:  Microsoft Excel  Bookkeeping Programs:  Quickbooks  Famous Software  Financial Report Programs:  FINPACK  University of Idaho Enterprise Budget Software

 DebitsCredits AssetsLiabilities ExpensesRevenue and Retained Earnings DividendsCapital Stock Recording Transactions Increase Debit Side Decrease Credit Side Decrease Debit Side Increase Credit Side

AccountDebitCredit Checking$10,000 Owner’s Equity$10,000 You invest $10,000 from your personal savings account into your farm business. You purchase a piece of equipment using $8,000 from the farm’s checking account and a loan from the bank for $12,000. AccountDebitCredit Checking$8,000 Note Payable$12,000 Equipment$20,0000 $10,000 - $8,000 = $2,000 left in checking account.

AccountDebitCredit Checking$20,000 Crop Sales$20,000 You deposit $20,000 from crop sales into farm checking. You pay your hired labor $4,000 for the month. AccountDebitCredit Checking$4,000 Labor Expense$4,000 $2,000 + $20,000 - $4,000 = $18,000 left in checking account.

What do you own and what do you owe?

  Use balance sheet to evaluate the value of what you own compared to what you owe.  Tells you the net worth of the business.  Tells you the financial position of the business at a point in time.  Solvency measures  Liquidity measures Balance Sheet

  Assets = Liabilities + Owner’s Equity  Can be rewritten as:  Assets – Liabilities = Owner’s Equity  Definitions:  Assets – Can be sold to generate cash or produces good that can be sold  Liabilities – Obligation or debt owed to someone else  Owner’s Equity- Represents what is left for the owners Balance Sheet Fundamentals

  Assets  Current Assets: Assets that can be sold quickly (liquid) or will be used up in less than 1 year (i.e. checking account, inventory)  Non-current Assets: Assets that are illiquid and have a life span greater than 1 year (i.e. equipment, buildings, land)  Liabilities  Current Liabilities: Liabilities due within 1 year (i.e. operating loans)  Non-current Liabilities: Liabilities due in more than 1 year (i.e. land loans)  Assets increase Owner’s Equity, Liabilities decrease Owner’s Equity Fundamentals Cont’d

Balance Sheet for Grant County Farms Co. December 31, 2013 ASSETS LIABILITIES Current Assets Current Liabilities Total Current Assets Total Current Liabilities Noncurrent Assets Noncurrent Liabilities Total Noncurrent Assets Total Noncurrent Liabilities TOTAL ASSETS TOTAL LIABILITIES OWNER EQUITY Total Equity Total Liabilities and OE

 Combine valued at $250,000.  400 acres of winter wheat planted at a cost $45.00 per acre.  Line of credit at the local feed store of $16,425.  Checking account balance of $6,436.  Real estate loan of $535,275, plus an accrued payment of $69,700.  Breeding livestock worth $197,000.  Corrals and buildings appraised at $103,000.  Owners contributed $225,000 in capital to start the farm.  Land worth $1,450,000.

Balance Sheet for Grant County Farms Co. December 31, 2013 ASSETS LIABILITIES Current Assets Current Liabilities Checking Account$6,436 Accounts Payable$16,425 Investment in Growing Crops$18,000Accrued Payment (Interest & Principle)$69,700 Total Current Assets$24, Total Current Liabilities$86, Noncurrent Assets Noncurrent Liabilities Equipment (Combine) $250,000Real Estate Loan$535,275 Breeding Livestock$197,000 Corrals & Buildings$103,000Total Noncurrent Liabilities$535, Land$1,450,000TOTAL LIABILITIES$621, Total Noncurrent Assets$2,000, OWNER EQUITY TOTAL ASSETS$2,024, Contributed Capital$225,000 Retained Earnings$1,178,036 Total Equity$1,403, Total Liabilities and OE$2,024,436.00

  Cost-Basis Balance Sheet – Uses the cost or cost less depreciation to value assets (what is its book value)  Market-Basis Balance Sheet – Uses the current market value less selling costs (what could you get if you sold it today)  Pros and cons of each:  Cost-Basis: promotes conservatism, conforms to GAAP  Market-Basis: more accurate for determining collateral Market v. Cost

Balance Sheet for Grant County Farms Co. XX/XX/20XX ASSETS LIABILITIES Current Assets Cost BasisMarket BasisCurrent Liabilities Cost BasisMarket Basis Checking Account$6,436 Accounts Payable$16,425 Investment in Growing Crops$40,000 Accrued Payment (Interest & Principle)$69,700 Crop Inventory$60,000 Total Current Liabilities$86,125 Total Current Assets$106,436 Noncurrent Liabilities Noncurrent Assets Real Estate Loan$535,275 Equipment (Combine)$250,000$255,000 Total Noncurrent Liabilities$535,275 Breeding Livestock$197,000$200,000TOTAL LIABILITIES$621,400 Corrals & Buildings$103,000$150,000OWNER EQUITY Land$1,450,000$2,900,000Contributed Capital$255,000 Total Noncurrent Assets$2,000,000$3,505,000Retained Earnings$1,230,036 TOTAL ASSETS$2,106,436$3,611,436Market Valuation-$1,505,000 Total Equity$1,485,036$2,990,036 Total Liabilities and OE$2,106,436$3,611,436

 Balance Sheet Analysis Financial Condition of your Farm

 Balance Sheet Analysis Liquidity  Focuses on Current Assets/Current Liabilities  Do you have enough cash to pay upcoming debts for the next 12 months without disrupting business operations?  Will you have anything left for emergencies? Solvency  Focuses on Total Assets and Total Liabilities  If you were to shutdown today, could you repay all your debt?  How much more debt can your farm handle?

Working Capital = Current Assets – Current Liabilities N o rule of thumb as to how much you need. Larger operations may need more than smaller operations. Goal: Working Capital of ____ Working Capital = $106,436 – $86,125 = $20,311

 Case Studies

 Grant County Farms, LLC. Objectives  Evaluate the company’s current financial health based on the balance sheet.  Based on your evaluation, what suggestions would you give Grant County Farms, LLC to better manage their liquidity and solvency?  Based on your evaluation of Grant County Farms, LLC’s liquidity and solvency, how do you feel about a growth strategy? What other information do you need to know? Operation and Background: You are the owner of Grant County Farms, LLC. It is the end of your fiscal year, and you want to measure the health of your business through profitability analyses. Grant County Farms owns 700 acres of non- irrigated cropland on which it runs a winter wheat/fallow rotation. You also run 300 cow/calf pairs on another 700 acres. You have an excellent reputation as a farmer, and you come from a well-establish family in the area. You are the second generation to own this farm.

 Homework  Gather the information for your balance sheet.  Construct or update your balance sheet.  Calculate your financial ratios for liquidity and solvency.  Discuss the financial condition of your business with your management team.

  Take a minute to write down one or two ideas or takeaways from this lesson. One Minute Takeaway

 Sieverkropp Consulting LLC. Contact: Elizabeth Sieverkropp (509) Website: Training Program Homepage: program-homepage