Recently I was asked the question, “How do we get better quality balance sheets?” at a Farm Credit University training event for the Commercial Ag Lender class. With the prosperity in agriculture in recent years, quite a few lending institutions are entering the ag lending market with a desire to lend money to farmers. Some require minimal financial information and documentation. Others promise credit in a New York minute!
High-quality financial statements including balance sheets are critical not only for lenders to assess risk but also for producers to manage their farm operations. One reason for producers to prepare quality balance sheets with sound information is so they can negotiate the best price for loans given the information. A balance sheet with incomplete information, i.e. not reporting all liabilities or overstating asset values, can be seen as a sign of lack of financial character, which goes into the loan decision-making process.
If a producer provides high-quality balance sheet information, progressive lenders will often financially benchmark their operation to others so they can determine strengths and areas for improvement compared to peers. Another factor in getting high-quality balance sheets is that some lenders will send out price, value, and cost estimates so that a more objective approach to budgeting and financial statement preparation can be made.
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High quality balance sheets initially can be difficult and time-consuming to prepare, particularly given all the livestock and crops involved in diversified and multi-entity operations, as well as debt schedules with individual items and categories. However, the statements can easily be updated once they are initially prepared, and if done on a timely basis, they can be a tool for financial management.
Business sheet tips
- Separate business assets and liabilities from personal assets and liabilities, i.e. prepare a separate business balance sheet and personal balance sheet.
- Do not forget three items frequently left off the balance sheet: capital leases for equipment or livestock, accounts payable and credit cards, both personal and business.
- A good time to complete the balance sheet is as of January 1, or the beginning or end of your accounting year.
- Do not forget to list contingent liabilities such as co-signed notes or other obligations as a footnote on your balance sheet.