SW
When working a new loan request or updating financials, I will occasionally receive an updated balance sheet pulled from a bookkeeping system (i.e. Quick books or your CPA).
While it is great to have your cash flow and bookkeeping up-to-date during all parts of the growing cycle, there are a few issues with creating balance sheets from this type of recordkeeping database. Accrual (or cash basis) financial statements misinterpret a few key items that will probably negatively reflect your actual financial position.
Here are some examples of the differences between a true market basis balance sheet and an accrual balance sheet.
Accrual balance sheets lack current inventories. No current crop or livestock inventories are included. Your 120,000 bushels of corn are missing! This severely impacts your liquidity and underestimates your true working capital.
Accrual balance sheets show equipment and real estate valued at the purchase price the day they were bought. Then, there is a separate line item showing the amount of depreciation that has been taken off those items since the day they were bought. With accelerated depreciation being used as a tax write off, this usually underestimates your equipment and building values compared to market value, further diminishing your assets.
From a liability standpoint, current portion term debt is often not brought forward into current liabilities. In fact, very few details are provided on the loan terms. This creates uncertainty around payments, interest rates, and due dates.
The accrual balance sheet can be a good starting point for recalling most of your assets to create the balance sheet. If you are using this format, make sure you include current crop and livestock inventories (including bushels and number of head), a list of all equipment and real estate with a market value attached to them, and all term debt details to create an accurate financial statement.
In the example below, Net Worth on the market basis balance sheet is an accurate $2,144,190 compared to the inaccurate Net Worth of $505,355 from an accrual statement!
Have a great week!