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How to Position Yourself with Your Banker
Last week I was on a webinar with a few other bankers, giving advice on how to approach your annual Renewal appointment with your lender. The panelists gave some great tips, have a listen: www.youtube.com/watch?v=1b8BOCd2YNQ
SW Financial Literacy
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Balance Sheet: Manage Your Finances
An updated balance sheet is a critical component of any farm’s financial health.
It offers a snapshot of your operation's financial position at a specific moment in time, summarizing its assets, liabilities, and equity. Regularly updating your balance sheet allows you to track performance and make informed decisions. Ensuring that your balance sheet reflects the most accurate and up-to-date information is key for strategic planning and growth.
The Structure of a Balance Sheet
Before diving into the specifics of how to update your balance sheet, it’s essential to understand its structure. A balance sheet is divided into two main sections:
Assets: This section includes everything you own that has value. Assets are typically divided into two categories:
Current Assets: These are assets expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory.
Non-Current Assets: These are long-term assets that will provide value over a longer period, such as real estate, machinery, or farm improvements.
Liabilities: Liabilities represent your financial obligations. Like assets, liabilities are divided into:
Current Liabilities: Debts or obligations that are due within one year, such as Line of Credits, accounts payable, or current portion due on long-term loans.
Non-Current Liabilities: Long-term debts that are due beyond one year, such as equipment and land notes.
Equity: Equity represents your stake in the farm after subtracting liabilities from assets.
Your equity (or net worth) can be found with this simple calculation:
Assets - Liabilities = Equity
Why Regularly Updating Your Balance Sheet Is Crucial
An updated balance sheet offers several benefits that can drive smarter decision-making. Here are some reasons why it is important to keep your balance sheet current:
1. Assessing Financial Health
An up-to-date balance sheet provides a clear picture of your farm’s financial standing. By regularly updating it, you can assess liquidity (how easily you can meet short-term obligations) and solvency (whether you have enough assets to cover long-term liabilities). It also allows you to spot trends, such as growing liabilities or declining assets, which might indicate financial trouble.
2. Supporting Business Decisions
Business decisions often hinge on understanding your financial position. For example, if you’re considering taking out a loan, lenders will want to see a current balance sheet to assess your ability to repay the loan. If your balance sheet shows strong equity, low liabilities, or a strong current ratio, you may have a better chance of securing financing.
3. Ensuring Accurate Financial Reporting
Regular updates to your balance sheet are necessary for maintaining accurate financial statements. An outdated balance sheet can make it easier to forget changes that have taken place to your financial position, thus it is more difficult to bring your balance sheet current. It is important that your financial reports reflect true and fair information at all times.
4. Improving Business Forecasting
A current balance sheet helps you forecast future performance. By reviewing past asset and liability patterns, you can project how changes in one area (such as a new loan or an increase in receivables) may affect the farm’s overall financial health. Updated financial data aids better budgeting and strategic planning for the future.
Steps to Update Your Balance Sheet
Now that we’ve covered why updating your balance sheet is important, let’s explore the process for updating it effectively.
1. Reconcile Your Accounts
Start by reconciling all accounts, ensuring that they match the current statements from your bank, credit cards, or other financial institutions. This includes cash balances, receivables, payables, and loans.
2. Review Your Asset Values
For assets like crop or livestock inventory, machinery, or real estate, ensure that their values are up-to-date and reflective of any changes in market conditions or depreciation. If you’ve purchased new assets or disposed of old ones, make sure these transactions are properly recorded.
3. Verify Liabilities
Check all outstanding liabilities, including loans, accounts payable, and accrued interest. Ensure that any payments made have been deducted from your liabilities, and that interest or other costs are recorded correctly. Also, verify if any new liabilities have been added and adjust accordingly.
4. Equity Trend
Finally, compare your total equity compared to your previous balance sheet. If the change in equity value doesn't feel right or make sense with the financial success of your operation this past year, there may be errors in your figures that need to be corrected.
Conclusion
An updated balance sheet is essential for maintaining a clear financial picture of your business. By regularly updating this key document, you can ensure accurate reporting, better financial decision-making, and a strong foundation for growth. Taking the time to reconcile your accounts, review asset values, and verify liabilities helps ensure your balance sheet remains a reliable tool for guiding your business through the complexities of agriculture.
Have a great day!
Grant
