NW Call to Action
The Best Number
Your financial health needs this.
Not all numbers are created equally.
#1 is the number for winners.
#23 is a great number for basketball players (Lebron/Jordan).
#100 is a landmark age to reach.
#365 gives us the days of the year.
#1,000,000 gets you millionaire status.
These numbers are all great, but not actually what I was going for with this article. What I’m checking is which number is the best to track on your financial statements.
I’m guessing your default answer would be profitability from your Cash Flow. Isn’t the goal to make money each year? Or maybe you say Working Capital. After all, I’m harping on having more Working Capital all the time! I, however, will disagree with both of those.
My belief is the best number is your Net Worth Change year over year.
Net Worth Change? What is that?
Net Worth
Before we start chasing down your Net Worth Change, we need to establish your single year Net Worth first. Net Worth (or Total Equity) can be found by subtracting your Total Assets by Total Liabilities.
In this example, Line 25 gives us Total Assets ($2,790,172) minus Total Liabilities ($1,462,345) for a Total Equity or Net Worth of $1,327,827. By itself, this number doesn’t tell you anything more than if you have officially hit millionaire status.
The importance comes when you start to stack your Net Worth year over year.
Net Worth Change/Change Your Thinking
Net Worth gains are your true operational earnings. While cash flows, income/expense reports, and your tax returns each have their place of importance when tracking profit, they are not able to show complete operational finance changes. Each one is flawed.
· Cash flows only show for a particular crop year, and often don’t include appreciation/depreciation, family living expenses or outside income, and other external factors that may take place outside of crop production.
· Income/expense reports often show inventories from the year prior and prepaids for the upcoming year, clouding your profitability.
· Tax returns are for the government and are filled with untrackable deductions (accelerated depreciation) while excluding non-business expenses.
*Net Worth Change takes everything that happens in your life into account. If you spend $20,000 on a family vacation, your Net Worth Change shows this. If you buy a farm, fix it up, and gain $100,000 in sweat equity, an accurate Balance Sheet with Net Worth Change will reflect this. When you start tracking your year of profitability by Net Worth Change, you start to look at the bigger picture and find ways to get ahead financially differently.
You can grind away making $10,000/yr raising a crop for 10 straight years (10x$10,000=$100,000), or you can buy the local elevator, fix it up, and increase its value on your balance sheet by $100,000 in 1 year.
Lending Green Light or Red Flag
Finding your Net Worth Change is simple.
Take several years of balance sheets, locate your Total Equity (Line 37), and subtract to find the difference (Line 42).
Here we have a 5-year Balance Sheet trend for Farmer Dave. In 2020, Dave had a Net Worth of $165,363 (Line 37) which he steadily grew each of the next 3 years. Even though the operation experienced some Working Capital loss, he was still profitable overall growing his Net Worth to $441,280. This shows he truly had earnings in the operation and his balance sheet was able to grow as a result. In most cases, this will result in a ‘Green Light’ from your lender!
2023 and 2024 were not so kind to Dave. He did manage to improve his Working Capital in each of those years but had Equity losses of $93,558 and $58,613 (Line 42) during that time. ‘Red Light’.
· After 1 year of Equity losses, you should review all living and operational expenses to see where you can cut costs and make improvements. The loss could be a one off by factors outside your control, but you should still sharpen your pencil and work to get better.
· After 2 years of Equity losses, internal alarms are sounding to reevaluate existing debt, any planned upgrades to the operation, and find ways to generate more income with what you already have. This is not the time to pour money into a new business venture. A fix needs to be found and implemented this year.
· After 3 years of losses, your lender may cut ties with you. You may be considered a high-risk account and can only get financing from high-risk lenders with interest rates 4% higher than what you had previously. The journey back to profitability becomes that much harder.
Do you see why this is so important? If you don’t make changes quickly to create profitability, what you have been building can be gone in a flash.
Key Points
· You need to have your balance sheet be as accurate as possible. Any information left off because ‘the lender doesn’t need to know that’ can put you out of business. I will coach you differently on a purchase based on what your balance sheet shows, and could give you bad advice if you leave information off your statement.
· Tracking Net Worth Changes is fun! It is a great way to monitor your financial progress, and a lot easier to update than finding and recording invoices on your cash flow. Net Worth shows the progress you have been working towards for years.
· In my experience, lenders almost never go over the Net Worth Change with you, and it is the most important number of all. If you aren’t getting this from your annual review, ask for it or find someone who can give you the feedback. Your operation is important, don’t be bashful.
As I review balance sheets for the start of the 2025 crop year, nearly EVERYONE has had Working Capital losses each of the past two years. With commodity price deterioration and drought, even the best operators aren’t always able to avoid this.
What I do see from those best operators, though, is they continued to have Earned Net Worth GAINS over the past two years.
And this is what they are doing to make it happen: 6 Characteristics of Farm Buyers
*Note: It’s important to update your balance sheet on close to the same date every year. If you vary much from a balance sheet every 365 days, you get inconsistencies in your trend from differences in when seasonal income and expenses go in and out of your account.
**This Balance Sheet Trend is available for those who have purchased the Farm Buying Toolbox. To learn more, sign-up here to be notified when the Toolbox is available: Farm Buying Toolbox | Farm640
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Have a great week!
Grant
