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Getting the most from your Financial Statements!

Once a year a corporate farmer will receive a set of Financial Statements with their Corporate Tax return. Are these statements just collecting dust in your >drawer? Or have you taken time to review them and understand what they really mean? What is the hidden message within the numbers?

First of all it is important to ensure that these statements are prepared on the accrual basis as cash basis financial statements provide very little useful information beyond giving some indication of your tax position. An accrual income statement will match the income to the year it was produced and the expense to the year it was incurred. This gives a more accurate picture of profit or loss in any given year than cash statements, which reports only what was sold and paid during the year. Accrual financial statements will also include a balance sheet, which is a snapshot of your operation at any given time (usually at year end). This snapshot will contain the value of all the assets of the business broken down into current (expected to be turned into cash within one year) and long term. The balance sheet will also hold liabilities of the business broken down into short term (due within one year) and long term. The differences between assets and liabilities of the business will be the equity that the shareholders hold in the business. A balance sheet always balances using this formula "Assets=Liabilities + Equity."

From the balance sheet and income statement you begin to get a feel for the financial health of your farm. For instance, if you look at current assets divided by current liabilities you see how much of your available cash, inventory and accounts receivable are going to be consumed in paying off the next years liabilities. Taking the total liability value and dividing by total assets gives an indication of the financial risk there is to the operation. There are many more ratios to consider in analyzing financial statements that can be mentioned here. It is very interesting to compare your numbers with industry benchmarks. Caution needs to be used in making decisions based on only one or two ratios. Perhaps the most powerful message comes from comparing the last few years to this year. This will point out trends that are developing. Is the farms liquidity, solvency and profitability becoming stronger or weaker?

Wheatland is excited to be offering a workshop January 15th in Fillmore on the very subject of "Understanding Financial Statements." We will take you through the components of financial statements and the valuable information that lies in them.