Most farmers have at least three financial statements - one for the lender, one for selling out and one for themselves. These financial statements list all their assets on one side, all their debt on the other, and net worth at the bottom.
The financial statement for a lender is usually distorted. If a hog operations is facing some financial troubles, the numbers may show the land and facilities at an inflated price - maybe even more than they're really worth.
A producer who is rock solid, on the other hand, is more likely to show just enough to obtain that loan. He doesn't want his lender to know too much or to think he's doing too well.
A financial statement for the possibility of selling out may also be high or low. This one is often in the producer's head rather than on paper.
Most people figure their assets are worth more than most other people will pay, however.
The third financial statement is the one that, over the years, will measure how well the producer is really doing. It will paint an accurate picture of a producer's real profit after all costs, including family living.
It's the financial statement that you need to use this year. It's the one that tells you where you really are. It's the one that is as accurate as can be. It's the one that ignores inflation in favor of measuring growth.
Get It Right - Now Any distortions on your financial statement in the present difficult times of low prices could put you on a path to despair, if not destruction.
Show your lender the optimistic financial statement and he may lend you more than you can really afford. That's especially risky during times of low prices and low or no profit. Never forget that it takes profit to repay loan principal.
Be too cautious and show your lender that low-ball financial statement and you may not be allowed to borrow enough to keep your business efficient during the tough times and poised to capture the rewards of the next stage of the cycle.
Make no mistake, it's a delicate balance. That's why accuracy is so important.
Make your financial statement for you this time, not for your lender, your wife, the auctioneer, real estate person or anybody else.
This is probably the year to involve your accountant or financial advisors to set a pattern of how to value your assets if you haven't done so before. Then do it the same way every year. If you can, go back and re-value items onlast year's statement if you need to in order to be able to make an accurate comparison with this year's. If you counted right a year ago, your inventory should be accurate. You may just need to adjust some values.
One thing to insist on is a financial statement that doesn't reflect inflation. Many farmers made their statements look fantastic in the late 1970s and early 1980s by using inflated land values. If you want a "selling out" financial statement, get a sheet that has two columns rather than one. On one, use book values that ignore inflation. On the other, use fair market values that include inflation.
A key point is to inventory everything you own. As you do that, you may want to make a list of things you really don't need anymore. If you don't use them and don't need them, get rid of them. For income taxes, a low income year is probably the best time to clean out. The money you get will help your cash flow.
When you have two or more years of accurate, no-inflation, financial statements, you can tell how you really did during the year. You'll know if the year of low prices hit you as hard as you think - or if the low prices hit even harder than you thought.
You will also know better how to plan for the next year.
For those of you who already have a string of accurate, no-inflation, financial statements, you know what we're talking about and you're a step ahead in your planning for the future and strategically preparing for the next up-cycle.