A closer look at an income statement and balance sheet.

By LaMar Barrington, Chief Credit Officer, Western AgCredit

Let's look at two key reports that can help you measure the financial performance of your operation and achieve your business goals.

The income statement:

Your income statement answers the question, "Am I taking in more money than I am spending?" [See "Net Profit or (Loss)," at bottom of example.] It measures the profit performance of your business for a specific period of time, such as a year, quarter, or month.

This report is very important in assessing the viability of your operation and in determining if the operation will be able to meet its financial obligations. To be useful, the report must be based on complete and accurate information. Tax returns alone are not always a good substitute for an income statement due to variances caused by tax management strategies such as pre-paying expenses or holding inventory for sale in the next tax year.

This report can also help you assess how you are doing against your expectations (your budget). Careful monitoring of income and expenses allows you to spot and correct any deviations before they turn into major problems.

By monitoring your income statement, you can keep a close watch on your targets, to avoid surprises and to make necessary adjustments.

For example, if you expect freight expenses to be $8,000.00 and you see they are $14,000.00 you will question the difference. You may find that you paid the same bill twice, or that operational changes increased costs by more than expected. By monitoring your actual income and expenses versus your budget, you can take steps to correct problems and understand their causes. You can also make other adjustments to your operation to try to compensate for the increased costs or decreased revenue.

The balance sheet:

Your balance sheet provides a statement of your financial position at a particular point in time. It is a "snapshot" of your business today, and becomes even more useful when you compare it to the snapshot of your business in a prior period.

The balance sheet identifies your ownership equity, or net worth, and shows how your net worth compares to your level of borrowed capital (see "Total Capital" and "Total Liabilities" at the bottom of the example. The balance sheet also shows the amount of working capital you have available to help the operation withstand temporary adversity.

If a business is heavily reliant on borrowed capital or loans, it is less able to withstand the difficulties caused by agricultural price cycles and weather problems. Operations with adequate working capital and significant owner equity are better able to survive the expected and unexpected problems common to agricultural production. These are important factors to keep in mind when considering expansion or capital improvements.

Your net worth is impacted by your historic operating profits/losses, fluctuations in asset values, and major gifts that you receive or give to others. Accordingly, you should think of net worth as a measure of financial progress rather than an isolated number. Net worth becomes more relevant when you compare it from one month to another, or one year to another. For example, what is my business worth today, how has it changed over the past year, and what caused the changes.

We understand how these issues apply to agriculture. Your Western AgCredit loan officer understands agriculture and has been trained to use these financial tools to evaluate your business. He or she will be happy to review your financial statements with you and help you to analyze your business.