Tricounty News

Good financial statements make farm families less vulnerable

In the last few decades, much progress has been made to standardize financial statements in agriculture. This allows for ratios and measurements commonly used in other industries to become standard in the farmer's financial world. Now the individual farmer can measure and understand the strengths and weaknesses within his financial life, and to benchmark himself with others in his peer group. How much family living must come from the farm? In some cases, all of it must. In other cases none of it has to. These items help to define how adequate the working capital is. The definition of "liquidity" is the ability of the farm business to generate sufficient cash flow for family living, taxes and debt payment. If the bills pile up faster than they can be paid, or the operating loan has to be refinanced because it will not get paid off, liquidity is not sufficient. Does that mean that you are broke? No! In fact you could be very wealthy, but just not "liquid" enough. The Center for Farm Financial Management at the University of Minnesota has been a key player in this evolution. The FINPACK software developed by them is a leader in the farming industry. The information here applies to the financial statements and ratio analysis produced by the FINPACK software. With good financial statements, excellent measurements can be made in liquidity, solvency, profitability, repayment capacity and efficiency. A balance sheet is necessary to measure "liquidity" and "solvency." In order to measure "profitability," "repayment capacity" and "efficiency," a good accrual adjusted income statement is also needed. As farm family members better understand their own financial statements, ratios and measurements, they will become less and less financially vulnerable. That is important. After all, it is their financial life. For more information, see Financial Management Series 4, "Ratios and Measurements," at www.extension.umn.edu. Click on "Agriculture," "Ag Business Management" and "Publications."