 My name is Jessica Kelton and I'm a regional agent for the farm and agribusiness management team. Today I just want to discuss a little bit about farm financial statements, what they are, what we use them for, and how you can use them for your operation and moving forward. I want to start by talking about why we need financial statements. Financial statements are several of them that we'll discuss today, but really these kind of give you an overview of how your operation is doing financially. Is it profitable? Is it losing money? What commodities? If you're producing multiple commodities, which ones are losing money? Which ones are making money? It kind of gives you an idea of how much your operation owes, and then ultimately you can use it to determine if you can afford to do something different. If you're wanting to expand your operation, can you afford it? Do you need to replace equipment? Can you afford to purchase more equipment? Can you diversify? Ultimately that's what your financial statements are all designed to help you do, to make decisions, the financial decisions on the farm. So what do we usually see growers using to make financial decisions on their farm? And unfortunately, a lot of times this is what most people see when they're looking at their finances, and this is kind of the only overview they see. And this is your schedule F, your profit or loss from your farming. This is how you file your taxes. If you're a farming operation, this is what you see. You report your income and you deduct your expenses. A lot of times you're depreciating some of your assets, and this just calculates how much income you're going to pay taxes on. And yes, it's a good something to be able to see how much income you're making, but it doesn't really give you a full picture of how the operation is doing. So instead of just focusing on this, which we're going to see one time a year, we really want to look at the different financial statements. What are those options? What can we look at? We have several that we look at. There's a balance sheet, an income statement, a cash flow statement, and then a statement of owner's equity. So what do those look like? What do they mean and how do we use each specific financial statement? So basically a balance sheet. The balance sheet is also called a net worth statement. And it shows the assets, things you own, and liabilities, the things that you owe money for on the farm on a specific date. So basically think of it kind of like your checkbook. When you open it up and you look at your checkbook from whatever your balance is, it's a reflection of what your balance is today. And that's basically what a balance sheet does. It shows you what your balances of your assets and your liabilities are for that specific day. Now the next day they may definitely change. It kind of gives you that snapshot for that day. Typically when you're doing a balance sheet, you're going to have it start at the first of your year. If you're like most growers, you're going to start with, your fiscal year is going to start in January. So it would be good to have a balance sheet as of January 1. So here you can kind of see what just a generic balance sheet would look like. You have your farm assets on one side and then your farm liabilities on another side. For this one, it says current assets and fixed assets. A lot of times they break them down into three different groups. Assets and liabilities are typically broken down into three types, a current and intermediate and a long term. So what do these look like? A current asset, those things that you own, but you will probably sell within a year. So if you think about if you have livestock that you're planning on selling in a year, stored grain, anything you've harvested but you're storing on farm, that would be a current asset. Same goes for liabilities. Current liabilities are things that you owe within one year. Most of the time when we think about a current liability, we're going to think about an operating loan, something that we've taken out alone to pay for our operating expenses. And once we harvest our crop or we sell our livestock, then we're going to pay that operating loan back within that year. So intermediate assets and intermediate liabilities. Typically the timeframe for those is going to be anything from one to 10 years. So a little longer than a current asset or liability, but not as long as a long term. So things that would kind of fall into this category, machinery loans and machinery, any equipment you own, typically it's going to be considered an intermediate asset after 10 years. Then are before less than 10 years, but in intermediate liabilities, things you're going to pay over a longer timeframe like the equipment loans for that type of machinery. The last asset and liability category used on a balance sheet are your long term assets and liabilities. And those are things that are kind of long term like the name suggests, but something greater than 10 years. So if you own land that would be a long term asset, but then if you're paying a loan on that land, then that would be considered a long term liability. Something over a number of years greater than 10. What do we use that balance sheet for? It gives us a snapshot of how we're doing, how much we own and how much we owe. One of the problems with that is it really doesn't give us, again, each of these financial statements give us a little piece of the puzzle, but not a full and complete picture. So that's why we have other financial statements. The other financial statement is an income statement. And this one's also referred to as a profit and loss statement or P&L. A lot of times you'll hear it referred to as a P&L. And that shows you income expenses and expenses over a specific time. Usually you're looking at it over a year. Again, most growers are looking from January to December, and it shows you how much money you had come in that year and then what those expenses were over that same timeframe. So if you look on here, you can kind of see there's different categories on here. But if you look on one side, you see your income, and then you can see below that you have your expenses. Now, when you're doing these, you can usually find a lot of different templates online. That would suggest looking for an ag specific one. Sometimes it's not as easy to remember everything. So it's nice to have a template that kind of lays out to jog your memory of where you're going to have income and where you're going to have expenses. So sometimes you may not remember, oh, yes, I need to include my fertilizer expenses in here. So this kind of gives you a breakdown, and it shows you what your expenses were for the year in total and then how much income you had for the different commodities or the different operations on your farm. Another financial statement that growers can use to help make decisions on their farm is called a cash flow statement. And a cash flow statement just shows you how that money's coming into the farm. So we saw with an income statement, we saw how much was coming in and how much was leaving. But a cash flow kind of shows you how it comes in and how it leaves. So what you're making and what you spend. And then if you're looking at it over a year's time, specifically if you have it broken down into a monthly cash flow, it really kind of helps you see, okay, unlike a lot of businesses where you have a steady income flow, it's not necessarily the case with farming operations. You don't have steady income every month. You're waiting for your crop to be harvested before you start having income or you're waiting for your cattle to get to the point where they're ready to be sold. So having a cash flow shows you, okay, maybe I'm not going to have cash coming in in January and February or March. Maybe it's going to start in July, August, September, October timeframe. But when is that money coming in? And on the flip side of that, when do I have my large bills? Some of our utilities are due every month or maybe they're set up on a different payment plan. When am I going to have to make my payments for my machinery? Is it broken into a monthly payment or do I have two months that are two months out of the year making those large payments? But a cash flow shows you when the money's coming in and when it's going to leave. And that will kind of give you an idea of when am I going to need extra money if I'm not cash flowing and I don't have the cash on hand. When am I going to need to use, say, my operating room to cover some of that outflow as I wait for my crops to be harvested and to have funds to be able to pay certain things? So that's what we use the cash flow for. There are some cash flows that are not designed to be a monthly. It may look at a quarterly system, but you can kind of gauge what works best for you. And if you really do have a lot of expenses, maybe not have monthly income using a cash flow broken up over months may be able to help you better determine when am I going to need an influx of money, whether it's from operating loan or if I'm planning on selling something, when am I going to need that money on hand to make those payments? Another financial statement that we can use is a statement of owner equity. And really that's just showing your net worth of the farming operation and how it changes over time. So did the farm maker lose money, but also did your assets gain or lose value? So if you look at what a statement of owner's equity looks like you can see, it can show you a cost value and then a market value and show you what your farm net worth was at the beginning of the year and how that changes based on your assets and your income, how that changes over span of a year. Now one of those things that all of these financial statements have in common is that some of these statements can be used to determine financial ratios and those ratios I'm not going to go into it. We can get you some information if you want to look at those ratios and they kind of give you a kind of a depending on which financial statement you're looking at what numbers you're looking at, those ratios can kind of give you an idea, hey, do I have too much debt? Am I in a good position financially based on what my ratios say or this aspect of my farm? Do I have too much current liabilities? Do I need to think about restructuring some of my loans so that I don't, it kind of get an indicator of are we in the clear? Do we look like we're in trouble? We could get into trouble as we move a few years down the road. Are we in trouble now? So a lot of those ratios that you can gather that information from these different financial statements can be used to help you determine what kind of decisions you're going to make for the farm. And like I said, I'm not going to talk about any of that today but if you want some information I can definitely get you some information and how to calculate those financial ratios but calculate financial ratios you definitely have to have these financial statements in front of you to look at. So having said that how do you develop your own statements? A lot of times we can get some of this information from our lenders that lenders are going to be plugging in some of this information to make decisions on loans whether they're, you know, if you ask to see that information or not they're still going to use some of that information to determine risk when they're making those loans. But we can go in and make our own financial statements. It will take a little bit of time. Once you get into the habit of doing it it is a little easier from year to year to be able to build on what you do originally. Like I said earlier, using ag-specific financial statements definitely save a lot of time and one of the ones that I found was the best and easiest to use is developed from Iowa State Extension. You can go to this website and it will take you to the free templates to create your own financial statements. Again, it is something that can take a little bit of time but putting in that effort on the front end is definitely better than trying to use just your Schedule F to make decisions for your form because you really just don't have a full picture of what's going on in your form until you start breaking it down and looking at it in detail with how the financial statements allow you to do. So as I said, there's a lot more information out there that we could discuss if you have any specific questions, feel free to contact me 334-405-0699 or feel free to just send me an email at the email on the screen. Thanks again.