YOUR BALANCE SHEET

1. YOUR BALANCE SHEET By Roger Betz, Sherrill Nott, Gerald Schwab Day 1 break to 12 p.m.

2. In the United States Four Basic Financial Documents: • Net Worth Statement (Balance Sheet) • Income Statement • Cash Flow Statement • and a newer one -- Statement of Owner Equity

3. Balance Sheet defined: A List of Assets Owned and Debts Owed -- At a Given Time, -- With Dollar Values Attached.

4. If the Question Is: “Are my assets worth more than my liabilities?” The Problem is SOLVENCY! If Net Worth is Positive, the Business is Solvent Definition: $ Assets - $ Liabilities (Debts) = $ Net Worth or Equity

5. What is the Balance Sheet or Net Worth Statement? • Picture in time -- a specific point, as in “Midnight, 12/31/XX.” • Shows financial position -- ability to handle risk • Net result of past • Very important component to track and monitor financial progress • Basic building block for financial analysis

6. The Balance Sheet • Name -- What does this represent? • Partnership, individual, combined • Needs to be consistent over time • Date -- This is as of what date? • Listing of all assets and all liabilities • Balances at the bottom of form • Assets = Liabilities plus Equity

7. Balance Sheet PreparationSome Issues • IDENTIFY clearly the person(s) or the business entity being described • SEPARATE the business assets and liabilities from the personal • Be CONSISTENT as to WHEN the Balance Sheet is prepared • at a minimum, prepare a net worth statement when your accounting year ends • Valuation of Assets -- costs and/or market • recommend two column balance sheet • The Balance Sheet is the Cornerstone to Financial Management

8. Take out a Piece of Paper Draw some lines and label like this:

9. Parts of the Balance Sheet Assets = What you own; have control of • Current assets • Normally converted to cash in 12 months, like crops, market livestock, prepaid expenses, cash, savings • Intermediate Assets • Useful life of one to 10 years -- machinery, breeding livestock, equipment, stocks, some buildings • Long Term Assets • Normal useful life of more than 10 years -- land, buildings, stocks • Selling would typically decrease volume or size of business

10. Parts of the Balance Sheet(Current)Liabilities -- What you owe someone else (against what you own) • Current Liabilities • What you are scheduled to pay in the next 12 months • Unpaid bills, accrued interest, property taxes • Operating loans • Principal payments on term debts to be made in the next 12 months

11. Parts of the Balance Sheet(Intermediate)Liabilities -- What you owe to someone else (against what you own) • Intermediate Liabilities • What is scheduled to be paid in one to 10 years (subtract out the current position) • Typically, machinery loans, breeding livestock, special use buildings • Match up to the intermediate assets

12. Parts of the Balance Sheet(Long Term)Liabilities -- What you owe to someone else (against what you own) • Long Term Liabilities • What was scheduled originally as 11 or more years • Land debt, house payments • Match up to the long term assets

13. Parts of a Balance Sheet(Term) Definition: • Term Debts are: • Intermediate liabilities (Intermediate term) • Long term liabilities Term debts are not current loans

14. Balance Sheet Specials • 1. Rented assets Assets: 1) Belong on landlord’s balance sheet 2) Footnote on tenant’s 3) If payable, rent is short-term debt 4) Growing crops

15. Balance Sheet Specials • 2. Growing Crops • 1) Date sets the list • 2) Winter Wheat • 3) Value = Cost of variable inputs

16. 3. Leased Items(tractors, pickups, buildings) • Assets: • A) On user’s balance sheet • = lease payments due • Liabilities • B) = lease payments due

17. Balance Sheet Specials • 4. Government Commodity Loans

18. How To Build A Balance Sheet • 1) Do a count: • Crops: bushels, tons, etc. • Animals: head • Supplies • Buildings • Land: acres • 2) $ Prices for each of the above. • Recommend both cost and market value for term assets

19. How To Build A Balance Sheet • 3) Machinery list (depreciation schedule?) Cost less depreciation = book value • 4) Assemble the above into the format • 5) Add up the assets • 6) Add up the debts • 7) Assets minus debts = net worth or equity

20. “Z” FarmsBalance Sheet Trends(example) WHY?

21. Change in Net Worthdue to: • Retained Earnings • from profits earned and retained in business • Market Valuation Equity • from change in market value of assets

22. Retained Earnings(contributed capital) • Dollars earned by the business that are kept or retained for reinvestment in the business • Calculated by: • $ Total Assets @ Cost Value Basis • $ Total Liabilities before Contingent Liabilities

23. Valuation EquityDollars of asset value that are created because the market value of term assets is greater than the book value • Calculated by: • + $ Total assets @ Market Value basis • - $ Total Liabilities including Contingent Liabilities • - $ Retained Earnings (contributed Capital)

24. What a Balance Sheet is NOT • Does NOT necessarily tell you if the business is making money • Does NOT tell you where net worth came from

25. A Good Balance Sheet 1) One page summary 2) Name and date 3) Shows type of farm 4) Cost and market columns

26. A Good Balance Sheet 5) Indicates physical quantities of major items 6) Sequence of items Sale time: quick long 7) Assets less debts equals net worth (Own - Owe = Equity)

27. The Balance Sheet:Building Block forFinancial Analysis • Financial Position • Trend Analysis • Feeds Into the Income Statement • Communication to Self • Communicating with those outside the business • Needs Good Detail