“When I want to know how my farm is doing financially, I just check my bank account.” Accountants and lenders shake their heads when they hear this sort of statement. While it’s important to monitor your bank balance, it provides limited information on how your farm is performing financially.
Financial statements
To make informed decisions, you need these three commonly used financial statements - income (profit and loss), balance sheet and cash flow.
Income statement:
- Shows revenues and expenses over a specific time
- Bottom line is the net income for the business
- Accounts for depreciation, receivables, payables and inventory changes (accrual basis)
- Used to assess profitability
Cash in the bank doesn’t tell you if the operation was profitable in the past fiscal period. Only an income statement can tell you that.
Balance sheet:
- Displays the company’s assets, liabilities and shareholders’ equity
- Assets = Liabilities + Shareholder’s Equity
- Snapshot of financial position at a specific point
Cash in the bank is just one element of your asset base. It doesn’t tell you anything about the farm’s liabilities.
Cash flow statement:
- Shows the net change in cash position over a specific period
- Adjusts for non-cash expenses such as depreciation
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