What is your business worth? Is it worth a million dollars? It may be, but to know you must discover the net worth of your farm or business. That may sound ridiculous, but it is possible.
If you own 340 acres and that land is worth $3,000 per acre, your land assets are worth more than $1 million. Hopefully, the undiscovered net worth of your operation is at least positive.
A more compelling question is whether your business net worth is growing or shrinking. Hopefully it is growing. But too many farmers have borrowed enough money that the interest payments on that debt don’t allow their equity to grow – even when the farm is making all its payments.
There is an easy tool for taking a financial snapshot of your business called a balance sheet. The mere mention of a financial tool, like a balance sheet, can be intimidating. The balance sheet is simply a list of one’s assets and liabilities, or debts. The most difficult part of a balance sheet is getting started.
Listing current, intermediate, and long-term assets and liabilities each year at the same time, provides the farm business with a record of change over time. It is like taking a photo each year of how your kids change and grow over the years. Well, maybe not quite the same, but you get the picture.
Balance sheets play an important role for helping beginning farmers, farms expanding into new enterprises, and assisting individuals with retirement and estate planning. They impact a business from beginning to end.
The benefit of listing the current and long-term assets and liabilities is in the calculation of the net worth. The net worth is the assets minus the liabilities.
There are some important things to know about building balance sheets. Pick a time of the year that is easy to remember, like January 1. Then make sure that as January 1 approaches you hold true to that date. While that date is easy to remember, another date may serve your business better. Consistency of building a balance sheet at the same time each year is a greater priority than the specific date.
There is more than one way to value your assets. The two most common methods are the market value and the cost value. The market value reflects the value the assets if sold. The cost value is the value of what has been paid for that asset.
These two values can be quite different for assets such as equipment that has been depreciated or replacement heifers that were raised on the farm. Take care to use the same method from year to year.
The market value approach is best if there is a need to understand the solvency of the business. This also plays a greater role in valuing an estate for distribution among the heirs.
The cost value on the other hand can provide a greater view of the profitability of the business over time. This method also requires access to better business records for accuracy. Both methods are important. Just pick one to get started.
Iowa State University Extension Guide on, “Understanding Net Worth,” is a nice summary. It can be found at https://www.extension.iastate.edu/agdm/wholefarm/html/c3-19.html
Whether you are thinking about beginning to farm, or wondering how to divide up your estate for your kids, balance sheets are a vital part of successful business management.
You may even discover your farm is a $1 million operation.
Mark W. Jenner is a University of Missouri Extension agriculture business specialist.
