As a longtime banker, I think there are very few things that customers dislike more than completing financial statements. I don’t like to do it myself. But truthfully, I don’t know of any other way for lenders, bank examiners, or you to truly assess the profitability of your farm or small business without completing and analyzing your financial condition at least on an annual basis. As your farm or business grows you should enlist the help of an accountant or financial advisor but, even then, you will have to do your homework prior to meeting with them.
So grab your pencil, legal pad, calculator, or trusty spreadsheet program and let’s get going with a few points.
1. Try to complete your financial statement with year-end or fiscal year end information. It is more meaningful for lenders and yourself when you tie your assets and liabilities to the end and beginning of your tax year. You can more accurately determine the income that your assets produced in this way.
2. Be accurate. So many times I have heard customers tell me they would just like to copy last year’s financial statement because nothing has changed. But things do change. Cattle prices are obviously not what they were last year and that old truck probably has decreased in value as well. Also, your investments may have increased in value and your real estate may be worth more.
3. Include all assets and liabilities. I have often heard customers say they didn’t include credit card debt or student loan debt on their financial statement. These are real liabilities and must be included. Your lender will verify your debt obligations with a credit bureau report and it is a big red flag to lenders when they see items that are not reported on the financial statement. I have also heard customers say they have more assets than what they listed. I can’t stress enough that financial statements need to be accurate for you and your lender to be able to do a self assessment of the profitably of your enterprise.
4. Don’t forget contingent liabilities. Many customers forget to include loans they may have cosigned or guaranteed for other people or business entities. These are liabilities that need to be accounted for. If the other people don’t pay or your business fails, they become your direct obligations.
5. Include financial information on related entities. Always include on your financial statement attachments if you have related business entities that may be titled in an LLC or a partnership. These often have significant impact on a person’s overall financial condition and must be accounted for on personal statements.
6. Solicit help. Lenders are more than eager to help you in financial statement preparation. You can request your CPA to help as well. Just be sure and bring information about all of your loans and assets with you to the meeting.
7. Use your financial statement as a tool. Whenever you go to your doctor for your annual physical they will often compare your results to your prior results. This is also true with financial information. I often meet with customers and compare their current year’s financial statement to last year’s and the prior year’s as well. If they are prepared correctly, this can be a very accurate indication of your enterprise profitability. If your net worth is increasing then you are making progress.
On the next cold, wintry day after the cows are all fed, dig out your bank statements, loan statements, and other financial information and get started. It is much easier for your lender to provide a quick, more efficient response to your credit requests when they have your financial information in a timely manner and in good order.
Kim Light is the president/senior credit officer at Heritage Bank of the Ozarks. He has been employed in banking for 36 years and farms 400 acres in Laclede County, Mo.
