Measuring the Health of a Business

Farm Business Planning– Lesson 3

A Project Funded by:USDA BFRDP

Grant #10506276Development Partners Include:

Mississippi State University

National Association of Agricultural Educators

Oklahoma State University• Agricultural Economics Department• Oklahoma Cooperative Extension

Service

Balance Sheets

•Used to measure the financial position or “health” of an individual or business

• A balance sheet is a systematic listing of everything▫Owned (assets)▫Owed to others (liabilities)▫Owner’s equity (net worth)▫Basic identity: Assets = Liabilities + Owner equity▫Or, Assets – Liabilities = Owner equity

• A “snapshot” of the business’ financial health▫Several years’ balance sheets measure long-term

success of business• Current and Non-current assets and liabilities

What's in a balance sheet?

• Current assets--“liquid” assets▫Assets that can be sold without affecting long-term

profit-generating capacity▫Cash and near cash assets

Bank account balance, certificates of deposit▫Owned and sold within one year

Feeder livestock, crops, assets held for sale▫Assets to be used up in production process in less

than one year Inventories of fuel, chemicals, feed, parts,…

▫Other Cash invested in growing crops and feeder livestock

Current Assets

•Cannot be sold (liquidated) without harming long-term profit-generation capacity▫Land, breeding stock, machinery, buildings▫Stock in agricultural cooperatives

•Difficult to sell quickly and realize full market value▫How low would you need to price your

prized possession to sell it TODAY?

Non-current Assets

•Financial obligations that are payable (due) within 12 months▫Charge account balances (feed store,

chemical dealer)▫Operating note balance▫Accrued property taxes▫Accrued interest on long-term debt▫Loan payments due in next 12 months

Current portion of long-term debt

Current Liabilities

•Portion of long-term debt due in 12+ months

•Note, need to calculate▫Principal balance (i.e., total amount owed)

– amount owed in next 12 months (current portion)

•Example: $100,000 note▫Payment required in next 12 months =

$8,000▫Current liability = $8,000▫Non-current liability = $92,000

Non-current Liabilities

•Computed as▫Owner’s equity = Total assets – Total

liability•Sources of Owner’s equity

▫Contributed capital $s invested from outside the business

▫Retained earnings Profit that has not been taken out of the

business by the owner(s)▫Change in market value of assets

Land value trends up over time

Owner’s Equity or Net Worth

•Cost-basis balance sheet▫Non-current assets valued at

Cost – accumulated depreciation▫All other assets at market value▫Used to measure businesses performance over

time•Market-basis balance sheet

▫All assets valued at market value▫Used to measure liquidation value of the

business▫Use for class assignments

Two Types of Balance Sheets

Current assets Current liabilitiesCash, near-cash, supplies, accounts receivable, crops held for sale, livestock held for sale, cash invested in growing crops

$ Accounts payable, accrued taxes (property), operating note balance, accrued interest, current portion of long-term debt

$

Non-current assets Non-current liabilitiesMachinery, equipment, breeding livestock, fencing, land

$ Non-current portion of machinery and equipment notes, non-current portion of breeding stock notes, non-current portion of mortgages

$

Total assets $ Total liabilities $Owner’s equity $Total liabilities + Owner’s equity

$

Balance Sheet Format

Special Thanks to:

•USDA BFRDP Grant Program

•Oklahoma State University▫Eric A. DeVuyst, Department of Agricultural

Economics

•National Association of Agricultural Educators