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Farm Finances Glossary

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Farm Finances Glossary Farm Finances Glossary Accounts payable/receivable event occurs, rather than when the cash amortization period will lead to smaller changes hands. The accrual method is monthly payments but a larger total Accounts payable is a liability account on preferred if you want your income payment. the balance sheet. It includes all invoice statement to best reflect your current payments due to your vendors for financial situation. In the feed example, a Appraisal products/services already received. farm practicing accrual accounting would record a feed expense as their livestock A formal valuation, usually of a piece of Accounts receivable is an asset account eat it, not when they buy a pallet-load of property prior to purchase. A lender on the balance sheet. It includes all cash feed. Accrual method adherents prefer usually orders a property appraisal due to your business by its customers for that their financial statements reflect before formally offering you a loan, to products/services already provided. economic activity, instead of cash ensure the property is truly worth what changing hands. you (and therefore they) are paying for it. Accrual accounting The accrual method is more complicated You will run into problems buying Sometimes the exchange of cash does than cash accounting. It requires property if the property’s appraised value not time up with an economic event that maintaining accounts payable, accounts is less than its purchase price. Lenders needs to be accounted for. Some receivable, and prepaid expenses secure your loan by issuing a lien against examples: Do you account for the accounts to track transactions that are the property in case of default, so they purchase of livestock feed when you buy recorded without an exchange of cash, will not offer a loan if seizing your a pallet of bulk feed, or as your animals and exchanges of cash that have not property would not recover their full consume it? Do you record a sale when been recorded. investment. In these cases, a large down you deliver your products, or when you payment or additional collateral will be receive payment from your customer? Amortization required to get a loan. There is no right way to account for these Farmers will most often hear Assets events, as long as you do it consistently. amortization used to describe the span of There are two methods of accounting: time over which a loan is to be repaid. A Assets are a type of account included in cash or accrual. In an accrual accounting thirty-year mortgage, for instance, is the balance sheet. There are many asset system, transactions are considered to amortized over 30 years. For a given loan accounts, such as cash, land, equipment, have happened when the economic amount and interest rate, a longer and accounts receivable. Asset accounts Looking for help with other financial terms? findingfarmland.youngfarmers.org Email them to [email protected] Farm Finances Glossary can include an individual item – a that with the income statement and gain is taxed at lower rates than ordinary potential example is land, if you own one statement of cash flows, which document income – possibly not at all, for people in property – or many items – supplies, for a span of time, usually a year. lower tax brackets. instance, may include all of your Lenders rely on your balance sheet to greenhouse and office supplies. Business plan determine your creditworthiness. On the balance sheet, asset accounts Analyzing your balance sheet alone A business plan is a document that should be listed at their book value. The allows them to understand your current communicates the future goals of an asset account for your farm, if you own it, indebtedness and what kind of collateral enterprise and how they will be achieved. should be listed at the price you paid for you own. When your balance sheet is Usually created for a loan application, a it; any appreciation to the property value analyzed along with an income business plan is a useful tool for anyone is not realized unless you sell it. It is OK, statement, lenders can calculate financial starting or changing an enterprise, even common, for market value and ratios to understand your business’s especially when management is shared book value of an asset to differ. ability to pay back a loan. Often lenders with a team. Overall, a business plan is a will require you to share a personal If you have a loan for a particular asset, stated goal, or series of goals, for the balance sheet in addition to your you would still list the full cost of that business, supported by pro forma business balance sheet. asset in its asset account. You will have a financial statements, and an explanation separate liability account for the loan of how the goal(s) will be accomplished. Book value associated with that asset, which will Business plans should contain the decrease as you pay back the loan. The value of an asset on your balance following information: There are both long-term and short-term sheet (“on the books”); usually the • Overview/description of the company (or current) asset accounts. (See current purchase price minus any accumulated and its owners assets.) depreciation. Book value does not • Stated goals of the company always, or even usually, match the • Value proposition Balance sheet market value of an asset. • Market analysis • Risk analysis If you sell an asset with a higher market The balance sheet is a summary of your • Capital plan value than book value, such as farmland farm’s assets, liabilities, and owner’s • Current financial position and that has increased in value over time, you equity at a given point in time. Contrast historical financial statements will “realize” a capital gain. This type of Looking for help with other financial terms? findingfarmland.youngfarmers.org Email them to [email protected] Farm Finances Glossary • Projected financial information income or (potentially) taxed unless the booked to your 2018 revenue if you asset is actually sold. practice cash accounting. There is no standard format or required length for a business plan. It can be one Capital gains are subject to lower tax Small businesses without dedicated page for a simple operation, or one rates than other income, or for those in accounting staff are more likely to hundred for a complicated enterprise. lower tax brackets, not at all. practice cash accounting. It is easier to Ask your loan officer if they have a manage and, arguably, easier to business plan format that they prefer. An Capital plan understand. internet search will yield many templates. A capital plan should be included in a Cash flows Capital expenses business plan, especially if that business plan is part of a loan application. The Cash flows are the dollars coming into Certain assets which give a long-term capital plan schedules the capital and going out of your business. The benefit to the farm, such as equipment expenses you intend to make. It can be as statement of cash flows is one of three and buildings, can be depreciated over simple as a list of items along with their main financial statements. When created the “useful life” of the asset. Purchasing prices and the year in which you plan to as a historical financial statement, the these assets is considered a capital purchase them. statement of cash flows shows how expense, in contrast to an operating business activity over a certain period expenses, which offer a shorter-term Cash accounting affected your company’s cash reserves. benefit and are therefore written off Every business plan should include a pro- immediately. For context on accounting methods, see forma statement of cash flows, which is a our entry for accrual accounting. Note that land is not considered a capital future projection of how cash will enter expense, and is not a depreciable asset. When accounting on a cash basis, and exit your business. For farm transactions are reported whenever a businesses, it is helpful to look at Capital gain (loss) cash transaction is made, no matter monthly, rather than annual, cash flows when the actual economic activity because farm expenses and incomes vary A capital gain occurs when an asset’s occurs. For example, if you deliver to a with the seasons. A pro forma statement market value increases over its book customer on December 30, 2017, but of cash flows acts like a budget, telling value and is sold. The capital gain is not they do not pay their invoice until you (or your loan officer) whether you “realized” and therefore not recorded in January 10, 2018, that sale would be will have sufficient cash to continue Looking for help with other financial terms? findingfarmland.youngfarmers.org Email them to [email protected] Farm Finances Glossary operations each month. It will also Understanding your business’s usual cash services provided while conducting and communicate the assumptions you are flows cycle, and being able to predict negotiating the transaction; as well as making to reach these conclusions. It is future cash flows, are essential to various recording, inspection, and always helpful to have a more becoming a successful business manager. appraisal costs. These costs vary widely, experienced farmer check your projected Cash flows projections will tell you when but can amount to 5% of the purchase cash flows to ensure that your your business might need operating price of the property. assumptions are reasonable and that you financing, or when it’s the right time to FSA and some other lenders can finance haven’t forgotten any cash outflows. hire a new employee or buy new closing costs with your loan, allowing you equipment.
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