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With the 2025 growing season set to begin, farmers need to track costs, analyze liquidity and focus on reducing debt.

Agriculture, Farm Operation January 01, 2025

Numbers You Should Know

Financial statements make a big difference with lenders and tax preparers.

by Bill Spiegel

Farmers can help themselves during loan renewal season by compiling updated and accurate financial information, including a historical income statement, current balance sheet, and projected cash flow for the upcoming year. These are critical, says Brent Gloy, an economist with Agricultural Economic Insights and a farmer from Grant, Nebraska.

Income statement. Whether you call it an 'income statement' or 'profit and loss,' this report measures profitability over a specific period of time. Most farmers should already have a cash basis income statement, used to prepare their most recent tax return.

Two parts to the income statement are income and expenses. Income comes from the sale of livestock, livestock products, crops, government payments, rebates, custom hire income, and crop insurance. Changes in market value of land, buildings, machinery and equipment are not included in the income statement unless those assets are sold.

Cash expenses on this report come from Part II of IRS Schedule F. However, converting the cash basis financial statements to accrual basis provides even greater value to both the producer and lender. This includes reporting all income "earned" during a period but not necessarily received, netted against expenses "incurred" but not necessarily paid during that same period.

Balance sheet. Another key financial statement tool is the balance sheet, which reports assets, liabilities, and equity at a point in time—typically the same time every year (December 31 is a common date).

Assets are items owned by the farm that have monetary value, including current (cash, accounts receivable, stored and growing crops, prepaid expenses, and market livestock) and noncurrent (breeding livestock, machinery, land, and non-farm assets).

Liabilities include current (vendor payables and debts due within 12 months) and non-current (debts with a term greater than 12 months). Term debt is generally comprised of debt on machinery, breeding livestock, and farmland.

A current balance sheet is essential, says Grant Wiese, an ag lender and founder of the Farm 640 website. Take the 2023 corn crop, for example. The high for December 2024 corn occurred on January 1, 2024. Balance sheets created in early 2024 included corn priced at $5 per bushel. By March, prices had dropped nearly a dollar.

"Every single January balance sheet overstates a farmer's position," Wiese explains. A farmer with 100,000 bushels of grain storage suddenly has a lot less projected income.

"As a lender, I looked at your balance sheet in January, and think you're worth $100,000 more than you are. That impacts decision making when a farmer wants to buy stuff."

Above. Economists Grant Wiese, with Farm 640, and Brent Gloy, Agricultural Economics Insights, offer suggestions on how to prepare for the coming season.

Cash flow. Wiese says farmers must have an updated cash flow projection, which shows cash moving in and out of the business. It is an indicator of the farm's financial health and determines an operation's peak borrowing needs.

"I want to see whether variable expenses are out of line with historical numbers," Wiese says.

It is a good exercise to do each month, Gloy adds.

"It's necessary to sit down and project what I'm going to spend, and what my income will be at these prices. Plug in your income and expenses and add debt service and any capital investments you want to make, and see if you have the dollars you need, or whether you need to borrow money," he explains. "For farmers, a monthly cash flow is important because you want to make sure you have a big enough operating line to cover what you need."

Future plans. Income statements and tax returns help explain what has happened in the past. Lenders will also want to know planned changes in coming months or years. Here, farmers need to share plans for equipment upgrades, additional labor needs, or expansion.

These decisions impact working capital, which is the difference between current assets and current liabilities—another key indicator of financial health, he adds. In the past few years, farmers have more than likely lost a lot of it.

When margins are tight, being proactive in compiling financial information will help growers make sound decisions, plus your lender can gain a sense of the operation's financial future, Gloy and Wiese agree. ‡