Mid-Year Balance Sheet

SW Financial Literacy

Mid-Year Balance Sheet

Nearly all farm balance sheets are made at the end of a crop cycle, either after the grain has been sold, at the end of a calendar year, or after the calf crop has been sold. This makes logical sense. You just received a profit for your work, paid down the expenses to raise that crop, and can level-set with where you are now compared to where you were this time last year when the previous crop cycle finished up.

Unfortunately, we don’t always create the balance sheet at the ideal time of year. Sometimes we just get busy. Other times, health issues or life happen, and we just don’t get one done. Sometimes one is only put together when the banker asks for it, and they may not ask for it every single year.

Scenario

So let’s pretend you did not update it last year or haven’t updated one for several years. What happens when your landlord approaches you to sell ground and you now need a new real estate loan? Your banker says they need an updated statement in the system. What do you do now? What are your options?

You could go back in time (figuratively) and create an end-of-year balance sheet, say December 31, 2025. That would successfully work in most cases. The struggle that can arise is every single line item must be accurate as of the date. If you bought or sold anything during that time, you have to backdate your statement to exclude purchases and include items sold.

All account balances also need to be as of that exact date, think checking, savings, retirement account, credit card, operating note, etc. You have to track down any previous loan balances and also find out exactly where your grain inventory and livestock inventory were, down to the bushel and head. You also would need to find out how much grain you had under contract, its delivery date, at what price, and what the local cash price was at the co-op. It can be done, but it is not the simplest thing to do.

Don’t worry, there is an easier way.

Prepaid Expenses

Creating a mid-year balance sheet is possible, but there are a few line items that get tricky to deal with. Let me explain them here.

Mid-year balance sheets don’t have a lot of grain or livestock inventory anymore. Most of that has been sold and used to pay down the operating note. What is different is the amount of expenses that have been put into the current crop, which may already be in the ground. You’ve paid for seed, chemical, fertilizer, fuel, repairs, labor, and various other items. Some of these items can be shown on your balance sheet. Here’s how:

Put together all of your expenses for the current crop. If you have paid for:

• Seed

• Chemicals

• Fertilizer

• Fuel

• Rent

• Feed

you can show the exact dollar amount of those expenses on your balance sheet under prepaid expenses.

Whether you paid cash, put it on your operating note, or acquired input financing from someone like John Deere Financial or CFA, as long as the expenses have been paid, you can show the equal asset on your balance sheet. You will do this up until the moment the seed is put in the ground.

NOTE: Not every expense qualifies to be included, just expenses directly related to the crop. Repairs do NOT count.

Once the item has been used for your next crop, it gets shifted from prepaid expenses down to investment in growing crop.

Planted the seed? Move it to investment in growing crop.

Sprayed the chemical? Move it to investment in growing crop.

You get the idea.

Investment In Growing Crop

Now, where this can get tricky and interesting is later in the crop season. At some point, usually around mid-August to September, your crop begins to take on a value far greater than what you’re showing under investment in growing crop because you are approaching harvest and have the potential to bring in that income fairly soon.

What I don’t want you to do is show 100% of the crop potential under investment in growing crop. That is too aggressive and not accurate. What you could start doing is inching up your investment in growing crop value closer to your crop insurance guarantee while never reaching your full crop insurance guarantee (around 75% of gross crop potential) until a few days before you are ready to harvest the grain out of the field.

Understand? Good.

Summary

If you have to put a mid-year balance sheet together this year, should you just continue that trend and continue to always make mid-year balance sheets?

NO!

Your mid-year balance sheet will show a worse financial position than if you had done a balance sheet right after harvest was completed or your calf crop was sold. The mid-year balance sheet only shows a few expenses that have been paid to raise your next crop.

Think about all of the other expenses that take place over the winter months, which get sucked out of your checking account and operating note:

Vacation, living expenses, health insurance, Christmas presents, equipment, repairs at the dealership, accountant fees, accrued interest on loans... the list goes on and on.

You best represent your financial position with a proper year-end balance sheet. However, if you need to make one mid-year, you’re now armed with the information you need to get an accurate statement put together.

If you have questions on your mid-year statement or need clarity on your specific situation, send me an email, and I’d be happy to help. grant@farm640.com

Have a great week!

Grant