Simple balance statements can inform producers about their total net worthWritten by Natasha Wheeler
“If we’re going to be a farmer or rancher, we have to have a lot of different things that we’re good at. We have to be a little bit of a mechanic, a little bit of an electrician, a little bit of a plumber and a little bit of a vet, but we need to have a little bit of a business mind as well,” remarks Justin Mills of Platte Valley Bank.
Having a business mind includes keeping track of the numbers, not only for conversations with the banker but also for the producer’s own benefit.
“If I never look at the numbers, how do I know if I am making or losing money?” questions Mills.
Mills acknowledges that producers work hard, getting their hands dirty, pulling calves, setting fences, irrigating and more, but penciling out the finances can often get pushed to the side.
“The bank looks at numbers a certain way, but the producer, on the other side, may look at them with a different perspective,” he comments.
As a producer, it can feel like the bank needs endless paperwork and financial data, but Mills suggests taking a different perspective.
“We need to know how this stuff works. If I go and sit down with the banker and I’ve put all my numbers and projections together, I know if things are going to work,” he explains.
One of the tools producers can use is a simple balance statement, which includes information such as cash equivalents, inventories and debt possessed by the producer.
“The balance statement is going to give us a snapshot of where we are from a financial standpoint,” Mills says.
The balance statement accounts for everything the producer owns and all of the money they have in accounts or investments, as well as all of the money that they owe for payments, loans or other accounts. The final product that is calculated is then considered the net worth.
“It’s not about who has the highest net worth. It’s about how things are changing. Are the finances growing? If they are not growing, are there legitimate reasons? We want to look at the changes,” Mills states.
In agriculture, there are many valid reasons for drastic changes, and it’s possible to have a net worth that goes up one year and down the next. Using the balance statement can help producers – and their bankers – see how those numbers play out.
In addition to a balance statement and keeping records of operation finances, Mills suggests putting projections down on paper.
“Some of the same numbers we use to fill out our balance statements can also go on our projections sheet,” he explains.
He continues, “Projections are sometimes a little more intriguing because now we can start to dream. But how many of us do that in the cab of our tractors and how many of us actually put it down on paper?”
Writing down projection numbers helps to zero in on what has to get done to achieve certain goals.
“If we aim at nothing, we are bound to hit it,” notes Mills.
Filling out a projections sheet includes considering likely incomes, such as crop and livestock income, as well as likely expenses, such as taxes, utilities, veterinary bills, etc.
“I always project out about 10 years for what I am going to do,” he remarks.
Taking advantage of tools
Mills also suggests learning how to use a program like Microsoft Excel to keep track of variables and financial complexities.
“We can do projections without Excel, but if we want to utilize the technology we have in front of us, we can do a lot more with the ‘what-ifs,’” he says.
He also explains that projection numbers are not set in stone. Producers can put in their best estimates and change those as different variables affect the finances.
“Don’t feel like we have to be locked into exactly what the sheet says, but, if we put some of the numbers down, it helps us to know where we are,” he remarks.
In the same way that school children receive grades to get a bearing on how well they understand the material, producers should have some kind of benchmark to track their progress.
“We need to know what our net worth is,” states Mills.
Justin Mills spoke at the Future Cattle Producers seminar in Casper in April.