Getting Started in Your Food or Farm Business video series highlights the key components of food and farm entrepreneurship and introduces you to the tools, skills, and resources you need to successfully start your own food or farm business. In this video, Katie Wantoch, Extension Farm Management Outreach Specialist, talks about the importance of financial statements and how they impact the future of the business.
Hello and thank you for joining me for this rural entrepreneurship video series. I’m Katie Wantoch, farm management outreach specialist with UW Madison Division of Extension. In this video, I’ll be talking about financial statements for the food and farm business and their importance when making decisions for the future. Let’s get started. To understand the farm businesses records, you need to understand the purpose records serve to and for your food and farm business. Keep in mind that you want to make the best decisions possible affecting the future of your business.
A farm business financial model is a tool you can use to help make those decisions. It offers a linear and circular process for informed decision making. From the image on your screen, you can see that there are three primary functional areas associated with the financial management model. Records feed into management reports and reports will help you integrate financial sense into your business decision making. The farm financial model begins with records which details collecting and organizing of your food or farm business’ production and financial information.
In this part of the process, you should be collecting production or physical records. You must also collect and organize your financial records or your income and expense receipts in an accounting system. An accounting system is a set of actions and methods designed to collect, store, and process financial transactions into management reports for decision making.
Traditional practices of farm financial recordkeeping have largely been informal, simple, and varied from the generally accepted accounting principles which have long been used in other types of businesses. With this information, you will be able to generate financial statements and can begin creating management reports for decision making. Under management reports, the records are transformed into financial statements for analysis and reporting of your business’s historical financial position and performance. Let’s review each of these financial statements.
The balance sheet is one of the most used financial reports and displays. What your food or farm business owns and what is owed. The difference represents your claim to assets or net worth or your equity in your farm business. The balance sheet lists assets, liabilities and net worth and represents a snapshot of the farm business as of a certain date. The balance sheet is also known as a net worth statement or statement of financial position because of the importance of net worth with respect to representing your food or farm business’s financial position.
The income statement is a report of the business’s financial performance during a given time frame in measure of profit or loss in each time period. Every food or farm business produces a product. Product sales generate a return to the expenses incurred when making that product. The income statement is used to measure the cash income or revenues, cash expenses, and the financial value of non-cash income and expenses used during one production cycle, usually a calendar year. The income statement is also known as the profit and loss statement or statement of earnings.
Statement of cash flows tracks the sources and uses of cash in your food or farm business, and as insight to the understanding of your financial position and performance. The statement of cash flows summarizes cash activity over a certain time period, such as a calendar year.
The statement of owner equity reconciles the change in equity from the beginning balance sheet to the ending balance sheet for your food or farm business. The primary motivation for this statement is to identify the amount and source of changes in equity. These for financial statements should be prepared on a consistent basis.
With well prepared financial statements, you will be able to analyze your financial ratios and measurements and understand your business’s history of its financial position and performance. Records and management reports provide a good basis for you to make decisions and plan into the future.
Pro forma refers to the future view of the business’s financial position and performance, which in turn can be analyzed for feasibility, profitability and risk ability. Pro forma financial statements complement the business’s budgets. Cash, partial, and enterprise budgets are commonly used to assist you in decision making.
In summary, the farm business financial model is also a tool for understanding the financial flow of your food or farm business. From record keeping to financial analysis, this model illustrates how to make sound financial decisions and identifies tools to help in this process. The Farm Pulse program, which contains articles and videos, is a free UW extension resource that provides more detail on each component of the farm financial model described in this video. In addition, Extension has developed the Farm Pulse Financial Management and Analysis curriculum, which is a self-paced online course for farmers and others interested in learning how to use their financials to explore their farm business decisions. This course, which requires registration and a fee, will help you evaluate your finances, take the pulse of your farm business, and set goals for the future of your operation.
Learn more about the program and courses at go dot wisc dot edu backslash farm pulse. Feel free to reach out to the farm management program with any questions by emailing farms at extension.wisc.edu. Thank you for watching.