Yes! You can achieve your goals.
Your Income Statement and Balance Sheet will help
It doesn't matter what your goals are. For example, you might want to:
• Start a new enterprise
• Increase your gross revenues to x million dollars
• Send your children to college
• Create more leisure time for yourself
• Bring the next generation into the business
• Plan a secure retirement
... or anything else related to your business, financial planning or lifestyle. Whatever your goals, you can achieve them by making the right connection between your goals and your business management reports. Effective management reports can help you achieve almost any major business goal.
Most ag businesses use some kind of record-keeping method to stay current with their bills and to file their tax returns on time. This is a great starting point. But if these are the only reasons you' re keeping records, then you' re just making other people happy — your creditors and Uncle Sam.
"Effective management reports can help you achieve almost any major business goal — including creating more leisure time for yourself!"
This article focuses on your two most important business reports — the income statement and the balance sheet:
- An income statement (also called a profit and loss statement) features
a listing of your current sources of income and how you spend your money.
Simply put, it itemizes the funds that come into your business and the
funds that go out.
- A balance sheet lists your assets and liabilities. It is a snapshot that profiles the net worth of your business.
Net profit vs. real earnings
Many business owners rely on their tax profit or loss as a measuring stick for their business success. However, records specialists generally frown on this practice because net profit does not really provide an accurate picture of the business.
A more precise measure of profit is real earnings, which you'll find in both the Income Statement and Balance Sheet. A business's real earnings are the relative changes that occur over time in areas of your business, such as income and expenses, inventory, outstanding bills and invoices. You evaluate real earnings to determine where you are in relation to your goals, and they may be positive or negative.
For example, you can refer to your Income Statement and Balance Sheet to see if your silo is full, if your bills are paid, if operating credit is available, and where your business is today in relation to where it was at the same time last year.
More specifically, let' s assume that two farmers both showed a $10,000 tax profit in 1998. Are both of their businesses equally successful? At first glance, you might think so.
However, we would look to their balance sheets for the real answer. Upon closer examination, we might see that one farmer's silo is filled with $175,000 worth of corn and the balance on his operating loan is less than $25,000. Meanwhile, the other farmer showed an identical $10,000 profit, but he has an empty silo and the balance on his operating loan is $125,000.
By examining the real earnings of both farmers, it is clear that their financial pictures are not equal. The first farmer is obviously in a much better position than the second one.
"Cradle-to-grave" decision making
You can use management reports to make important business decisions throughout your life — from starting your business to settling your estate. At every crucial point in your financial life, you (and your record-keeping specialist) can look at these reports to evaluate the consequences of every major business decision.
Summary
Your net worth (Balance Sheet) points out how your management decisions affect your business. With up-to-date numbers in front of you, if you detect a dip in your net worth, you can spot problems and take corrective action.
Your net worth tells you how much you have for retirement, how much you can gift to your children, the value of your business for a potential partner and much more.
For example, when bringing the next generation into ownership of the business, parents typically gift a percentage of the business each year to the next generation. This way no cash exchanges hands, no taxes are due (if the worth of the gift does not exceed $10,000) and the children own a percentage of the partnership.
However, in order to transfer the appropriate percentage of your business, you need to know the percentage of the net worth you are giving away. If you don't know the net worth of your business and the components that make it worth that amount, it is tough making that gift.
Your net worth will tell you if you can even afford an intergenerational transfer. For example, can you afford to gift away 50 percent of your business over the next 10 years and still have enough money to retire? The report will tell you the income you have to supplement the transfer, including investment income.
The next step
If you need to develop an accurate Income Statement and Balance Sheet, call your local Farm Credit office. We will help get you started, whether you already use computerized reports or simply track your business by monitoring your checkbook.
Contact us at info@NorCalFC.com for more information today!
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