Why does your banker want an updated financial statement all the time? Why is it so important? Well a financial statement tells your banker an overview of your overall financial condition. In order for a lender to continue to extend credit, they have to be confident in your ability to repay your debts. If filled out correctly a financial statement could help you avoid receiving multiple calls from your banker on your financial well-being.
What needs to be on my financial statement?
Everything! The more precise and upfront you are the better. Vagueness never benefits you.
For Your Current Assets
For your current assets you should detail all liquid assets and assets you will (or could) sell/liquidate within the next year. This will include your cash in banks, savings, bank CDs, investments, retirement accounts, and the cash value of your life insurance policies. There could also be other items, but those examples give you an idea of what should be in that section. Also, farm/agricultural financial statements vary from traditional statements in that farmers need to list their crops and supplies on hand. Farmers should list their cattle, crops left in their grain bins, monies left to collect from buying points and cotton gins, as well as pre-bought supplies such as chicken litter, nitrogen, or feed for cows. All these items help your banker determine how well you can support your current debt load as well as determine your ability to acquire additional debt. This section can answer many questions for your banker. If they are currently analyzing your income statement and find a shortfall they may be concerned. However; if they can look at the current asset portion of the financial statement and find that the money went to purchasing supplies for next year the shortfall is explained and they can move on to approving your loan!
For The Non-Current Assets
For the non-current assets you should detail all of your other assets that will have a useful life greater than 1 year or you cannot liquidate easily. Most financial institutions prefer the items listed from most liquid (interests in other entities or equipment) to the least liquid (farmland). We will start with the more liquid section. List your interest in any other entities. For example: If you and your Father are 50/50 owners of Father and Son Farms LLC, you should list what the value of your 50% stake in that LLC is. If there are no assets in that entity (possibly only used for tax purposes) you can omit your interest in the LLC. Similarly, if you have debt in that LLC, you should list that debt as a contingent liability. We will discuss this further in the liability section.
The farm equipment can be listed for its initial value and then accumulated depreciation subtracted, or just listed for its present value with depreciation accounted for. Include an updated equipment list that details your valuation of the individual pieces! This list should include the make, model, serial number, an indication of condition, and the value you place on it. It is also helpful to list the amount of debt left owing on each piece. Finally, your farmland needs a value! If you own both a mix of land types – irrigated land, dryland, timberland, commercial real estate, then you should value each portion separately. Your dryland is not worth as much as your irrigated and your commercial real estate is probably worth more than cut over timberland, so you have to adjust for that by valuing each type independently. List each type with the amount of acreage you have of each then disclose your per acre value and put down the total for each.
For Both Portions Of The Asset Section
For both portions of the asset section, you should always be realistic. Your land or equipment is not worth more just because it’s yours. Sentimental value does not exist on a financial statement. Also, if you expect your investments to jump up 20% over the next year, that is great, but you should list its value as of the day you fill out the statement not what you think it will be in the future.
Before we begin the liabilities section, you must remember this…DO NOT WITHHOLD INFORMATION INTENTIONALLY! Nothing will destroy your credibility with your banker faster than them finding out you have debt elsewhere you “forgot” to mention.
For The Current Liabilities
For the current liabilities you should list all debts due within 1 year. This will include the portion left to be paid on your line of credit to the bank, accounts payable, taxes, payroll liabilities, and other items that fall in that short term category. Please do not omit the debt you owe to farm supply/chemical/fertilizer companies. This can be a VERY big deal! Almost every year there are farmers that pay all the debts to their bank and do not volunteer the information that they still owe the agri-supply companies. The farmers will “roll” that debt into their LOC for next year and eventually will have to request a shortage loan and have to explain where the shortage came from. This situation could effectively negate the credibility and trust you have with your current banker.
For Non-Current Liabilities
For non-current liabilities you should list any and all debts you owe. Some debts that most farmers have such as John Deere, Ag Credit, and those agri-supply companies do not report to the credit bureaus. Therefore; you have to accurately list your debts and terms for each debt on your statement. It is best to separately list each loan and not lump debts together. Be specific! List the balance due, payment amount, and collateral at least. If there is room add the interest rate as well, you never know the bank you are applying for you LOC with may offer to refinance your other debts at a lower rate! As mentioned earlier, also be sure to disclose any contingent liabilities. This would apply if you are the part of another entity and personally guarantee debt on behalf of that entity. If this applies to you, then you should list the total amount of debt you guarantee and what percentage of the company you own.
Finally, check your math and total your net worth. Check for any errors and possible accidental omissions. You should now have a rock solid financial statement that any banker would be happy to receive. Who cares if your net worth is not astronomical! If you give the right information in a clean and easy to read format you are off on the right foot with your banker. This is often more impressive than a high net worth!