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Good financial analysis, once considered an exotic skill by farmers who focused mainly on production, is now a skill that you need just to stay in the game. That's a lesson learned Wednesday by the 40 young men and women taking part in the National FFA Organization's New Century Farmer program. The week-long program is sponsored by Pioneer Hi-Bred and Rabobank.
Financial analysis is just one of many "baseline skills" that the next generation of farmers and ranchers will need, said John Baker, an Iowa State University Extension attorney and president of the National Farm Transition Network.
"You should check your credit report probably at least quarterly," he added. Lenders are using them more and more as one source of information about your farm's financial health, and they're often wrong.
Other, more reliable reports that the young farmers themselves will prepare were described in a crash course in ag finance offered by three speakers from Rabobank, a Dutch cooperative lender that is more than a century old and has made loans in the U.S. for 25 years.
"I have found in my career and in interviewing ag students in colleges that there's no Credit 101," said Laura Roessler, Regional Assistant Vice President for Rabo AgriFinance. So Roessler described in plain English, the financial documentation that all ag lenders require. To the novice, the requirements of good financial analysis might seem pretty rigid. "The first four letters of analysis spells anal -- and that's me," Roessler joked.
For example, one of several key documents is the balance sheet, a tally of your assets and liabilities, or "what you own and what you owe against those assets," as Roessler described it. But when you put a value on those assets, you should use book value, which is what you paid for that asset. If you don't know, then you should use the market value, your estimate of what it would sell for. And you should be able to show how you came up with that market value.
Subtracting everything you owe from all that you own gives you your net worth. If it's small, "you can't afford to take a lot of risk," she said.
An income statement, a capsule view of what your farm produces versus what it costs to produce, can use information from you Schedule F tax return, she said. But the tax return alone, "is probably not a true indication of any operation's profitability," she said. That's partly because farmers often shift operating costs or grain sales from one year into another to lower income under cash accounting. But lenders like to see an income statement that uses accrual accounting. That shows income when you earn it, not when it's sold, for example. An accrual income statement will have your best estimate of the value of your 2004 crop in 2004, even if you sold some in 2005. If you bought inputs for 2005 in 2004, it's still considered a 2005 expense under accrual accounting.
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