Measuring, Planning & Talking to the Banker

Feb 25, 2016

Measuring, Planning and Talking to the Banker

By Jill Steenbergen, January 2016



Being able to understand your farm’s financial statements and where your strengths and weaknesses lie (from an accounting standpoint) helps you to have intelligent and candid discussions with your lender. This is also important for partnerships and succession planning discussions. 


The Balance Sheet and Income Statement are used for measuring a farm’s performance. 

  • Balance sheet shows the financial position at a snapshot in time. Example: on Nov 1, 2014 the farm had $50,561.42 in the bank, $4,325.63 accounts payable and $2,145.32 accounts receivable. At that date, the farm’s assets were $952,854.16 and liabilities were $547,328.14, giving a net worth (or farm equity) of $405,526.02.


  • Income statement shows the performance over a period of time. Example: in the year 2014, the farm had $340,896.12 income and $270,693.14 expenses, giving a $70,202.98 gross (or before tax) income.

It is always good to compare income (or profit and loss) statements from year to year, to look at your farm’s financial trends and growth. Accountants do this through a comparative analysis (a two-year comparative review with income statements side by side). You can see your farm’s growth through a comparative analysis of the balance sheet (comparing assets and liabilities) from one year to the next. This shows what was put back into the farm to grow the assets.

Industry-wide measuring is also important, to show price trends that are documented across the entire industry.  Benchmarking is recognized by lenders as evidence of viable businesses.  This can be used to discuss borrowing money, as you can show your business plan and the evidence that the numbers you are using have been obtained by many other producers.



An easy and cheap method of budgeting is to take your last year’s income statement, export it to an Excel file and predict what will be different next year, updating the numbers to make a projection.  Or just copy the numbers into a simple spreadsheet to make up a budget for next year.

Example: add new vehicles or equipment (and insurance and registration expenses), add additional breeding stock purchased (and the increase in feed and fuel cost for them), subtract debts that were paid off (or add new ones incurred), update any changed in hired help costs, etc. 

Once you have this updated, it’s easy to go in and play with numbers as things change. Example: dry conditions are increasing feed costs, so you want to get an idea of what your worst case scenario may be.  So you put in the highest feed prices you might expect, and the lowest calf prices.  There is your worst case scenario so you can think about possible options.

…Or rising calf prices have you thinking you might be able to afford some equipment upgrades in the fall, but how much do you need for the tractor you’d like? You can play with the numbers again to see what your best case scenario might be.

This is an easy way of creating a one year, 5 year or 10 year plan.  You can enter numbers in for growth, and play with them as your inputs (fuel, feed etc) and outputs (calf cheque) fluctuate. Although there are many unknowns in farming, have a plan you predict will happen, along with a best and worst case scenario (giving you the far opposite ends of the spectrum). This is essential for good discussions with your lender, and also family discussions, or partnership/ shareholder discussions.


Talking to the Banker

A key to discussing your farm’s performance with your banker is understanding your balance sheet and income statement, and being able to compare to previous years.  How is your farm improving?  Is the money earned each year going back into the infrastructure, increasing land owned, equipment, livestock numbers…?  Are you able to decrease input costs as you become more efficient, improve your herds genetics, calving rates, rate of gain, and number of live calves at weaning?  Are you able to show the trend of these increased efficiencies through your books?  Can you show a 5 or 10 year plan of how to grow your cow herd or increase profitability at your current numbers?


**Be able to link the practical part of farming with the numbers that show up in your books**


Three basic accounting terms:

  1. Assets: items of value owned by a company (may be tangible or intangible.)
  2. Liabilities: obligations of the company to transfer something of value (an asset) to another party.
  3. Equity: the owner’s value in an asset or group of assets, or the value of assets contributed by the owners.

Assets = Liabilities Equity          --The two sides of a balance sheet, or net worth statement           





The difference between Current, Intermediate and Long-Term Assets (and Liabilities): loan applications often separate your assets into current, intermediate and long-term, and your liabilities into these same 3 categories. The reason: it gives a clearer short term vs long term picture.  Current assets and liabilities are what you owe in the short term and your ability to pay those obligations (your cash flow).  Long term assets and liabilities give an idea of your long term investments, and what debt is owed against them (your solvency, or what would be left if you sold everything… your net worth.)  The short term picture is important to look at your cash flow and the long term picture is important to look potential collateral (or security) for a loan.


Three Measures of Risk lenders look at:(and the financial ratios they use to measure it)















  1. Liquidity- having enough current assets to cover current liabilities at any given time (can you pay your bills? …how is your cash flow?)

Current Ratio: Total Current Farm Assets / Total Current Farm Liabilities

Working Capital = Current Assets – Current Liabilities

  1. Solvency- having enough value in the form of assets to cover all liabilities (do you own more than you owe, or have a positive net worth? --- do you have collateral?)

                  Debt/ Equity Ratio (or leverage ratio) = Total Farm Liabilities /  Total Farm Equity

  1. Profitability- comparing the profit generated to the total capital invested in the business (will you make money?)         

Return on Assets (ROA) = Net Farm Income / Total Farm Assets


Your credit score:

There are a few simple ways to increase your credit score:

  • The most obvious one: pay bills on time. Leave a few days for processing of online or telephone banking payments.
  • Have zero balance credit cards (instead of cancelling ones you don’t need, simply keep them active with zero balance).
  • Don’t max out your available credit; if you have credit cards and line of credits, try not to have them all maxed out when you get a credit check.
  • Don’t apply for too much credit at once.
  • Don’t have one-store-only, high interest credit cards.
  • Don’t go over your credit limit on a credit card, it’s best to stay under 80% of your available credit.


More information on business planning and using your financial statements can be found on the Alberta Agriculture and Forestry website, Farm Manager webpage at: Alberta Agriculture and Forestry webpage:$department/deptdocs.nsf/all/bus14421 or google Alberta Agriculture Farm Manager Home Page a

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