Are You Really Using Your Financial Statements to Improve your Operation?

Financial Statements

For years now your bank or other financial institution has been asking you for financial statements whenever you request a farm loan.  Whether it is for operating, farmland or term financing the drill is the same – “please provide us with 3 years of historical financial statements”.  If you do not have them handy you immediately call your Certified Public Accountant (CPA) to gather them up to send off to the ag lender.

Upon receipt, your lender proceeds to analyze these statements.  They will spend time pouring over your balance sheets for discrepancies from year to year.  Have your short- or long-term assets been increasing or decreasing over this time period?  Same questions with liabilities.  Is the collateral listed sufficient to cover the debt?  Has your debt gone up or down?  Is your working capital and thus your current ratio strong enough?  Is your debt to asset ratio at an acceptable level? 

Then they will move on to the profit and loss statement.  They will be checking revenues related directly to the farming operation.  Are these reasonable based on what has been done historically and what they know about the industry in which you operate?  Are there one-time revenue items, such as a property sale, which will not be around next season.  Has this revenue stream been able to service debt in the past?  And most importantly will projected revenue service the debt going forward?

This is a very brief synopsis of what your lender will be looking for in your financial statements.  As you are aware, there are generally three levels of financials: compiled, reviewed, and audited.  Each level requires more and more verification by your CPA, with audited statements being the most scrutinized and, of course, the most expensive.  Not coincidentally, your lender normally has more comfort with reviewed and audited statements.  But with the higher cost of reviewed and audited statements comes more analysis and reporting of useful information available to you and your lenders.

Some CPA firms will analyze all their customers in your pier group and post many of the ratios mentioned above in a summary report for you to see where you stand in your industry.  They will also include notes to the financial statements explaining in detail many of the line items which are not self-explanatory.  You may know these by heart, but your lender will not.

Back to the original question. “Are you really using your financial statements to improve your operation?”  I am sure some of you feel financial statements are an evil necessity required by the lenders, lamenting they are costly, and you wish you could do away with them altogether.  The frustration is understandable.

My suggestion would be to approach this dilemma a little differently.  Since you have to pay for them anyway to satisfy your lenders, why not use them to the fullest extent possible to assist in managing your operation?  These statements, when drilled down, contain a wealth of financial information useful in your day-to-day operations. 

I cannot tell you how many times, as lenders, we see red flag items in a financial statement(s), which if properly analyzed by the borrower, would have assisted in managerial decisions, and ultimately could have avoided subsequent problems.   

When issued your most recent financial statement go over it with your CPA and understand all it is telling you.  If you are fortunate enough to have a CFO/controller on staff, then fully utilize their skills.  Just imagine what your lender will think when you come in offering upfront answers to the questions they are ultimately seeking.

The financial statement is like any other tool in your managerial toolbox.  Use it to full capacity, and it will serve you well and might even make your lender happy.

Roy Martin, Conterra Ag VP Relationship Manager, is based in Fresno, California and works throughout the Southwest.  Roy has over 40 years of agricultural finance and ag lending experience… and he plays a mean harmonica. If you’re ready to refinance or make your next farmland purchase and have questions, you can talk ag with Roy at

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