Agriculture is subject to cyclical changes in a variety of financial factors such as markets, land values, and input costs. Regular financial statement reviews enable farmers to adapt their strategies in response to changing conditions, identifying areas for improvement, enhancing overall operational efficiency.
Farm loans consistently require three years of historical financial statements, preferably prepared by a Certified Public Accountant (CPA). Lenders meticulously analyze balance sheets, scrutinizing asset, liability, and debt trends. Key ratios like debt-to-asset ratio, working capital, and current ratio are examined to gauge the overall financial health of the operation. The profit and loss statement shows revenues tied to the farming operation are assessed for sustainability and debt-servicing capability.
Types of financial statements are classified as compiled, reviewed, or audited. While audited statements are pricier, lenders tend to prefer them for their comprehensive analysis. And some CPA firms actively analyze customers within a peer group, summarizing key ratios for insights into industry standing.
How can farmers use financial statements to improve their specific operations? Mistakenly seen as a necessary evil, financial statements provide valuable insights into daily operations. Farmers can leverage these statements to identify concerns and proactively address potential issues. Thoroughly reviewing statements with a CPA or utilizing in-house expertise enhances understanding, which facilitates informed decision-making and strategic planning.
“We understand that many operations have long-standing relationships with their CPAs, and many prefer simplicity in financial statement generation,” comments Matt Manuel, Conterra VP relationship manager. “I try to provide clarity and insight into the importance of quality financials and that it is best to make the process a collaborative effort on behalf of the producer, CPA, bookkeeper, and lender.”
Identifying financial red flags may involve assessing discrepancies in balance sheets, fluctuating ratios, or unsustainable revenue sources. Proactively addressing these concerns requires collaboration with financial experts to develop strategies for improving financial health. This might include adjusting operational practices, exploring new revenue streams, or implementing cost-saving measures.
“The cost of higher quality financials pays for itself by providing all parties with a better understanding of overall financial position and leading to more borrowing power for the producer,” continues Manuel. “It also assists in getting ahead of any potential issues before they become real problems. This is especially true in today’s current market conditions as underwriters are being more critical of an operations position than in recent years.”
When discussing financial statements with ag lenders, farmers should consider asking:
- What specific concerns do you have regarding any identified red flags?
- How can we collaboratively address these issues to strengthen the financial health of the operation?
- Are there alternative financing options or restructuring plans that could alleviate the concerns?
- What proactive measures can be taken to mitigate risks and enhance financial stability?
- How can we ensure ongoing communication to promptly address any emerging issues?
By posing these questions, farmers can engage in constructive discussions with lenders, fostering a collaborative approach to resolving financial challenges. Neglecting regular financial statement reviews can compromise a farm’s financial health, limit growth opportunities, and increase vulnerability to unforeseen challenges.
Without regular reviews, farmers may overlook early signs of financial trouble, such as increasing debt levels, declining profitability, or liquidity challenges. Timely identification of these issues is crucial for proactive problem-solving.
Farmers may find it difficult to make informed decisions about resource allocation, investments, or operational changes without a clear understanding of their financial standing. Additionally, neglecting regular reviews may result in outdated or inaccurate financial information, potentially leading to strained relationships with lenders who rely on accurate data for risk assessment.
Understanding financial statements is a powerful managerial tool. Use them to full capacity to not only benefit day-to-day operations but also to strengthen the relationship with lenders and allow the navigation of challenges with strategic foresight. Conterra offers a variety of financing and loan structure options designed exclusively for agriculture.
Conterra Ag Capital is a private lender, focused exclusively on agriculture. A native to the region, Matt Manuel works directly with farmers, ranchers, and lending partners throughout the Great Plains Region. Conterra lending experts are strategically positioned nationwide, providing flexible farm and ranch loans, crop operating loans, development and alternative lending to America’s farmers, ranchers and agribusiness. Find the Conterra relationship manager nearest you and start a conversation today.
Disclaimer: Please note that the information provided in this article is for educational and informational purposes only, and should not be construed as financial or investment advice. While we have made every effort to ensure the accuracy and reliability of the information presented, Conterra Ag Capital and its affiliates make no representation or warranty as to the completeness, correctness, timeliness, suitability, or validity of any information contained in this article. You should always consult a qualified financial advisor, tax professional, or other qualified professional for advice on your specific financial situation.
