SIMPLY perusing your accountant-prepared profit and loss statement is not a very good way to determine the overall profitability of your business.
It is one report that is easy to read, but unless you understand the balance sheet and cash flow budgets as well, you may be flying blind and heading for a fiscal cliff.
Knowing your numbers is crucial for any business - agriculture is no exception. Of course, there will be good years and not quite so prosperous years in farming, it's the nature of the beast, and everyone - including financiers - accept this reality.
Having up-to-date financial reports is also important - this is easier now with most transactions taking place online.
The profit and loss statement prepared by the accountant looks back in time, sometimes 12 months. A lot has normally happened since then.
The balance sheet is another report that is worth understanding. Like the profit and loss statement, it is also historical, and essentially is a snapshot in time - normally at June 30 each year. Both financial statements are intrinsically linked. For every credit, there is a corresponding debit, and all transactions affect the profit and loss, and the balance sheet.
The other issue with the balance sheet in particular, is that in the vast majority of cases the values are "at cost" and remain this way. This is why your land in the balance sheet is valued at a lot less than its true worth.
There are other complications, as most agribusinesses have multiple entities, such as trusts or companies, and this muddies the water even more.
The good news is that your accountant is an expert in this, and so you can let them sort it out. The challenge for the business owner is to extrapolate some meaningful production information out of these reports.
Knowing your cash flow position is vital in any business, including agriculture. The timing of payments is normally very spasmodic and seasonal, and having a good handle on this aspect of your business is vital.
Having a detailed understanding of this will allow you to work with your bank to ensure you have sufficient working capital during the course of the year.
As machinery gets more expensive, I am increasingly seeing agribusinesses that have quite detailed equipment finance schedules.
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Given the present tax incentives, it can be very tempting to purchase a piece of equipment for the write-off. But, this should only be one aspect of the decision-making process.
Other considerations should include the benefits the equipment brings to the business.
What are the annual payments? Will there be a balloon at the end? And will it come back to bite in a tax sense once you sell the equipment, as it's fully written off?
All are relevant questions, and easily answered with a bit of planning.
Knowing your fiscal position is like lots of other activities in farming. You need to know what you are doing and why.
Understanding your financial position is no less important than getting the agronomy or livestock management right.
- Details: michael@bagshawagriconsulting.com.au
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