How to master your financial statements

Do you spend as much time working on your business as in it? Shannon Bussiere, senior credit manager at FCC, often asks farm owners this question.
While working on finances may not be thrilling, developing a thorough understanding of the four key financial statements is valuable. This knowledge helps to inform management decisions and communicate your farm’s financial health to partners and advisors.
Balance sheet
“The balance sheet tells you if you’ve been successful year over year,” Bussiere says.
Analyze balance sheet data to confirm whether assets are greater than liabilities and determine the ratio.
This statement can be used to calculate liquidity ratios (such as the current ratio and quick or acid test ratio) and solvency ratios (such as the debt-to-asset ratio and debt-to-equity ratio).
Income statement
What may seem like small efficiency gains throughout the operation add up over the course of the year.
The income statement compares revenue to expenses. Bussiere recommends analyzing cost data line by line.
“Is there a way you can be slightly more efficient when it comes to total cost?” she asks.
What may seem like small efficiency gains throughout the operation add up over the course of the year.
For profitability analysis, calculate your return-on-assets and return-on-equity ratios using your balance sheet and income statement. Metrics like earnings before interest, taxes, depreciation and amortization (EBITDA), and gross margin are also key.
Cash flow statement
Since the cash flow statement tracks inflow and outflow, it makes the purpose of the business clear.
Is cash flow from operations positive? If not, how did you manage the business during adversity?
Understanding cash flow is critical for budgeting and can set you apart from peers by allowing you to act on opportunities.
Net worth statement
“Your net worth is a long-term look at success,” Bussiere says. “It’s a snapshot of whether it’s positive or negative, and an opportunity to measure growth year over year.”
Did your assets grow? What are your assets comprised of? How did your liabilities change?
The shift from reactive management to proactive management involves knowing these numbers and what your trends are.
From an AgriSuccess article by Rebecca Hannam.