What Financial Reports do Bankers Want to see from Farm Operations?

Prepare before renewing an operating line, financing equipment or requesting additional credit

It usually starts with an email from the banker: Please send your current balance sheet, year-to-date profit and loss statement, cash flow projection and updated debt schedule.

The records exist. They’re just spread across the accounting system, tax return, grain reports, cattle records, equipment list and a handful of spreadsheets.

“It’s all there. It just isn’t all in one place.”

That becomes a problem when you need to renew an operating line, finance equipment, buy land or explain why this year’s borrowing request is higher than last year’s. You know what is happening inside the operation. Your banker only knows what the numbers show. That can lead to some familiar questions:

“We have plenty of equity. Why is cash still so tight?”

“The tax return says we made money. Where did it go?”

“We had a good production year. Why are we bumping up against the operating line?”

The answer is rarely found in one report. There may be separate entities for land, equipment and operations. Grain may be carried from one crop year to the next. Livestock numbers may be growing while cash is shrinking. Money may move among related companies, owners and family members.

Most ag bankers are trying to answer four basic questions:

What is the operation worth? Is it profitable? Can it make its payments? How much will it need to borrow before cash starts coming back in?

These reports help answer those questions.

1. A Current Fair Market Value Balance Sheet

A balance sheet shows what you own, what you owe and what is left over. The banker uses it to look at your net worth, collateral, working capital and overall debt load.

For lending purposes, farm assets are often shown at a reasonable estimate of their current value. That is different from a tax-basis balance sheet, where machinery and buildings may be listed at their original cost minus depreciation.

Land, equipment, grain inventory, market livestock and breeding livestock may be worth considerably more than their depreciated tax value. A fair market value balance sheet gives the banker a clearer picture of what those assets could be worth today. But a large net worth does not necessarily mean cash is available.

A grain operation may have significant land equity and still be using most of its operating line to cover seed, fertilizer, chemicals, rent and payroll before the crop is sold. A ranch may have substantial value tied up in its cow herd while spending more cash on feed, pasture or retained heifers.

That is why bankers pay close attention to current assets and current liabilities. They want to know whether cash, receivables, grain and livestock expected to be sold soon will be enough to cover unpaid bills, upcoming loan payments and the operating line.

Values should be realistic and prepared the same way each year. If land and machinery values are increased whenever the operation needs to look stronger, the banker will notice. The balance sheet should also include all debt and the portion of term loans due within the next 12 months. Leaving out accounts payable or an equipment note doesn’t make the operation stronger. It makes the report harder to trust.

2. A Profit and Loss Statement that Shows What the Operation Earned

The profit and loss statement, or P&L, answers a different question: Did the operation make money?

A tax return doesn’t always give a clear answer. Many farms report taxes on a cash basis. Grain sales can be pushed into another year, inputs can be prepaid and equipment purchases can create large depreciation deductions. Those may be sound tax decisions, but they can make a profitable year look weak or make one year look much better than it really was.

A useful farm P&L matches income and expenses with the period in which they were earned or incurred. In accounting terms, this is an accrual-adjusted income statement. In plain language, it means the report accounts for changes in grain, livestock and input inventories, along with unpaid bills and money still owed to the operation.

That matters when someone says, “We sold more this year, so we must have made more.” Maybe. But if feed, fertilizer, labor, repairs, interest and rent all increased, higher sales may not have produced a higher profit.

For large operations, the P&L also needs to reflect how the entities work together. If the operating company pays rent to a family land entity or leases machinery from an equipment company, those payments should be easy to follow. Otherwise, expenses may be counted twice or part of the operation’s income may be missing.

A banker will often compare the current year with the prior year and the original budget. The explanation behind the change is important. Was crop revenue down because of yield, price or the timing of sales? Did feed costs increase because of drought? Did repair costs jump because two major pieces of equipment went through the shop?

The bank does not expect every year to be a record year. It does expect management to know what happened.

3. An Actual Cash Flow Statement

A profitable operation can still run short of cash. That is why the P&L and cash flow statement are not interchangeable.

The cash flow statement shows what happened to the money that came into the business. Cash may have been used to make principal payments, buy equipment, build inventory, retain livestock, prepay expenses, pay taxes or cover owner withdrawals.

Consider an operation that reports a profit but purchased a combine, paid down a land note and held more grain at year-end. The money did not disappear. It went somewhere the P&L does not fully show.

The actual cash flow statement connects the profit shown on the P&L with the change in the operation’s cash and debt. It helps answer the question many owners ask at the end of a good year: “If we made that much money, why isn’t it in the checking account?”

4. A 12-Month Cash Flow Projection

The actual cash flow statement looks backward. The projection looks ahead.

A banker wants to know how much the operation expects to borrow, when the line will reach its highest balance and where the money will come from to pay it down.

For a crop operation, the projection may show several months of seed, fertilizer, chemical, fuel, rent and payroll expenses before meaningful crop revenue arrives. For a livestock operation, it may include feed purchases, pasture rent, livestock purchases and expected sale dates. It should also include debt payments, taxes, planned equipment purchases and owner withdrawals.

The numbers do not need to predict the future perfectly. They do need to be based on assumptions you can explain.

If the projection assumes top-end yields, stronger prices and no unexpected repairs, the banker is likely to question it. A more useful projection starts with a reasonable estimate and shows what happens if prices fall, yields come in below plan or feed costs stay high.

This is especially important when the operating line needs to increase. “Everything costs more” may be true, but the projection should show how much more, when the money will be used and how the added borrowing will be repaid.

When Whole-Farm Numbers Aren’t Enough

Traditional financial statements tell the banker whether the overall operation is healthy. They don’t always show which crops, fields or livestock enterprises are producing the return.

A Crop Gross Margin Report can separate income and direct expenses by crop season. You can compare corn with soybeans in the same year or compare several years of results for the same crop. With good records, the report can also show differences among fields or rented farms.

That can reveal situations hidden inside the whole-farm P&L. One rented farm may produce strong yields but still lose money because of rent and input costs. A crop may generate more revenue per acre while requiring so much working capital that another crop produces the better margin.

For ranches, the same approach can be used to compare cow-calf, backgrounding, feeding or other livestock enterprises. The purpose is not to create more paperwork. It is to find out which parts of the business are carrying their weight.

Gross margin does not include every shared or overhead cost, so it should not be treated as final net profit. It does, however, give the owner and banker a better explanation of what is driving the overall results.

What Else Might the Banker Request?

The exact list depends on the bank and the type of loan. In addition to the four reports above, be prepared to provide recent tax returns, an updated debt schedule, production history, grain or livestock inventory, accounts receivable and payable details, an equipment list and crop insurance information.

The numbers should agree. If the grain inventory on the balance sheet does not match the production records, or the debt schedule does not match the liabilities shown elsewhere, expect more questions.

The goal is to give the banker a clear explanation of the business: Here is what we own and owe. Here is what we earned. Here is where the cash went. Here is how much we need to borrow, and here is how we expect to pay it back.

If pulling that information together takes several weeks or your reports are already out of date by the time they reach the bank, that is the reporting problem to fix first.

AgriBuilder brings accounting, farm management tools and agriculture experience together in one system. It can provide a clearer view of your farm or ranch through traditional financial statements, cash flow projections and crop- or field-specific reporting. If your financial information is accurate but difficult to pull together, or your current reports don’t answer the questions you and your banker are asking, contact Adams Brown to learn how AgriBuilder can help you get more from your numbers.