One day last week I was asked about the importance of constructing a new set of financial statements each year. As I thought about this question I kept coming back to a lesson I learned from a great loan officer.
Back in the early nineties, I worked at Farm Credit Services and we had a loan officer who was very particular about his customers’ financials. He asked a lot of questions and made his customers find answers. One day I was talking to a friend who was also one of this loan officer’s customers, and this friend was complaining about the grilling he got year in and year out as they worked through the loan process. I laughed and told my friend that the loan officer probably knew more about his operation than he did.
That winter that friend started coming into the office to talk to his loan officer more often. Years later he told me that my simple comment had made him consider why the loan officer asked all those questions, so he started questioning himself. Over the years he learned the value of two things; 1) accurate financial statements and; 2) a well-informed sounding board. He told me that as he learned how to read and analyze his financials, managing his farm became less stressful and more effective because he could see how decisions would impact his operation and his financial well-being.
A balance sheet is a simple statement that shows what you own and what you owe at a given point in time. You can update it in a matter of minutes by simply doing a quick mental inventory. What did I buy this year? What did I get rid of? Simple. Right?
An updated balance sheet is only as good as the effort you expend to accurately and completely update it. I’ve had customers who spend weeks viewing and evaluating all their assets each year and I’ve had others who just took a 10% depreciation annually. Obviously, the more accurate your update the more accurate your analysis can be.
The real value of a balance sheet comes in how you use it. It isn’t just a snapshot of where you stand with assets and liabilities, it is an end and a beginning. Each year as you construct your balance sheet and compare it to previous balance sheets you can see if you made progress or fell back, which then should lead you to question what worked or what didn’t work, which should lead you to better management decisions.
It is a beginning in that you can use it to determine how a decision can impact your financial position. For example, if you are considering purchasing and developing a parcel from the neighbor you can develop a pro forma balance sheet. You would add the value of the ground to your assets and the cost of purchasing and developing to the liabilities and you can see the immediate change to your net worth.
There is a wealth of information in a simple balance sheet, all there to help you succeed. This last fall I received a call from a local farmer who could not understand why he was always cash poor but had a strong net worth. We sat down and dug into his balance sheet and found several assets that were not paying their way, they were draining his cash every month. He had assumed that since they were “worth” more than he paid for them, they were a good investment.
It is well worth your time and effort to construct complete and accurate financial statements every year. As you generate, read, and analyze your financials you will find you are making better, informed decisions and you will find greater success as a result.
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