Episode 4: What are year-end balance sheets and how to build them with Credit Analyst Joel Althauser
Finances and record keeping. They’re not the most exciting parts of farming, but they are powerful pieces you need for a successful loan approval.
But where do you even begin?
The answer is a balance sheet.
In Episode 4 of AgCredit Said It, our hosts sit down with credit analyst Joel Althauser to discuss the perfect recipe for creating a balance sheet. Joel is an expert in all aspects of financials at AgCredit. He’s the guy crunching numbers and looking at spreadsheets so that your account officer can make the best loan decision for you.
Joel says a balance sheet is arguably one of the most important financial documents. “It’s a document where you are recording what you own and what you owe,” explains Joel. “The important part of it is that it is a snapshot in time. It’s a photograph of the financial health of your operation at that given time.”
The Balance Sheet
One basic financial tool your lender will ask for is a balance sheet. Your lender will look at this document to better understand your operation’s finances when you are exploring a loan.
The term balance sheet might not sound like much fun to most people, but Joel explains that this seemingly complicated document can be broken down into two major sections: assets and liabilities.
Assets are what you own. This could be cash, bank accounts, equipment, real estate, vehicles, or retirement accounts for example.
Liabilities are what you owe. In other words, Joel says this is “what you have borrowed in order to obtain those assets.” This could be loans from financial institutions, individuals or accounts that you have payable to co-ops.
Short-term and Long-term Assets and Liabilities
From here, these two sections can be broken down further into short-term and long-term assets and liabilities. Joel explains that current assets and liabilities are those that have a 12-month life or less. Typically the cash you have on-hand, or as Joel describes it, what you currently have on-hand that you could pay your bills with. In addition to cash, this could be grain inventory, inputs, etc.
“Your lender wants to see if you can meet your obligations that occur in the next 12 months,” says Joel.
On the flip side, you will also want to show your assets and liabilities that are greater than 12 months. These would be the debts that pertain to your assets, such as vehicles, equipment or real estate. Joel says to view this portion of your balance sheet as the long-term outlook on the financial health of your operation.
Accuracy is Key
When it comes to filling out your balance sheet, being as accurate as possible is vital.
Joel shares that it may be human nature to not want to show every dollar you have saved on your balance sheet, but in reality, you don’t want to leave anything off.
Showing your total assets allows your account officer and credit analyst to see your character, or in other words, how you acquire your assets and what you do with your earnings so that they can give you credit for all of your assets.
“The picture has to get painted for us in its entirety in order for us to make sound decisions for an operation,” says Brenna.
One of the best ways to make sure that your balance sheet is accurate, especially when valuing your equipment and vehicles, is to value these assets at current market value. Brenna explains that AgCredit has various tools available to help you look at marketplace value, specifically the Farm Service Agency’s pricing metrics.
Timing is Key, too
You might often hear your account officer talk about a “12/31 year-end balance sheet”. This is a particularly important date to your balance sheet because it should match your tax return that gets completed based on the year that just ended.
“The beginning of December is a great time to sit down and dust off that balance sheet from the year previous,” says Phil. “What did you buy this past year? What loans did you take out? Writing this down helps prep you for the year-end balance sheet you’re going to be getting ready to do.”
Balance Sheets in the Real World
Not only does a balance sheet help your lender better understand your operation, but it also serves as a great guidepost for making decisions about your operation.
For example, Joel says when he was contemplating a combine trade, he referred to his balance sheet.
When looking at the revenue side of his operation, all looked well. But even so, he wanted to take the time to really look at things and see how the year was going to turn out.
And things did turn out well. “But what it gave me was the confidence to say ‘Okay, I can go ahead and make that, and guess what? I may be able to put a little more money down on that machine than I thought I could,’” says Joel.
As we wrapped up our conversation, Joel shared some of his best tips for balance sheet success.
His first piece of advice was to start simple. Joel says to start by just making notes for yourself as you go through the year. This will help make completing your balance sheet at the end of the year that much easier.
And his other piece of advice: don’t be afraid to reach out to your account officer and meet for breakfast to go over your balance sheet. “They’ll jump at the chance because the best information we receive from our members is when we sit down as a team and complete that balance sheet together,” says Joel.
Wrapping It All Up
The ins and outs of putting together a balance sheet aren’t one of the most riveting roles of owning a farm, but with an accurate financial understanding of how your operation is doing, your loan officer (and credit analyst behind the scenes) will be able to make the best borrowing decision for your operation in order to determine loan approvals.
We cover a lot of ground about balance sheets in Episode 4 of AgCredit Said It, so be sure to listen for more tips on dishing out a great balance sheet as you approach the end of the year.
Here’s a glance at this episode:
- [2:03] Our guest, Joel Althauser introduces himself and his background in agriculture.
- [3:24] In Joel’s role as a credit analyst for AgCredit, he describes his job as analyzing borrowers’ financial information so that they can make sound loan decisions.
- [4:02] Credit analysts, or underwriters, look at balance sheets, tax returns and earning statements to determine best investments for their account officers’ clients.
- [4:32] For beginning or starting farmers, one of the best ways to begin record keeping is by creating a balance sheet and having a measure of your earnings, or tax returns.
- [5:42] Balance sheets have two major sections: 1) Assets - what you own, such as cash, equipment, retirement accounts, etc. and 2) Liabilities - what you owe, such as loans.
- [10:23] On the balance sheet, Joel looks for time and term. In other words, current assets and liabilities with a 12-month life or less, and long-term assets and liabilities. This helps paint a picture of the financial health of your operation.
- [12:13] Balance sheets also help measure how strong the capital is in your operations. The difference between your current assets and current liabilities is called capital margin. This is the capital you have available to meet immediate needs that you may not have planned for.
- [15:19] It may be human nature to not want to show every dollar you have saved on your balance sheet, but in reality, you don’t want to leave anything off. Showing your total assets allows your account officer and credit analyst to see your character, or in other words, how you acquire your assets and what you do with your earnings so that they can give you credit for all of your assets.
- [18:00] You might often hear an account officer talk about a “12/31 year-end balance sheet”. This is particularly important because your balance sheet should match your tax return that gets completed based on the year that just ended.
- [26:39] One of the best ways to make sure that your balance sheet is accurate, especially when valuing your equipment and vehicles, is to value these assets at current market value. AgCredit has various tools available to help you look at marketplace value, specifically the Farm Service Agency’s pricing metrics.
- [33:39] Joel shares personally how he has used a balance sheet within his farming operation to make a purchasing decision.
- [37:49] As we approach the end of the year, Joel’s best tips for success are to begin to make notes for yourself as you go through the year so that you can simplify completing your balance sheet when the time approaches, and don’t be afraid to reach out to your account officer to meet for breakfast or lunch and go over your balance sheet.
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Host Phil Young
Phil is an account officer for AgCredit serving Van Wert County. He’s been in ag lending for over three years but his agricultural background goes back much farther. He grew up on his family’s farm where his father raised a large herd of sheep. Currently, he helps with the family farm raising corn, soybeans and wheat. Phil likes working at AgCredit because he can help people achieve their dreams. Whether that is purchasing a new piece of farm ground, updating a piece of equipment, or helping a borrower understand their financials, helping his clients succeed is always his goal.
Host Brenna Finnegan
Brenna has been an account officer serving Lorain County for three years. She’s worked in the agricultural industry for over 16 years with experience in livestock production, specialty crop production, seed production and processing/distribution. She grew up on a small family farm raising row crops and cattle. She currently has her own herd of beef cattle that she breeds and sells as show stock calves for 4-H and FFA members. At AgCredit, Brenna enjoys being able to work directly with the local farmers and especially helping young farmers achieve something that they didn’t think they could.
Guest Joel Althauser
Joel is currently the Credit Analyst Manager for AgCredit. As the Credit Analyst Manger, he manages a team of credit analysts and handles analyzing data for several branch offices. Outside of AgCredit, Joel farms his family’s ground raising a few hundred acres of corn and soybeans. He enjoys having his small farm because it keeps him grounded in what he does here at AgCredit.
Announcer (00:02):Welcome to AgCredit Said It, the podcast for farm newbies and seasoned professionals alike. In each episode, our hosts sit down with experts from across the agriculture industry to bring you insights, advice, and must have information on all things rural living. Farming to finances, and everything in between. So, let's get to it.
Brenna Finnegan (00:27):Welcome back to AgCredit Said It. It's Brenna, here with Phil today, to talk about prepping for year end.
Phil Young (00:35):It is crazy that we're at the end of the year already, Brenna.
Brenna Finnegan (00:37):I mean, Christmas is right around the corner, and all the other holidays that take place. It is kind of nuts to think that 2021 is now coming to an end already. So I don't know, what about you? What do you think is crazy right now?
Phil Young (00:54):It just was a blur. Obviously 2020 was crazy, 2021, I would dare to say, maybe equally as crazy. So hopefully 2022 is maybe brighter, maybe.
Brenna Finnegan (01:07):Well, to brighten up things a little bit more, we might as well just go ahead and start talking about finances and records. It's not one of the most exciting parts of farming. But it's definitely one of the most important. So with us today to help answer some of the questions that you guys may have about year end financials, we have Joel Althauser. Joel is a credit analyst manager here at AgCredit, which gives him the unique expertise to talk financials with us. Welcome, Joel.
Joel Althauser (01:38):Thanks, Brenna.
Brenna Finnegan (01:38):Thank you for joining us.
Joel Althauser (01:40):Thanks. I'm really happy to be here. Hopefully we can make it a little bit more exciting. It's my job, so I think it's very exciting. So maybe that's on me to try to make it so.
Phil Young (01:50):I'm sure you'll spice it up.
Joel Althauser (01:52):I'll try.
Phil Young (01:52):I have no doubt. Well, before we jump into our topic, I wanted Joel to share a little bit about his farming operation. He works at AgCredit, but he also farms. Can you share a little bit about what you do on the farm?
Joel Althauser (02:03):Sure, Phil. I grew up on a farm in west central Ohio. We had farrow to finish sow operation, corn, beans, beef cattle. Your typical farm four years ago. But as time went on, Dad slowly sold that out as us kids left. Now my farm operation just involves farming all of our family ground, corn and beans, only a few hundred acres. But it does keep it real for me, and keeps me in touch with agriculture. It's good to have that as it keeps my feet grounded as far as what I do every day with AgCredit.
Brenna Finnegan (02:45):I think it's great knowing that we all, we discussed it in a previous podcast, but we all have this connection to it and fully understand the industry. We all, it really does seem like all of us have our feet in the water too, kind of thing.
Phil Young (03:03):Yeah, it's not just numbers on a paper, yeah. It comes to life in our everyday lives.
Brenna Finnegan (03:10):Yeah.
Phil Young (03:11):Well, Joel, so we're excited to have you on the show. I guess, can you jump in, so everyone knows what you do here. We said you're a credit analyst, and you manage a team of analysts. What does that mean? What do you do here?
Joel Althauser (03:24):For today, I think we’ll just talk about the credit analyst part of it. For everybody out there listening, maybe another term to use would be underwriter. That's a term that more people have heard and understand. What do analysts do here at AgCredit? We look at the financial information, and we are trying to come up with realistically a grade for that loan. Remember, loans are assets for our cooperative. So we have to see how good that asset is. We're trying to make the best investments for our members.
Joel Althauser (04:02):So what the analysts do, they give the account officers time to be out there, on the farms, working with the members, so they're not sitting behind a desk trying to crunch numbers into a spreadsheet all day long. That's what the analysts do. We take a look at the balance sheet, and we take a look at the tax returns, the earning statements, and provide some analysis so that team, that account officer, that credit analyst, can make a better decision.
Brenna Finnegan (04:32):So for somebody starting out, we do have a lot of younger members within our association. What would you say are the basics for somebody to get started as far as record keeping, and starting that pattern? Here, we always talk about the pattern of picking the same date every year kind of thing, and do this balance sheet, year end summary of your ... What's the word I'm looking for? Operation. What would you say is initial advice for somebody getting started?
Joel Althauser (05:06):So there are some basic tools that any lender is going to look for. Those would be a balance sheet, and then a measure of your earnings, which can be tax returns. Make certain, if you can, get your taxes filed timely, make certain you have copies of them, and make certain you have those available for your lender. The balance sheet, and I would argue that's probably the most important tool as far as the financial tools go, that is a document where you are recording what you own and what you owe.
Joel Althauser (05:42):The important part of that is it is a snapshot in time. It is a photograph of the financial health of your operation at a given time, and that's the date at the top of that balance sheet. Balance sheets basically have two major sections. Assets, what you own. It could be cash, it could be accounts, it could be equipment, real estate, vehicles, your retirement accounts. Then what you owe, or what you have borrowed in order to obtain those assets. Loans, it could be loans to banks, other individuals, accounts that you have payable to co-ops, etc.
Brenna Finnegan (06:22):Credit cards are always the one people forget about.
Joel Althauser (06:25):Credit cards, that is right. Yeah. That's the thing, a lot of people want to try to separate the personal, which there is an argument to do that. But we need to include it somewhere. We still, by and large, deal with family farms. There aren't a whole lot of our family farms that's, "Oh, no that's personal, we're going to separate that off."
Brenna Finnegan (06:44):I just had that conversation the other day with somebody. They're a member of a family operation kind of thing. This was pre-marital, all that kind of stuff. It's like, "Well, what's the combined taxes? What's the combined balance sheet?" They're like, "Well, we don't need any of that person's information." It's like, but I still kind of need it.
Joel Althauser (07:06):Sure. Who pays for food on the table? Who pays ... We all do have to live. So we have to be able to figure out, are there enough resources there to do that? So I don't know if that answers your question, Brenna.
Brenna Finnegan (07:18):Yeah, it does, it really does. I mean, a lot of people, you kind of walk through what the balance sheet is already. We also covered what type of information we are actually looking for. I did, I wanted to say, there is one thing that I think people do forget about is their ownership of other things. So when you start getting entities, and you create an entity for this landholding company, or you create an entity for this grain operation, and suddenly you have multiple members of multiple entities forgetting that you own part of that. Whether it's 50/50, a third, whatever it may be, you still have to put that on there. When we get balance sheets for all of those entities, we link them together through each balance sheet in some way, shape, or form. So I think that's one thing that people forget about.
Phil Young (08:16):I kind of found out the inverse. Someone will list that they have an ownership and a business at the bottom of their balance sheet, and that kind of rolls into, "Well, actually, I need to see that whole balance sheet. It'd be great to see that whole thing." So that's another part of it too.
Joel Althauser (08:30):We probably might want to touch on why. It's easy to show that you own a quarter of an entity that has a value of a couple hundred thousand dollars. What we don't see as the lender, we don't see what debts they have. We don't see, do you need to contribute some capital to that entity in order for them to pay their bills? That's not a bad thing. But if you do every year, and we don't know that, and we are calculating your repayment ability based on just yourself, and low and behold, you've got to provide a couple $20,000 to that entity every year, we grossly overestimated your ability to repay. The thing is, it's not a bad thing to you. The last thing we want to do is loan you into a hole, loan you into a corner.
Brenna Finnegan (09:24):Yep, that's our last, last thing we want.
Joel Althauser (09:27):The last thing we want to do.
Brenna Finnegan (09:27):Yeah. It's really painting the whole picture.
Joel Althauser (09:30):Exactly.
Brenna Finnegan (09:31):The picture has to get painted for us in its entirety in order to make sound decisions for an operation. In fact, I mentioned to somebody the other day, we are here to help you. We want to see you guys grow. We want to see our members flourish in their industry, because obviously we've already discussed, we all have a passion for it. So it's kind of like one of those things, if you tell us the whole picture, then we can make that better decision for you.
Phil Young (10:04):That kind of tails us into the next topic is once you do a balance sheet, once we have everything, what are you, as a credit analyst, what are you looking at? What metrics are you looking at on there? What kind of jumps out at you when you look at a balance sheet?
Joel Althauser (10:19):Basically, why do I have to do all this?
Phil Young (10:22):Yeah, but why?
Joel Althauser (10:23):Just so when we talked about a balance sheet a minute ago, one of the things I didn't get to is this divided into two sections as far as time or term. There is the top portion, which is current. Assets and liabilities that, within reason, are going to have a 12 month life or less. That's the cash in your wallet. This is my analogy, Joel's analogy on a balance sheet. We're looking at the cash you have on hand. What do you have that you can pay bills for right now? That's cash, that's grain inventory, that's inputs-
Brenna Finnegan (11:03):Something that can be quickly liquidated.
Joel Althauser (11:05):That's correct.
Phil Young (11:05):Liquid is the term.
Joel Althauser (11:09):Most of you out there listening have heard the term cash is king. Cash is still king. So we want to see, can you meet your obligations that occur in the next 12 months? Your debt payments you have in the next 12 months? Your ongoing operating needs? Family living needs in the next 12 months? Do you have the ability to meet those obligations? The second part then, the bottom part of that balance sheet are your assets and liabilities that are greater than 12 months. Some divide that further into intermediate and long term, I'm not going to get into that. All we're really concerned with, those that are more than 12 months. So vehicles, equipment, real estate, the debts that pertain to those assets. That is your rainy day fund. That is your investment account, your retirement account. Think of the bottom part of your balance sheet as that's the long term outlook as far as the health of your operation.
Joel Althauser (12:13):So what we're looking at, we want to look at the difference between those current assets at the top and those current liabilities. That is what we call working capital margin. That's the margin of capital you have available to meet immediate needs that you may not have planned for that come up right now, or in the next few months. We are also then going to look at the bottom part for what we call owner equity, or how much of that balance sheet do you own? When we look at that net worth, when we subtract the total liabilities from the total assets, we call that net worth. That is what you own. The balance sheet serves ... There is an old rule in lending called the five Cs of credit. I'm not going to get into all five. We're going to hit one of them here, and the one of them is capital. The balance sheet helps us measure how strong the capital part of your operation is.
Brenna Finnegan (13:16):I think that that really does start to show things, at least to us, that, how much do you own? We do realize that as people age, they tend to start owning more of their assets than they start owing on those assets. So it's part of the analysis process, I think, that we take that into consideration. A 25 year old that's buying his first farm under our young beginning, small ag programs, those, we know they're not going to have the equity there. That's taken into consideration when we look at all of this sort of stuff. A lot of people worry about that bottom number.
Joel Althauser (13:57):Right. That's a very good example, the 25 year old. So the 25 year old that does a good job with their balance sheet, and we, maybe this is our first application, we don't know a lot about them. We look and hear, "Wow, they've saved $50,000 already since college." It tells us an awful lot about how they manage their lifestyle. Versus the other balance sheet, that maybe they have zero saved.
Brenna Finnegan (14:26):That also makes a look into their family living. A lot of people underestimate what their actual costs are, just to survive in a year's time, their family living expenses. Somebody who is making $100,000 a year at their job outside of the farm, and they say that they only live on $20,000 a year. Well, what's happening with the other 80? Is it in the savings? Because if it's in the savings, it's a lot more believable. Now if it's not in the savings, well, where is it going, for one? That's a part of your family living. So therefore, your family living is actually probably a tad bit higher than that $20,000. There are little hints along the way that all of this stuff, all of this information coming together helps us figure out.
Joel Althauser (15:19):Let's take that a step further, that same example on why you really want to be accurate with your balance sheet. It's human nature to think, "I don't want to show them every dollar I have saved. I kind of want to keep that to myself." You should be proud of that. If you've got a bunch in savings that you've worked hard to do, that tells us so much about one of the other Cs of credit, character. It tells us a huge amount about how you measure or how you acquire your assets, and what you do with your earnings.
Phil Young (15:55):There have been countless times where I've sat down with a new borrower, or a young guy, and walked through their balance sheet, and they maybe preliminarily filled it out before they got there. We go through it, and we add five or six things that they just completely forgot about. "Oh, I forgot I owned that piece of equipment," or, "Oh, yeah, I do have that retirement account from my old job that I didn't count." Or, "I forgot to list my wife's vehicle." Things like that that pop up. So that's why it's good to do it, but also maybe sit down and have someone review it, because I'm trying to give you credit for all of your assets. I'm trying to tell the whole story. I don't want to leave anything off.
Brenna Finnegan (16:32):It comes back to that story.
Phil Young (16:33):That's why we do that. Yeah, right.
Brenna Finnegan (16:35):Every time. So now I think about somebody who might be older, and they're not telling us the full picture. Then suddenly we start finding all this information out, and we start adding it. Sometimes seeing it written down, it's just kind of like creating a budget for yourself. Not everybody wants to do it. That's a slap in the face of what you've actually done, and what you need to do. I think the balance sheet, and seeing it progress from year to year, we're going to talk here about the importance of the timing of that balance sheet and everything. That's a part of that.
Brenna Finnegan (17:12):Year, to year, to year, do you see growth? Is that net worth growing? Is it shifting downward? Okay, if it's shifted downward, what happened in the operation to make that occur? Was it a bad harvest year? There is not enough crops in the bin? Was it, did you spend extra money buying another farm? All that kind of stuff. So it's kind of coming full circle, and keeping track of that annually. We kind of talk about completing, quote unquote, year end balance sheets by the last day of the year. You guys will hear us all talk about, all the account officers talk about 12/31 balance sheets. Joel, what is the importance of the consistency of that and why do we emphasize that so much?
Joel Althauser (18:00):When we say year end balance sheet, the example I'm going to give, we're going to look at December 31st. Now, I will say, if you have, maybe, a larger operation, maybe you have a corporation, and you've incorporated your farm operation, you might put your taxes on something other than a calendar year. So that would be a little bit different situation. We would look at a different date for that, and it would be the year, the end of your earnings period for that corporation. But let's go with 12/31.
Joel Althauser (18:38):The reason we want a year end balance sheet is we want it to match the end of your tax year. I'm going to give maybe the simplest example, and it's a very common example in northwest, north central Ohio, corn, beans, a little bit of wheat. We're primarily grain. It's not uncommon at all for us to get harvest in, decide we don't want all of that income in this year, and defer pay, defer some of that grain income until the following year. Typically, what happens, you get your check about January 3rd. So you did it for a reason. You moved that income to the next tax year. So you're not going to deal with that on taxes until the following March, a year from March when you do those taxes.
Brenna Finnegan (19:34):You're giving me flashbacks, man, of all my previous jobs.
Joel Althauser (19:40):Brenna made a comment about we want to give you credit for the assets you have. So let's say then, you can put your balance sheet as of January 15th. We get your tax return. In the meantime, on January 3rd, you liquidated $200,000 in grain. Where did that show up, if you did a January 15th balance sheet, where did that show up, all of that grain, on anything that we received? It's not on your tax return. It's not on-
Brenna Finnegan (20:06):It's amazing how much chronological order of occurrences is so important.
Joel Althauser (20:12):It is. So much goes on in this type of agriculture in the last two weeks and the first two weeks of the year. The important thing is this. We say 12/31. But what we're really after is the balance sheet should match that tax return that gets completed based on that year that just ended.
Brenna Finnegan (20:36):So right here in December, we're at the beginning of December here, and right now is really the time to start thinking about the 12/31 date, and how you're going to go about doing it. Because we have only three weeks here. If you need a request to help balance out those taxes, that's important for us, because we're under crunch time. We want to get that purchase done for you or whatever so that way you balance everything out. Not encouraging it, but seriously, sit down with your tax person and think about what year things would be better off in. Picking that date of 12/31, I think, it kind of solidifies it.
Phil Young (21:26):Yeah. The beginning of December is a great time to sit down, dust off that balance sheet from the year previous. What did you buy this past year? What loans did you take out? Just write that on a sheet of paper and that helps prep you for the year end balance sheet you're getting ready to do.
Brenna Finnegan (21:41):So I completely agree with the whole year end, the 12/31 date, and picking that as the date to just base everything off of. So AgCredit asks for this information in order to better understand our member's operations. It gives us a financial understanding of how the operation is doing, and we use that information to determine loan approvals. So when we get your 12/31 balance sheet, it's in the system, everything is good. February 15th, you come and say, "Hey, I need a loan."
Brenna Finnegan (22:16):Well, we're going to take that information about that loan and add it, now, to that balance sheet, so we can make that adjustment throughout the year. So like Phil here said about keeping track of the things you buy or sell, that's where that becomes important. So you might have sold a piece of equipment on January 30th, you need this loan February 15th. Well, now I want to make that adjustment. That's what it's guiding us to do, so we can make all those adjustments accordingly. If you guys have anything to add on that? It's building that chronological order of things.
Joel Althauser (22:55):I think you mentioned, there are many times where a farmer will have a situation where they realize after meeting with their accountant in December, they need to actually ... They need to figure out a way to minimize tax liability. Let's put it that way. Accountants, bless their heart, they're going to try to work with the member to try to get that tax liability down. The issue comes when, unless you have a current balance sheet, unless you’ve taken the time to do that, how you address that tax liability may change with what you have on hand in inventory.
Joel Althauser (23:36):The best example would be we've all had very good years, followed by a very poor year. How many times after a very poor year do farmers end up having a pretty high tax liability because in the prior year that was very good, they held a bunch of that grain over to after January one? A lot of times in agriculture, the impact of that good year or bad year, they lag. Without knowing what we have on hand and what we owe, especially what we owe immediately, what you're operating on balances, or your payables are, without that knowledge, we can make decisions that might really hurt the operation. Both we, as the lender, and you, as the borrower. Our job is to try to help you make the best decision. We want you to succeed.
Brenna Finnegan (24:32):You mentioned the taxes, and keeping track of that sort of stuff. So keeping track of a good year/bad year, like you said, when they report things, it's going to show us that pattern of prepayments, or delayed payments that were made for inputs or things like that. So we can really see, with the balance sheet and with the tax, the assistance, we can actually see the pattern for that operation. I mean, it's good to keep track of things as you go. The balance sheet, staying on that topic of the balance sheet, should the average farmer be looking at their balance sheets and financials to help make their decisions? How can the information on it help them to make a better decision?
Joel Althauser (25:20):One example would be the one I just gave, that would be year end planning. That can come in all forms. It means you can make a decision based on the inputs that you have, that, "Okay, I want to hold my grain." That's based on a combination of two things. What your balance sheet looks like towards year end, and what year to date your income and expenses added up, what you do when you go visit your accountant in late November, early December, you do an estimate. Well, if the results of that estimate are you need to either reduce income, which might be too late, or increase expenditures, there are several ways you can do that. Your balance sheet will help you determine how you do that. Whether you borrow money to buy more inputs, whether you buy a piece of equipment that is needed. If you don't have that information, you don't know how to respond appropriately.
Phil Young (26:19):Actually, I want to circle back to just filling out the balance sheet in general. I guess the question I get a lot is when you're filling in the equipment lines, or vehicles, how do I value my stuff? Give me tips on what's the best way for a borrower to look at their equipment list and start slapping values on that kind of stuff?
Brenna Finnegan (26:39):The purchase price isn't always exactly, from five years ago, is not going to give us the exact value of that piece of equipment.
Joel Althauser (26:47):Along with that, we want to make certain these balance sheets that we complete, and this is to your point, Phil, are accurate. The best way to do that is to value those assets at market value. Now, equipment, how do you do that? First of all, your AgCredit account officer can help you with that. We have a number of tools available that look at the marketplace and that can help you value your equipment. We also have several account officers that are very, very good at it. One of them would be Matt Adams, who you'll hear on other podcasts. Beyond that, when you get into real estate, we know what real estate has been selling for.
Joel Althauser (27:28):But I would give everybody out there a piece of advice. Don't get carried away in increasing the value of your real estate that you already own. That's another rainy day fund. If we need to do that, we'll work with you on that. Don't get carried away on that. Livestock is a tricky one. First of all, we don't, there aren't as many farmers that own their livestock anymore. I know that sounds like a strange concept, but an awful lot of them contract, at least in great numbers. But those of you that do own your livestock, breeding livestock, same as land. Don't get carried away in moving the value of that breeding livestock.
Brenna Finnegan (28:08):So you mean my champion cows aren't worth $5,000?
Joel Althauser (28:14):If you have one champion cow, okay. But if you have a dairy herd, be consistent. That's the other one. We want to be accurate, but we want to be consistent in our valuations, and our timeliness. You should do that balance sheet at the same time, hopefully right at year end. So finally, on grain, I was doing a little prep for this podcast, and actually found something that I think we're going to start circulating here internally. I believe Iowa State does a year end summary of what they feel you should value all of your assets at, mostly your commodities and livestock. We've talked about that internally.
Joel Althauser (28:55):We're not caught up in what you think... Unless you have a contract on it. What you think you're going to sell that corn for in April. We're caught up with what it's worth on 12/31. The other item I would touch on briefly would be market livestock, especially if you own a lot of hogs or a lot of cattle. Over in Phil's neck of the woods we run into a lot of cattle. You can really manipulate a balance sheet by tweaking cattle weights or cattle price. So to start out, get your numbers of cattle, number one. Secondly, if you have them in pens, be consistent in how you estimate the weight.
Brenna Finnegan (29:41):That's fine to break it all out, too. Pen A, B, and C, these are 500 pounds, those are 800 pounds, those are 1,200 pounds. Because we know there is a different value for each, I guess, weight class, I guess you could say, on at least livestock. Now one thing I was going to mention, internally, we use a lot of FSA's prices. We know that FSA's prices right now, at least what they put out a year ago, this is what you guys should use, this is the number that they have for us, and we use that. But right now, it doesn't match, or it doesn't align properly right now with the values of what people are getting at the elevator, or at the slaughterhouse, or anything like that. So we know this, beans right now, $13, $12, something like that. But we also use the 9.75 in our analysis. So how do we go about ... Explain the difference.
Joel Althauser (30:45):Okay. Maybe something in depth for another podcast, another time. But I'm glad you brought that up, Brenna. There are a couple of differences here. I alluded to it when I said I'm not concerned as much with what you think you'll get for your grain in the spring when you take it out of the bin. I'm concerned with what you can sell it for today. We want to understand the difference between the balance sheet and the income statement.
Joel Althauser (31:08):What Brenna is getting to is more the income statement. We are going to use, when we project your, not next year's earnings, but your typical year earnings, what your operation will earn in a typical year, we're going to use, and right now we use, prices that are calculated by the Farm Service Agency, because it's a good source of pricing metrics for the future. They look at future's markets and a whole host of other things to come up with those. On the balance sheet, you're looking at what is the value of that product right then? So what is the worth of that grain at that time? Those are two different facts. Those are two different-
Brenna Finnegan (31:56):So would you say it's a good idea to jot down 12/31 prices at your local elevator?
Joel Althauser (32:02):Absolutely. Now, where you have grain priced already, you have a forward contract, you have a basis contract in place-
Brenna Finnegan (32:10):We already have the value of it.
Joel Althauser (32:12):Yep, you already have the value of it. Or you have deferred paid and you already sold it, you already know it. Now I'm going to list that on your balance sheet as grain still, because it hasn't been booked on the income statement as grain yet. So I'm going to list it as inventory on your balance sheet, as of 12/31.
Brenna Finnegan (32:28):Chronological.
Joel Althauser (32:30):Yep. Back to, so you want to know your bushels, and you want to know what the prices were at your local elevator, exactly where you normally deliver. Let's say you sell beans that have a 50 cent bonus, because they're non GMO. That's fine. You're going to get that out of them. We get that.
Brenna Finnegan (32:51):Organics coming into play, how do you value that?
Joel Althauser (32:54):Same thing. What's your local market? Some would say organics get a little dicey because they'll say, "Well, I have a contract." If you read a lot of those contracts closer, the price on them may not be clearly defined in that. Down my way, soybeans, they're going to have a price, you're going to be able to use that price. Some of the problems there, some years are getting them delivered. See that with beans over in Delphos, that sometimes we can't get them delivered. But either way, typically we have a price that we can use. You ought to be able to talk with them at year end and know what that price is.
Phil Young (33:30):So Joel, you come to work, eight to five, you put on your Joel credit analyst hat. Then at five o'clock, you swap that out for a farmer Joel hat. I guess, when you go home, and you have this experience looking at balance sheets, and you have this experience looking at financials, and you go home, and you're a farmer. Can you give an example of maybe how you, personally, have used your balance sheet to make a financial decision, or stared down and just put pen to paper on should I do this or should I not?
Joel Althauser (33:59):The best example I have would be a couple years ago, when I contemplated a combine trade. I had been thinking about it, was only looking at the revenue side of it, the income I had made so far. But I said, "You better sit down and look at ..." I saw some money out on my operating note, and was in the middle of harvest. I said, "I better sit down and really look at how this year is going to come out." Now, it was going to be fine. But what it gave me was the confidence that, "Okay, I can go ahead and make that." Guess what? I may be able to put a little bit more money down on that machine than I thought I could. That's what I did, and it made it a lot better ... I just felt better about the decision.
Phil Young (34:40):Mm-hmm. Yeah. It can help affirm a decision, or it maybe can help say, "Maybe I shouldn't do that right now." I have had experience with somebody who came into my office. We went over their financials, and ultimately came to the decision, maybe it isn't a good choice to build this barn right now. What this person was facing was, "Hey, I'm thinking about putting up this livestock barn." It was an independent livestock guy. He said, "I think I want to add or increase my size."
Phil Young (35:10):We got looking at it, and it was like, well, actually, this may not be the perfect year to do that. So we said, "Let's sit down next year and look at this. Not that we're not going to do it. But maybe we look a year from now." If that's not right, then we'll do it next year. But it's a good thing just to say, okay, take a breath. It may seem like a good idea in your head, but once you take a look at things, you may change your mind.
Brenna Finnegan (35:33):This last fall is a really good example of that. Equipment values have increased. Truck values have all increased. So you think, "I can get this out of that. So I'm going to go ahead and trade that in or sell that." But you also have to think, you have to go back and buy something else in order to replace it. So if you don't have that backup plan already in place, some of the times those sales don't make sense, or that trade in doesn't make sense. I think keeping track of all of that information and the balance sheet helps you do that, it helps to make that decision. I mean, I, for one, thought it was a great idea to trade in a truck.
Phil Young (36:11):Right. Who doesn't want a new truck?
Brenna Finnegan (36:14):Yeah. Who doesn't want to drive around in a one ton diesel? But I decided not to because it really is, financially, a better decision for me to just stay on course with what I got. I pretty much have all the features in the truck that I already have and want. So might as well just stay where I'm at. Then I didn't have to buy another hitch for the camper, and all that kind of stuff to go in it, too.
Phil Young (36:38):It's all those little things that add up too, right?
Brenna Finnegan (36:40):Yes. Yep.
Phil Young (36:42):Sometimes the sparkle of the idea, it doesn't quite meet what maybe in reality is what you should do. So sometimes saying no is the hardest part.
Brenna Finnegan (36:51):Shiny and pretty is definitely a hard thing to walk away from.
Phil Young (36:56):Yep. Joel, I guess one of our last questions we have that we want to ask you is any tips for farmers as we approach year end, how can we set them up for success as we cut it on the roller coaster ride down to 2021?
Joel Althauser (37:10):As you get closer to year end, if you typically sit down with your accountant, use that as your also, once that meeting is established, when that appointment is, use that as your deadline to start that, to get that balance sheet in place. While we're talking about that balance sheet, that's something you can work on all year. Those of you that like a spreadsheet, or if you just like a pad and paper, when you, in September, book some 28, pay for that, stick it in the tank, jot that down. That's going to go on your balance sheet.
Joel Althauser (37:49):This is something you can work on over time. When you start, you're working through harvest, and been out on the combine all day, filling up one of your grain bins, and one of the bins is full, go in at night, take a minute, pull up that spreadsheet, put that bin down there. Hey, the east bin, 20,000 bushels, filled it. It's there. Just make some notes to yourself as you go through the year, and completing that balance sheet at year end will be very simple. The last thing I would encourage, our account officers, just like you all, are pressed for time. We all are. It seems to be life in the United States anymore.
Brenna Finnegan (38:37):The clock is always ticking.
Joel Althauser (38:41):Reach out to your account officer. Say, "Hey, let's get together for breakfast and go over my balance sheet." They'll jump at the chance, because the best information we receive from our members is when we sit down as a team and complete that balance sheet. It's by far the most accurate, the most consistent. Down the road, when you can look back at 15 years of balance sheets laid out side-by-side, that's where I do think recordkeeping and balance sheet prep becomes a little bit fun, because it brings back an awful lot of memories for you ... A well completed balance sheet will tell you an awful lot about that year. "Oh yeah, that's the year that son went to college, and yep, I remember the drought that year."
Brenna Finnegan (39:26):Took out that student loan for him.
Joel Althauser (39:28):Yeah, there is the student loan, and guess what? We didn't have any grain on that-
Brenna Finnegan (39:32):Did he pay that back?
Joel Althauser (39:35):Or the opposite. Holy smokes, look how much grain we had three years ago in the bins. It tells you an awful lot about the success and the maturation of your operation. We like to look at that. We like to look at history. That's where I think a balance sheet can be kind of enjoyable and maybe a little bit fun.
Phil Young (39:56):The nice thing, if you do it 12/31, you get it done, you get it to AgCredit. Maybe you're not planning on doing a loan next year. But now it's sitting there waiting for you when a loan request comes up, it's already done. That's something less you have to worry about when maybe you're out planting-
Brenna Finnegan (40:10):Makes our decision making a whole lot quicker.
Phil Young (40:10):And you're like, "Boy, I really don't want to sit down and do my balance sheet right now." Well, you did it three months ago. It's all done.
Joel Althauser (40:16):This is one of those times I can take the heat. I'm the one always pushing these two, "Hey, do we have a balance sheet? Do we have 12/31?" So those members that get a little bit frustrated, don't blame Brenna, don't blame Phil. Have them give Joel a bunch of grief, because I'm always asking for it. But it makes, we get you better results. We get you better information for you to make better decisions about your operation.
Brenna Finnegan (40:40):Well, Joel, you said the perfect word. Team. We want to be a team with you, like we said earlier, we want to see you guys succeed. Sitting down, and having breakfast with somebody or lunch with somebody, and completing all that information really does solidify what the team is all about, and us helping you guys. So I think that's one way to definitely look at it as - utilize us as a teammate rather than, the banker. Ugh. In order to create that atmosphere, I think it's a good way of thinking of it. But Joel, we want to thank you for joining us today, and taking the time out of your day to sit down with us, and to discuss the ever so thrilling topic of year end financials.
Phil Young (41:29):I feel like you made it spicy. I feel like you jazzed it up. He came, he showed up, he did it.
Brenna Finnegan (41:35):Yep. Since we're here at the end of the year, it is that time where it's a great time to sit down and start thinking about year end financials, and wrapping up the operation, and hauling in that last load, or making that last purchase, or sale, or whatever it is. So we want you to remember, you can always reach out to any of your account officers. I'm pretty sure we've touched on that quite a bit, always reach out to us, here at your local AgCredit office, to help you go through what you need and what's best for your operations.
Brenna Finnegan (42:09):So year end mailings will start going out in December. So some of the offices have already been gathering up that information and trying to put those packets and get them out to you guys. So be prepared, it's on its way. We just want to say thank you again, to Joel, and thank you for tuning in to AgCredit Said It.
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