[N.b. The following farm income statement definition is based upon the Ag Decision Comprehensive Financial Framework authored by William Edwards, retired economist and lecturer at University of Iowa]
What is a farm income statement?
A farm income statement is a financial summary weighing up the cash value of your farm’s business income directly against its expenses.
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The resulting number is an overall net figure of cash income for your farm.
This income statement is a very different document to a tax return (which is drafted for the objective of declaring your taxable farm income to relevant revenue agencies).
The purpose of the income statement is to give you a succinct summary of what tangible, financial benefit your farm business is actually giving you. It is a primary performance measure of your farm’s economic sustainability.
If your collective cash farm income is in excess of its expenses, then your farm will be in net profit. You will be facing the prospect of receiving a financial reward for you efforts.
However, if your collective cash farm income is less than its expenses, then your farm will be in net loss. Despite all your labours, the farm business in this condition will require financial input to continue.
Why use a farm income statement?
A farm income statement tells you if your farm business is actually paying you back for your time and labour invested.
After all, the whole purpose of a business is that you put your efforts in and you get paid back in return. A bit like employment but with additional responsibilities and benefits.
A farm income statement tells you categorically if you are operating in profit – plus, where your gains originate from.
“But doesn’t my self assessment tax return tell me the same?”
A tax return is for detailing your tax obligation.
Its format and specified inputs are not fit for accurately examining profit, but for declaring taxable income.
Whilst completing a tax return meets a statutory need, a farm income statement is what you should use as the main method of assessing whether your farm business is worth your time invested.
What is accrual? And why do we use this accounting method?
Accrual is the accounting practice by which:
…transactions completed within any given period are attributed to that same period (regardless of whether the corresponding cash was received at the time.)
*It is not therefore recorded against the period where the cash was received.
The practice of recording transactions, rather against where cash is received as opposed to the transaction completed is called ‘cash basis’.
Outline of the farm income statement
This is cash received for:
- sales from livestock e.g. beef, poultry
- livestock products e.g. milk, honey
- crops i.e. wheat, barley; government pay outs
- tax credits or other eligible tax benefits and refunds
- monies from crop insurance payouts
- and other business (diversification) income sources
DO NOT inc: loan income, or monies received from asset, property or machinery sales; or non-farm income
Cash Income Adjustments
These are sums either added to or subtracted from your farm income figure for these reasons:
- changes – increase or decrease – in inventory value (either by quantity or unit value of stock) e.g. grain, livestock feed, breeding livestock
- accounts receivable as yet received
- unpaid cooperative contributions
These are cash expense items incurred during the accounting period related to farm business operations (including, but not limited to):
- fuel costs
DO NOT include:
- livestock mortality (this will naturally be reflected in the head count reduction in the income inventory adjustments)
- social security receipts such as Child Benefits etc.
- interest paid on farm loans
- sales of capital assets, property and machinery
These are additions or subtractions to the cash expenses figure to account for:
- feed & supply inventories & prepaid expenses (expenses paid within the period but not to be used for until next)
- accounts payable (expenses used within the period, but not to be paid for until next year)
- depreciation of capital assets (however, calculated – although it is advised to be as accurate as possible)
DO NOT include: interest expense here (this is not to be ignored, but to be added later on)
This is the outlay of cash for the paying off of farm loan interest amounts.
Cost of lands acquired within the period taken away from sales proceeds obtained from the land sales.
The Outcome: Net Farm Income
Your final outcomes within this statement and conclusion:
- net farm income (overall trade and commercial exchanges, transactions of activities within your farm – what the net inflow or outflow of cash value has been) both accrual and cash basis, is finalised here within this statement.
- Also the net farm production figure…i.e. a total resembling just how profitable, or otherwise your core farming operation is alone.
Online Farm Income Statement: Calculator and PDF Template
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[*Have on hand your income and expenses data. This web form calculator and PDF builder should take approximately 40mins to complete.
Results are emailed to you…enjoy.]