Geoff McIntyre
Prepare Effective Financial Statements to Safeguard your Business
As a farm business owner, you probably haven’t worried about updating your resume recently. After all, it’s unlikely you’ll be applying for jobs or lining up interviews any time soon – you’ve got a business to manage and grow. But when your financial institution is considering the financial health and stability of your business, they actually rely on what many banks see as the equivalent to a business resume: your financial statements.
A properly prepared set of financial statements provides your business partners, such as your banks and suppliers, with a more accurate report card of your businesses’ performance than your tax return or bank balance. A balance sheet documents the financial position of your farm business at a point in time by listing the businesses’ assets and liabilities and the owners’ equity in the business. An income statement details the businesses’ revenues, expenses and net income for a period of time, usually one year. A statement of cash flows may also be included. This statement highlights the cash inflows and outflows of the business for the same period of time as the income statement. Notes to the financial statements are often included to provide additional information to readers. Financial statements will typically include comparative numbers for at least the preceding year.
Your bank will likely want an independent accounting firm to issue the financial statements. If you have borrowed significant funds, they may also require the accountant to issue a report on those financial statements – either a review or an audit. Even if your accountant assists you in the preparation of the financial statements, It is important to remember that the responsibility for accurate reporting remains with the management of your farm business.
Banks and lenders provide working capital for your farm business and therefore can have considerable influence over your success. Fortunately, your lender has a vested interest in helping your business succeed. Your success means you will have the funds necessary to meet your debt obligations, including interest, on the money you have borrowed. Your lender’s ultimate job is to keep your account as profitable for the institution as possible, relative to the risk and time needed to manage the account.
As your business grows, your lender will become a larger business partner. To think of it another way, the more you borrow, the more attention your lender will pay to your enterprise’s performance. Just because you have lots of equity or your loan payments are always on time doesn’t mean the bank will consider your account ideal. The more capital you require, the more risk there is for your bank, and the more lending requirements – called covenants – your bank will tend to put in place.
A covenant is a condition on your loan. Certain bank covenants take the form of specific financial ratios that are calculated directly from your financial statements. Typically they relate to things like debt service capacity and capital expenditures. The purpose of a covenant is to protect lenders by flagging any potentially risky financial behavior by borrowers. If you consistently break your covenants, your loan may be considered in default and the bank can potentially increase your interest rate, or even ask for the loan to be repaid in full. In fact, most lending agreements these days allow for the bank to unilaterally demand repayment in full at any time, regardless of whether your farm business is in default of any covenants.
It is important to develop and maintain a strong relationship with your lender. However, even if you have a good personal relationship with your account managers, they may be unable to help if someone at the corporate level decides your business is a financial risk. Risk adverse corporate leaders evaluate your management capabilities strictly through formulas and projections based on your financial statements, and not who you are as an individual.
If you’re not sure what your ‘business resume’ says about your enterprise it’s time to talk to your trusted business advisor. He or she can help you understand what message your current financial statements are sending and help you plan to ensure that your future financial statements send a strong message about the financial health of your farm business.■
Geoff McIntyre, CPA, CA
Okanagan Region Agri-Food Leader
MNP LLP Kelowna office. Contact him at
250-979-2574 or Geoff.mcintyre@mnp.ca and Marsha Stanley, CPA, CA,CBV, CGA
Vancouver Island Regional Agriculture Leader for MNP LLP. Contact Marsha at 250.748.3761 or marsha.stanley@mnp.ca.
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