Inventory of the Legacy:

Balance Sheet and other lists

Dr. Bart Eleveld

Extension Economist, Farm & Ranch Management

Agricultural & Resource Economics Department

Need to know what’s being transferred

• Personal possessions of emotional value– Where are possessions on “heirloom scale”?

• Values and traditions– Can’t be forced on next generation, but they can’t continue them if they

don’t know what they are.• Human resources, management skills and capabilities• Titled property

– Core of the business that’s being transferred– Partially determines strategies of transfer, ownership and future

management plan for the business– Assets: What does the business/family own? – Liabilities: What are the claims by creditors?– Equity or Net Worth: What is left if assets are liquidated?

Balance Sheet is starting point for all business planning

• Gives an instantaneous or “snap shot” view of financial strengths and weaknesses.

• Tells how vulnerable to risk or downturns the business may be.

• Shows the liquidity and solvency of a business / family / individual

• A convenient way to list titled property

What is liquidity?

• Ability to pay short-term debts and obligations of the business/family without major disruptions or liquidations of long-term (durable) capital. – Can you pay all claims that are expected

during the next 12 months?– Can you “ride the waves” and stay afloat?

What is solvency?• Ability to pay ALL debts and obligations of the

business/family by liquidating or selling of whatever assets might be necessary.– A more extreme measure of financial well-being.– Will you survive a catastrophe (liquidation) with

something left over? Lifeboat, raft, or just floating debris?

– In the context of today’s seminar, the catastrophe may come unexpectedly, or the liquidation may be planned, or the ship may continue to sail along, albeit with a new skipper, depending on the preparation and plan.

Useful way to inventory physical and financial assets and liabilities

• Current Assets– Cash, bank accounts and

inventory items readily convertible to cash

• Intermediate Assets– Machinery, breeding livestock

• Long-Term Assets– Land, buildings and

improvements to real estate

• Personal– Separate or combine with

business?

• Current Liabilities– Notes and accounts payable

within 12 months• Intermediate Liabilities

– Loans payable over 2-10 years

• Long-term Liabilities– Loans payable over 10+

years• Net Worth (+ or -)

– Retained earnings – Change in market valuation

How do they balance?

AssetsLiabilities

AssetsLiabilities

+ Net Worth

Current: Liquidity

Total (Long-Term): SolvencyBalance by definition:

Assets = Liabilities + Net Worth

Net Worth = Assets - Liabilities

Example Scenario: Max and Marlene Profit

• 50-something couple with three kids they want to bring into the business

• Complete case study is in binder

• Will look at Balance Sheet today and in next workshop will look at the Income Statement and planning budgets

Max & Marlene Profit• 3 children, oldest wants to farm with family• Marlene has full-time job, Max does custom

work plus part-time job• 1500 ac. cropland in wheat-barley-fallow• 2500 ac. private rangeland• 50 ac. irrigated pasture• 80 cow-calf pairs• How to make it work ?

What, you can’t read this?

There’s a copy of it in your binder. And we’ll look at it a piece at a time.

Blank worksheet for FINPACK in binder

Excel spreadsheets on website:http://arec.oregonstate.edu/succession.html

Current assets

Cash and bank accounts

Inventories of supplies

Inventories of marketable commodities

Current liabilities

Notes and accounts payable

Accrued interest (if loan payments were made on balance sheet date) and accrued taxes

This year’s principal on long-term loans

Intermediate assets

Breeding livestock

Machinery and vehicles

Useful life of > 1 year and < 10 years.

What value to use?• Cost or book value

– Purchase price minus accumulated depreciation– What an accountant would use

• Market value– What you could realistically expect to sell asset for– What a lender would use

• Raised breeding livestock?• Both are useful to know

– Cost: Net worth shows “retained earnings” due to income accumulation

– Market: Net worth shows “actual market equity”

Intermediate LiabilitiesNotes and loans on intermediate assets (2-10 years)

Long-term assets

Real estate: land, buildings and other improvements to land.

Useful life of > 10 years

Potential for large differences between cost and market value

Long-term liabilities

Notes and loans on long-term assets: usually mortgages and contracts on real estate

Deferred or contingent liabilities: If you liquidate, who besides creditors do you have to pay?

Deferred or Contingent Liabilities

• On current assets: – ordinary income and social security taxes

• On intermediate and long-term assets– Capital gains taxes on gains or recaptured

depreciation– Also allow for selling costs of durable assets

• In succession/estate planning context it may be useful to include estate and inheritance taxes

LIQUIDITY

SOLVENCY

NET WORTH

Summary of

Balance Sheet

Resources for Balance Sheet• FINPACK financial analysis software

– Center for Farm Financial Management @ U. of MN. – Does balance sheet plus feasibility and cash-flow

budgeting for whole farm/ranch management plans– Free trial download available:

• http://www.cffm.umn.edu/– Can “rent” an annual license for ~ $100/yr.

• 2 spreadsheet formats– Montana State University’s– OSU/WSU Integrated Financial Statements– Both on Succession Workshop website:

• http://arec.oregonstate.edu/succession.html