We tend to think of financial statements as something those pesky accountants want done in order to complete our tax returns. In reality they are vitally important in allowing us to monitor the financial impact of our everyday lives running our farms and avoiding debt issues .
Financial statements are only helpful if they are truthful. Don’t fool yourself just because you are fooling the Tax Office. The first requirement to ensure that your profit and loss statement is accurate is a Balance Sheet (or Statement of Assets and Liabilities) that balances. If there is no balance sheet the profit and loss may be completely wrong.
The other factor that can make your financial statements useful, particularly your Trading Account and Profit and Loss, is a comparison with last year’s figures and your budget for this year. Ideally financial statements should be run off monthly or quarterly to provide advanced warning of problems. In farming it is rarely possible to control income, so it is very important to keep expenditure to a minimum and save a sustantial part of each year’s profit to build up cash reserves.
Knowing how much you are making or losing should be top priority, particularly if you are carrying a loan or overdraft. The sooner you clear those the better, because when tough times come, they will make life much harder for you.
Don’t think of financial statements being just for the Tax Office. Use them to boost profits.
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