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Distributed in furtherance of the Acts of Congress of May 8 and June 30, 1914. North Carolina State University and North Carolina A&T State University commit themselves to positive action to secure equal opportunity regardless of race, color, creed, national origin, religion, sex, age, or disability. In addition, the two Universities welcome all persons without regard to sexual orientation. North Carolina State University, North Carolina A&T State University, U.S. Department of Agriculture, and local governments cooperating. |
PLANNING THE LONG-TERM RECOVERY OF YOUR FARM 3. Am I still solvent, and what equity do I still have in the farm? The answer to this question is important for several reasons. The difference between the value of your assets and your existing debt is your equity or net worth. Lenders look at this information before making a new loan or restructuring existing debt. The value of your equity is the collateral you have to offer when you seek a new loan because it tells the lender whether, in a worst-case situation, you could cover your debts by selling some or all of the farm assets. If your debts exceed the value of the farm assets, the farm is considered to be bankrupt and there is no collateral to back a new loan. A disaster may have reduced the value of your farm assets significantly, and insurance and other assistance may not provide full compensation. You should estimate your equity or net worth to see if there is sufficient collateral for any new loans or credit needed for your farm reconstruction and disaster recovery efforts. Comparing your current net worth to what it was before the disaster provides one measure of the financial damage caused by the disaster. Equity or net worth is estimated by completing a net worth statement. It is sometimes called a balance sheet or financial statement. Farmers who have borrowed money are usually familiar with a net worth statement because lenders require one as part of the loan process. It lists your farm assets and their value on the one hand, and your liabilities on the other. For a family farm, it is helpful to include nonfarm assets and liabilities in a separate section on the balance sheet. The difference between total assets and total liabilities is your net worth or equity on the day you fill out the information. Assets should be valued at both fair market value and cost (book value). For some purposes, including borrowing money and measuring the value of your equity, fair market value is appropriate. Both fair market value and cost are needed to estimate potential tax liability from the sale of farm assets. For other purposes, including income-tax reporting, a cost basis is needed. A worksheet is included below for your use. Preparing a net worth statement or balance sheet should be a routine part of farm financial management. To be most useful for management purposes, a balance sheet should be prepared on the first day of every financial year—January 1 for most farmers. Over time, you can look back at trends in the market value of farm assets and the amount of farm debt and see how the farm is progressing. In a healthy farm business, asset values and net worth normally trend up and debts trend down. RESOURCES Additional computer tools and information on Net Worth Statements are available from the Iowa State University “Ag Decision Maker” Web site at: http://www.extension.iastate.edu/agdm/decisionaids.html Click on “Finance” Scroll down to the “Financial” heading • Click on Net Worth Statement to download a spreadsheet version of the supporting schedules and Net Worth Statement • To learn more about calculating net worth, download the following fact sheet http://www.extension.iastate.edu/agdm/wholefarm/pdf/c3-20.pdf • To analyze your net worth statement download this accompanying computer spreadsheet http://www.extension.iastate.edu/agdm/wholefarm/html/c3-20.html
Prepared by Geoffrey A. Benson, Extension Economist, North Carolina State University
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