How to Prepare an Income Statement for Agri-Business Firms

Running an agri-business – whether a crop farm, livestock operation, or integrated agri-enterprise – means dealing with seasonal cash flows, volatile commodity prices, input cost fluctuations, and year-end tax obligations all at once. Amid this complexity, one financial document cuts through the noise and tells you whether your business actually made money: the income statement. According to Mississippi State University Extension, an income statement is a summary of revenue and expenses for an accounting period, and the resulting figure – net farm income – tells you directly whether you turned a profit or incurred a loss. Knowing how to prepare one is a non-negotiable skill for any agri-business owner or manager.

What is an income statement? 🔗

The University of Wisconsin-Madison Extension describes the income statement as a report of the farm business’s financial performance during a given time frame – it measures profit or loss in a given period, usually one calendar year. It is also called a profit and loss (P&L) statement. AgWest Farm Credit notes that unlike the balance sheet – which reflects the financial position at a single point in time – the income statement captures income and expenses across an entire period. Together, these two documents provide a complete financial picture of the agri-business.

For agri-business firms, the income statement is particularly valuable because it helps owners understand true profitability, identify where costs are rising faster than revenues, assess whether pricing or herd management decisions are sustainable, and support loan applications. Farm Credit’s AgBizInfo points out that lenders also rely on the income statement to assess a borrower’s ability to repay loans and manage the business effectively.

Cash vs. accrual: choosing the right accounting method 🔗

Before you begin preparing an income statement, you need to decide on an accounting method. There are two primary approaches, and the choice significantly affects accuracy.

Cash accounting 🔗

Under cash accounting, revenue is recorded when cash is received and expenses are recorded when they are paid. It is simpler and closely mirrors how most farmers file their income taxes using Schedule F. However, Mississippi State University Extension cautions that this method may not provide a comprehensive view of the farm’s current financial position – for instance, it won’t capture grain stored at year-end or bills already incurred but not yet paid.

Accrual-adjusted accounting 🔗

The University of Minnesota Extension recommends using the accrual-adjusted income statement for a true measure of profitability. This approach combines the cash-basis records with inventory changes from the balance sheets at the beginning and end of the year. It accounts for crops in storage, outstanding invoices, prepaid expenses, and accounts payable – items that cash accounting misses entirely. The Farm Financial Standards Council (FFSC) formally recommends this method for agri-business financial reporting.

Structure of an agri-business income statement 🔗

The University of Wisconsin-Madison Extension explains that the income statement is structured into two main parts – revenues and expenses – and produces three key profit measures: Income from Operations, Net Farm Income, and Net Income. Let’s walk through each section step by step.

Step 1: calculate gross revenue 🔗

Gross revenue is the starting point. For an agri-business firm, revenue comes from multiple streams:

• Crop revenue: Includes cash crop sales plus any increase or decrease in crop inventories and crop accounts receivable. A farm that harvested corn in December but sold it in January should count that stored crop as revenue in the year it was produced.
• Livestock revenue: Covers sales of market livestock, changes in livestock inventory, and any breeding livestock transactions.
• Other operating revenues: Government program payments (such as ARC or PLC payments), crop insurance proceeds, custom work fees, cooperative dividends, and cash rent income. Mississippi State University Extension provides a detailed example where a farm’s gross revenue included over $46,000 in agricultural program payments alongside crop and livestock sales.

Adding all these streams together gives you gross revenue.

Step 2: list operating expenses 🔗

Operating expenses cover all costs directly tied to running the agri-business. These typically include:

• Variable costs: Seeds, fertilizers, pesticides, herbicides, feed purchases, veterinary fees, fuel, and hired labor.
• Fixed costs: Machinery lease payments, insurance premiums, property taxes, and administrative costs.
• Accrual adjustments: Changes in accounts payable and prepaid expenses must be factored in. For example, fertilizer purchased but not yet used is adjusted out of the expense figure for the current year.
• Depreciation: The University of Minnesota Extension explains that depreciation is the decline in value of machinery, equipment, and buildings due to use and obsolescence. While no cash is paid for depreciation in a given year, it is still charged as an operating expense because it reflects the real cost of using those assets. It is typically calculated on a straight-line basis using economic depreciation rates recommended by the FFSC.

Subtracting total operating expenses from gross revenue gives you income from operations – the profit generated purely from the farm’s regular production and marketing activities.

Income from operations: the core profitability metric 🔗

Mississippi State University Extension describes income from operations as the return from regular farm activities, and highlights that it is particularly useful for comparing financial performance across years because it excludes one-time items such as capital asset sales and income taxes. If this figure is consistently positive, the core farming operation is viable. If it is consistently negative, the business model itself needs attention – not just financing arrangements.

Non-operating income and expenses 🔗

Not all financial activity in an agri-business relates directly to crop or livestock production. After calculating income from operations, the income statement accounts for non-operating items. These are financial activities outside the farm’s primary operations:

• Interest expense: Iowa State University Extension (Ag Decision Maker) explains that interest is the cost of financing the farm business rather than operating it. Both short-term operating loans and long-term debt interest are included here. Loan principal repayments, however, do not appear on the income statement – only the interest component does.
• Capital gains and losses: When a tractor, piece of land, or other farm asset is sold above or below its book value, the resulting gain or loss is recorded as a non-operating item.
• Investment income: Interest earned on savings accounts or returns from non-farm investments held by the business.
• Miscellaneous non-farm income: Oklahoma State University Extension notes that many farm operations also have non-farm income sources – such as off-farm wages or rental income – which are included as separate line items at this stage of the statement.

Adding these non-operating revenues and subtracting non-operating expenses from income from operations produces net farm income – the income before taxes.

Net farm income: what it tells you 🔗

The University of Wisconsin Extension defines net farm income (NFI) as the standard measure of profitability for the farm business. It represents the value of everything the farm produced during the year minus the cost of producing it – and it is the return to the owner’s capital, labor, and management. A growing NFI, benchmarked against similar farms and compared to previous years, signals a financially healthy operation. A declining or negative NFI is an early warning signal demanding action.

The USDA Economic Research Service tracks net farm income at the national level as one of the primary indicators of the financial health of the entire U.S. agricultural sector, reflecting just how fundamental this metric is to understanding agricultural economics at every scale.

Arriving at net income after taxes 🔗

Net farm income is not the final line. The last step is accounting for income taxes. The income tax expense section includes three components: current taxes paid, any increase or decrease in accrued income taxes for the period, and changes in deferred taxes. Mississippi State University Extension explains that subtracting total income tax expense from net farm income produces net income – the amount available to pay the farm owners, cover family living expenses, service debt, or be reinvested into the business through equipment purchases or land acquisition.

Key financial ratios derived from the income statement 🔗

The income statement does more than show profit or loss – it feeds directly into critical financial ratios that help evaluate the farm’s overall financial health. Mississippi State University Extension highlights several important ones:

• Rate of Return on Farm Assets (ROA): Measures how efficiently farm assets generate income. An ROA above 5% reflects a strong financial position.
• Rate of Return on Farm Equity (ROE): Shows the return on the owner’s own capital invested in the business. An ROE above 10% is considered strong.
• Operating Profit Margin Ratio: Operating profit per dollar of gross revenue. A ratio above 0.25 indicates a strong position; below 0.10 signals financial stress.
• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Useful for comparing the farm’s capacity to service debt across years and against industry benchmarks.

Common mistakes to avoid 🔗

Even experienced farm managers make errors that distort the income statement. AgBizInfo identifies the most frequent issues: mixing personal and business expenses, failing to record depreciation, underestimating fixed costs, reviewing financials only at year-end rather than quarterly, and recording income inconsistently from one year to the next. Any of these errors can make a profitable farm appear unprofitable – or mask real financial problems until it is too late.

It is also important to remember that the income statement alone is not sufficient. Horizon Farm Credit emphasizes that a complete financial analysis requires the income statement to be used alongside the balance sheet and the cash flow statement. Together, these three documents give lenders, investors, and farm owners a full view of profitability, liquidity, and solvency.

Pulling it all together 🔗

Preparing an income statement for an agri-business is not just a year-end accounting exercise – it is an active management tool. By systematically recording gross revenue, deducting operating expenses to arrive at income from operations, accounting for non-operating items to reach net farm income, and finally deducting taxes to calculate net income, farm managers gain a clear, evidence-based picture of where the business stands. Done consistently each year using the accrual-adjusted method, it becomes one of the most powerful tools for long-term planning, lender communication, and strategic decision-making in any agri-business.

What do you think? If your agri-business showed a positive income from operations but a negative net income, what non-operating factors would you investigate first? And how often do you think an agri-business should review its income statement – only at year-end, or more frequently throughout the production cycle?

References

1. https://extension.msstate.edu/publications/farm-financial-analysis-series-income-statement
2. https://farms.extension.wisc.edu/articles/preparing-an-income-statement/
3. https://www.agwestfc.com/education-and-resources/financial-tools/preparing-financial-statements/preparing-agricultural-financial-statements
4. https://www.agbizinfo.com/articles/farm-income-statement-explained-how-measure-profitability-your-farm
5. https://extension.umn.edu/farm-finance/income-statement
6. https://www.extension.iastate.edu/agdm/wholefarm/html/c3-25.html
7. https://extension.okstate.edu/programs/farm-management-and-finance/e-farm-management-training/farm-income-statement-and-tax-issues-for-farmers/site-files/docs/income-statement.pdf
8. https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances
9. https://www.horizonfc.com/about/newsroom/how-analyze-farm-financial-statements