Farm financial management – Getting started
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EmailBeginning farmers should manage their finances to strive for profitability. Implementing a good accounting system and developing beginning and end of year balance sheets is an important start.
Many beginning farmers get started in the business because of their passion associated with the production phase of agriculture. They enjoy being outdoors with sunshine on their face, the smell of fresh air, and the feel of healthy soil. They may love driving tractors or watching cattle graze. All of these factors contribute to the nostalgia associated with farming. Unfortunately, farmers are seldom paid for these wonderful feelings and emotions.
Too often, new farmers focus on production management and neglect the financial side of the business. Unless a beginning farmer has a huge savings of cash or can supplement farm losses with off-farm income, the farming operation needs to be profitable to be sustainable.
Find an accounting system
Farmers should start with a good accounting system and a beginning balance sheet. The farm accounting system does not need to be complicated or sophisticated. Many beginners start with a handwritten system. Michigan State University Extension has a publication, Farm Records Book for Management (bulletin E-1144) that is comprehensive and understandable.
For producers who prefer electronic systems, spreadsheet templates and accounting software programs are available. Spreadsheet templates can be as simple as handwritten systems with the added benefits of online backups, access across devices, improved accuracy and automatic calculations. The Farm Records Book for Management spreadsheet is the spreadsheet version of the Farm Records Book mentioned above, which can be copied, downloaded or printed. The Farm Cash Flow and Personal Cash Flow spreadsheets are income and expense tracking sheets, for the farm and the household respectively, where downloaded bank statements can be pasted for easier categorization and reconciliation with receipts. The Accounting Recordkeeping Form builds a spreadsheet as you take pictures of receipts, saving everything to a Google Drive account. You can learn more about these and other spreadsheets by visiting the MSU Extension farm business management website.
There are many affordable accounting software programs designed for small businesses. These systems work well for small farming operations. They are general in their design so producers can build their own list of expense and income account categories. Some producers have used the previously mentioned farm records book or the IRS Schedule-F Form 1040 to build those accounts. Farmers can also buy software specifically designed for agriculture. Michigan State University offers accounting support from campus specialists and local educators for a fee through the Telfarm program. The Telfarm program uses PcMars for its accounting system. PcMars is designed for agriculture use, is affordable and user friendly
Separate farm and personal finances
Farmers can more easily track and record agriculture expenses and income with a separate checking account. If transactions are completed via credit card, one should also be designated to the business. Having a business checking account and credit card account allows for easier tracking of farming transactions and separating from personal living expenses and income. The credit card should be reviewed monthly to ensure that all transactions are recorded. The checking account should be reconciled monthly using the bank statement. Reconciling the bank statement is one of the best guards against making mistakes in the accounting system.
Proper accounting helps at tax time
Farmers who implement a good accounting system will find that filing taxes is much easier than with a poor or nonexistent system. A good accounting system will also aid in evaluating farm profitability. Michigan State University Extension educators and specialists recommend recording a unit of measurement of product sold (pounds of beef, bushels of corn) with the dollar amount with their deposits of income from commodity sales. This allows for a better understanding of how much product is being sold on a per unit basis. Also, during year-end financial analysis, cost of production can be calculated of a per unit of production.
Balance sheets keep farms on track
Farmers starting a new business should develop a beginning balance sheet. The balance sheet is a listing of all the assets and liabilities of the business. The balance sheet is designed to list all the assets owned by the business on the left side. The liabilities are listed on the right-hand side. Subtracting the value of liabilities from the value of assets is the net worth of the business. Assets and liabilities should also be split into current (less than one year), intermediate (2-10 years) and long term (11 years or longer) categories. Comparing the value of assets to liabilities within given time frames allows owners to evaluate the liquidity and solvency of the business. Beginning farmers frequently find themselves with a heavy upfront debt load making cash flow difficult. The balance sheet is useful in calculating working capital, current ratio, debt to asset ratio and others which can be used to determine the strengths and weaknesses of your operation as compared to industry guidelines of the Farm Financial Standards Council.
Another balance sheet should be developed at the end of the fiscal year, which will also serve as next year’s beginning balance sheet. Comparing the beginning and ending-year balance sheets will show producers their change in net worth.
At the end of each year, using the cash inflows and outflows from the accounting system and the beginning and ending balance sheets, an accrual adjusted income statement can be created. This report makes inventory adjustments to the cash income and determines the true farm profitability, which is the return to the farmer's unpaid labor, management and equity invested in the business.
A good accounting system with year-beginning and year-ending balance sheets are the backbone of a good financial record keeping system. They are critical pieces to completing a year-end financial analysis and to answering questions of the financial direction of the farm.
