Keeping accurate financial records helps keep your farm profitable
Today more than ever the farm or ranch is an agricultural business and must be treated as such. Financial record keeping can provide a farm a look into the health of their business, its profitability, and a snapshot in time of its present equity.
In many cases farmers feel overwhelmed by record keeping because it takes time, a change in behavior and for some, the requirement to learn a new skill or software. For many, when they need a new equipment part they run to town and purchase it, put the receipt in their pocket or throw it on the dash of their truck. Often, the receipt is either destroyed in the laundry or blows out the window and never does get recorded. The result is inaccurate records.
Good record keeping requires the discipline to record each and every transaction that occurs for the farm regardless of how great or small. Without having basic knowledge of our income and expenses how can someone make an informed decision about their business/farm? Proper accounting can assist many farms and agricultural business in knowing the value of their business.
There are two basic forms of accounting that are considered standard: accrual accounting and cash accounting.
Accrual accounting is used by most businesses outside of production agriculture. It necessitates recording all transactions when they take place regardless whether or not cash has actually been exchanged.
Example. If Producer A has done some custom work for neighboring Producer B. Producer A sends Producer B an invoice for the custom work. Although Producer A has not yet been paid, the transaction is recorded in the accounting as an Account Receivable and Producer B would record the transaction as an Account Payable. This system makes it very easy to track all services rendered (income and expenses) thereby allowing a producer to see exactly what has occurred within a year’s period of time.
Cash accounting, which is accepted for use within production agriculture and only a few other industries, means recording transactions only when cash is either received or paid out.
In the previous example no record would be entered because no cash transaction has occurred. Once Producer B finally pays Producer A, a transaction would be recorded. When using the cash accounting system accrual adjustments have to be made in order to provide the necessary information to create financial ratios that can help determine the strength of the farm or business. Cash accounting is the most used and widely accepted method of accounting for production agriculture.
There are numerous brands of software that can meet the basic accounting needs of some small farms and businesses. If you are in the market for this kind of software, Michigan State University Extension offers a system that includes accounting software, and assistance in determining a farm’s financial health for a modest fee.
Regardless of the record keeping system you use, if you have any farm management, accounting, or financial related questions, arrange a discussion with an MSU Extension farm management educator.