Getting your hands dirty is what you do on your farm. You work in the soil, maintain machinery, raise livestock and much more. But, effective farm management doesn’t stop there. It consists of maintaining accurate financial records and establishing a record-keeping system.
It’s true that record-keeping takes time, but it’s essential to the success of your farming operation. It helps you make solid future financial and farm management decisions. In this article, we’ll dive into why you should take the time to track your financial transactions and how you can get started with a record-keeping system.
Benefits of Keeping Farm Records
Regardless of the time of year, you should take the time to sit down and go over your financial records regularly. Keeping a good set of financial records helps you be prepared come tax time. Here is a summary of other benefits.
Easily Track Income and Expenses
A detailed financial statement allows you to track your income and expenses on the farm, helping to optimize cash flow. Consider everything from expected crop yields to production inputs like fertilizer, fuel, insurance and rent. Don’t forget about equipment expenses. If you own livestock, factor in projected livestock prices, feed costs and veterinary bills.
Better Plan and Forecast
With the help of financial records, you can keep a close eye on your current farm status and plan for the future. Records evaluate how your farm is doing and how much it contributes to your overall success. Financial records also help show where activities could be improved and serve as a guide for future decisions. For instance, a record of expenses may show that you’re spending too much money on animal feed or seed. Accurate record-keeping can also help you create comprehensive business and estate plans once you decide to start the succession planning process.
Be Prepared When Applying for Financing
When applying for loans or financing, detailed farm records are often required to determine your eligibility and prove that your farm is financially stable. You may need a line of credit, which can provide quick access to funds when you need to bridge the gap between payables and receivables.
You may also need an agricultural loan, such as a farm equipment loan, operating capital loan or Beginning Farmer Loan. Keeping accurate records makes it easier for banks or other lending institutions to extend a line of credit or approve a loan.
There’s no right or wrong way to manage your farm records. Some prefer simple, hand accounting using a pencil and paper. Others may consider online or digital methods:
- Excel spreadsheets
- Accounting software programs, like Quickbooks
- Farm management software that is integrated into farm equipment
- Farm accounting software apps
Quickbooks is a popular program. It loads your financial data and generates a cash-flow statement. You can sync your accounts to Quickbooks through your bank and automatically download all your transactions. This helps eliminate the process of manually entering your transactions when making your reports.
Choose a system that is easy to understand and can meet your accounting and planning needs. It should also satisfy income tax, legal and other reporting requirements.
Begin Collecting and Preparing Financial and Production Records
Once you’ve chosen a record-keeping system, collect and organize your farm business’ financial and production information. Both financial and production records are needed to help you make critical risk management decisions which can lead to long-term profitability.
Financial records show detailed farm income and expenses. This can include:
- Income and expense receipts
- Invoices, checks and bank statements
- Bank payments
- Capital improvements
Production records include anything physical, such as:
- Livestock, including health history as well as what and how often you’re feeding them
- Crops yields, fertilizer and seed inputs, irrigation and planting/harvest dates
Preparing Financial Statements
Financial statements, such as a balance sheet, income statement and cash flow statement of earned equity and working capital, should be prepared on a regular basis. Below is a brief overview of each.
- Net worth statement or balance sheet: Shows you the big picture of your farm’s financial situation. It includes your farm’s assets, liabilities, equity and net worth.
- Income statement: Tracks different sources of farm income and expenses. It breaks down the gross and net profits of your farm.
- Cash flow statement: Shows you when cash flow may be low and how to plan. It tracks inflow and outflow of cash for your farm.
- Earned equity: Breaks down how your net worth changes from the beginning to the end of the year.
- Working capital: Reflects the amount of liquid funds that your farm operation has available to meet short-term financial obligations. Use your farm's balance sheet to determine the difference in value between current assets and current liabilities.
Analyzing Your Records
Once you establish a farm record-keeping system, analyze the production and financial records. You should:
- Compare past records and look for efficiencies in your farming operation.
- Determine whether costs have increased and how they can be lowered.
- Assess the volume of your crop or livestock and cost of production.
- Look at your level of debt and debt repayment options if you have a loan.
- Analyze when it makes sense to expand or add investments.
Working With Your Accountant and Ag Lender
When compiling and analyzing your financial records, reach out to your ag lender. They will help guide you through the record-keeping process and offer general advice about the different strategies you can use. They can also connect you to other tools and financial resources.
You’ll also want to talk to your accountant. They will help ensure that you have the right financial documents in place come tax time.
Ready to take a strategic approach to your farm’s finances? Contact our team of Ag Bankers today to learn more about how Northwest Bank can help support your farming operation.
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