Understanding Farm Business Records and Accounting

Understanding Farm Business Records and

Accounting

Karisha DevlinAgriculture Business Specialist

Worst Farm Job?

• Hauling Manure

• Fixing Fence

• Bookkeeping

http://www.usda.gov/oc/photo/94cs0930.htm

Types of Accounting

• Cash vs. Accrual Accounting– Cash accounting is only recording

business transactions when cash flows in and out of the business.

– Accrual accounting is recording the transaction when it actually occurs, even though cash may not exchange hands at that time.

Cash vs. Accrual

• The IRS allows farmers to calculate taxable income on a cash basis. This gives someease and flexibility for recording. Inputs can be prepaid to increase expenses for the current accounting period or income can be delayed

Cash vs. Accrual

• However, accrual accounting more accurately shows profitability for that period.

• Thus it reflects a truer picture of business performance because it matches revenue and expenses in a given period.

Cash vs. Accrual

• Just because you measure revenues and expenses on accrual basis does not mean you have to record farm transactions on this basis for your records.

• Accrual adjustments are made on the Balance Sheet and on the Cash Income Statement.

Farm Records Needed

• Production– Crops:

• Acres, Production, Inputs

– Livestock• Births, Deaths, Weights, # Feed

– Determine:• Yields• Calving %, Rates of Gain, Feed Use

Farm Records Needed

• Production

• Financial

• Farm Business Analysis—Both!– Cost/Acre, Cost per Bu– Cost/Hd, Cost/Lb, Cost of Gain

Cash or Accrual?Single or Double Entry?

• Cash– Cash Receipts – Cash Expenses– Primarily Single Entry

• Accrual– Cash plus Accounts (inventories) – Generally double Entry(Debit-Credit)

• Modified– Cash (taxes) with Accrual Analysis– Single or Double Entry

Utilizing Your Farm Records

…To Assist You in Making Farm Business

Decisions

What can our records tell us?

Where we stand individually and how we compare to the industry

Allocation of income/expenses to analyze enterprises

Internal analysis of our farm’s strengths and weaknesses

What else can our records tell us?

Identify trendsRed flag problem(s)Recognize limitationsWhat potential strategies we want to

explore for the farm businessWhere we want to start

implementing selected strategies

Why keep financial records?

• We’ve talked about internal reasons for record keeping.

• Who else might need to see these documents?– Lenders– Accountant– IRS– State/Federal entities – -Investors

Why keep detailed financial records?

• To know which enterprise(s) you have that are making (and maybe more importantly) losing money.

• To track your income and costs for a cash flow projection or lender.

• It’s really not very difficult to do.

Things to Remember on Your Records…

• Separate fertilizer from chemicals and keep by crop.

• Keep feeder livestock and breeding livestock in separate categories.

• Everything on an MFA (or others) ticket is not necessarily feed.

• It is beneficial to you to keep production (crop and livestock) records.

• Labor is labor and not machine hire or something else.

Farm Business Records,What to Include?

• Cash Receipts, Cash Expenses

• Track Loans

• Beginning & Ending Inventory

• Purchase & Sale Quantities

• Cost/Market Values

• Depreciation?

How?

• Handwritten

• Computer

Other Considerations

• Farm Financial Standards– Guidelines & Standards:

• Financial Reports & Values• Financial Criteria & Measures (Ratios)

• Enterprise Analysis

• Cost/Profit Center Analysis

Financial Management in Agriculture…

Financial Management Tools Available to You

Financial Management Tools Available to You...

• You and your advisors have several financial management tools that you can use.

• In this session we’ll discuss each one and where they may fit in.


• The first (and most important) financial management tool available to you is your records.

• Your records tell you about trends in your operation and can help totell you where your strengths and weaknesses are.


• Remember that your records include your financial history too.

• 3 to 5 years of balance sheets, profit and loss statements, and production history are an invaluable financial management tool.


• They can also tell you about trends in your business, how much you’ve progressed, and how much additional risk you can handle.

• If you haven’t started to keepthis history, start now!


• What if you are looking into something different or don’t have that many years of records (new owner, etc.)?

• There are some other options.


• Another financial management tool is a partial budget. A partial budget works well to look at a new enterprise or a change in an existing enterprise.

• The format of a partial budget is included in your materials.


• A partial budget looks at additional returns as a result of the change.

• It also looks at any reduced expenses or costs that could occur.

• Conversely you must look at any additional costs that may occur.

• Finally, we must determine any reduced returns that could happen.


Partial Budget TemplateUniversity of Missouri - Commercial Agriculture ExtensionWhat is the proposed change?

Section 1 Section 3

Additional returns from proposed change

Amount of Change

Additional cost of proposed change

Amount of Change

Sub-total additional returns $0.00 Sub-total additional cost $0.00

Section 2 Section 4

Reduced costs from proposed change

Amount of Change

Reduced returns from proposed change

Amount of Change

Sub-total reduced costs $0.00 Sub-total reduced returns $0.00

Summary SectionTotal Change in Benefits $0.00 Total Change in Costs $0.00(Section 1 + Section 2) (Section 3 + Section 4)Net Change in Income $0.00(Change in Benefits - Change in Costs)

Written by: Dr. Vern Pierce-Beef Economist


• A partial budget is good when you don’t have the time or information to do more.

• However, remember that partial budgets are designed to give you a “quick and dirty” look at something differentin your operation.


• Another financial tool that you can utilize is regional or state averages (figures). This should be used when you can’t use any of the others.

• FINPACK incorporates some of these as do other programs.


• You can get these regional or state averages from your Agricultural Business Specialist or the University of Missouri.

• Keep in mind that these are only averages and vary a great deal.


• An in-depth Financial Management Tool that you can utilize is called FINPACK.

• It is available from your Agricultural Business Specialist.


• FINPACK has several different pieces to help you in your operation.

• FINAN is a cash flow / annual financial planning tool that you can use with lenders, etc. It answers the “how do I get there” questions.


• FINLRB is another piece of the package. It lets you look at several different alternatives in your operation, it answers the “what if” questions.

• That might mean expanding by purchasing land and livestock or selling some assets and cutting back.


• FINLRB can look at almost any alternative you want it to.

• Information is state specific to Missouri as well.


• FINAN looks at an end-of-the-year analysis of your operation. It answers the “where am I” question.

• FINPACK does take some time and effort to do but can tell you a lot of information about your operation.


• These tools will help you better understand your farm operation.

• Once you’re there, you can use them to get where you want to go!

Documents

Understanding Farm Business Records and Accounting