The first and most important step in taking control of your farm operation’s financial well-being is to keep good and accurate farm records.
I can’t remember one single person in my career that has said ‘man I like keeping records,' but I have had discussions with several people that were glad that they had them. Record keeping seems like an intimidating task, and yet there is nothing too time consuming or difficult about keeping a finger on your financial pulse. Managers can make informed decisions affecting the day to day operations of even the smallest farming enterprise when they keep accurate records, resulting in effective management.
When You Need Farm Records
Lenders require business and personal information on everything a farmer owns, as well as the status of all outstanding debts. They also require production records and an estimation of expected sales and expenses for next year.
The Internal Revenue Service requires farmers to report cash sales, expenses, depreciation and information on government program participation. While farm records are often maintained only for IRS filing purposes, additional information is needed for informed management decisions. Any financial decision that is not based or accurate farm records may or may not be profitable, it’s a guess.
Guidelines for Record Keeping Systems
Keep these points in mind when implementing or reviewing your financial record keeping system.
Keep It Simple. There are a vast number of single entry, dual entry, cash, accrual, manual or computerized accounting and bookkeeping systems. But, if a record keeping system is complicated, you are more likely not to keep it up.
Maintain a financial record system that has only the amount of detail that is required by the complexity of your business.
Make sure your records provide information on a timely basis.
Any record system you choose should contain the following:
1. A business checking account that handles only business transactions. We all have to pay bills out of our personal account sometimes to stretch our cash flow. Very Important: Transfer the money from your account into your farm account. Then pay the bill.
2. An expense ledger broken down by the month.
3. An inventory ledger for count and validation.
4. A depreciation schedule.
5. A balance sheet to determine net worth.
6. An income statement to determine net profit (or loss)
7. A cash flow statement to measure flow of funds.
With record keeping system that is accurate and timely, the farmer has sufficient information to assess his business in the following manner:
• Where income was produced
• Strengths and weaknesses of the farm business
• Returns on labor and management
• Trends on net management
• Production efficiencies
Good record keeping is important, not only for tax purposes but also for efficient farm management. Using financial records and methodology will help you understand how and where your business is going. Record keeping and sound data interpretation will help you define the weakest links of your farm business operation and enable you to start corrective action plans.
Good records also allow a producer to set priorities. Very few producers have enough resources to make every improvement they’d like in their farming operations. However, a good record keeping system can help the producer see where the best possible investments will have the largest return.
Record keeping is like anything else, the more you put into it, the more you're going to get out of it. Get a relationship with an accountant, banker, lawyer, insurance agent and never forget your Maker. Good records help, but it never hurts to mix in a prayer now and again.
James Myatt is the Vice President at Community First Bank in Harrison, Ark.
