If your farm is more than just a hobby, you’ve probably been educated on the importance of record keeping. To prepare your income tax return, your tax professional will need a summary of income and expense; to evaluate the growth of your operation over a period of years, you will need accurate financial reports; and to plan for the transition of your farm to the next generation, you need reliable information to show your heirs what’s at stake.
For some of you, this may mean your receipts and invoices go in a shoebox all year, which you deliver to the accountant’s office, and voila! Those records are transformed into a tax return. For others, you may have an important member of the farm operation learn accounting, or you may hire a bookkeeper or a CPA to keep your books.
All the methods above represent different forms of something called an accounting system, which is an undeniable requirement of a successful operation. And while the size and capacity of your operation certainly factor into what kind of accounting system you need, certain elements can produce much more valuable and reliable information, while others can remove a great tool from an owner’s tool-belt (I’m talking to you, Mr. and Mrs. Shoebox). Let’s discuss some of the key elements in an effective accounting system.
First, timeliness. Even if you have perfect financial data, it’s useless if it isn’t up-to-date. Knowing how healthy your body was a year ago really doesn’t help you diagnose how you’re doing today.
Second, accuracy. Timely financial information can help you make informed decisions and avoid financial surprises, but if the information you’re relying on is wrong, do you think it will help you make the right decisions?
Third, accessibility. Accurate and timely information allows you to use your financial data to the greatest degree, but if that data resides in an accountant’s office or on a desktop computer somewhere out of reach, you can’t get your hands on the information when you need it. Cloud-based accounting systems offer affordable access to financial data, 24 hours a day.
Fourth, priorities. The right accounting system for your operation will deliver the right information to the right person, and it will allow each person involved to fill the right role.
Fifth, relevance. If your accounting system feeds you mounds of information that you can’t use, or don’t know what to do with – it’s not the right system. You need the right information, and you need to become an educated user of that information.
Sixth, cost-effectiveness. The size and cost of your farm equipment is reflective of what’s appropriate for your farm operation, and your accounting system should be, as well.
Finally, repeatability. It’s simply not enough to check all the boxes on this list two months in a row, and then fall short for the next three. Timely, accurate financial information that is accessible when you need it and reflective of the priorities you’ve identified for your operation – that’s what you must have from an accounting system, every single day. The system must also provide information that is relevant to the decisions you face and the opportunities available to you, and it must provide value that exceeds its cost.
An over-arching goal of most farms and businesses is to find the “sweet spot” where there’s great peace between workload and profits. Not every operation finds it, but among those that do, a common characteristic is a well-designed and smooth-running accounting system. Apply these principles to the design of yours, and maybe you’ll find your sweet spot, too.
Adam Wolfe, CPA is the Partner & Tax Director of Bobby Medlin, CPA and works in the firm’s Lake Ozark branch. Adam has worked at the firm’s Lake Ozark branch since 2010.
