Another year has come and gone and you are still struggling with the same bookkeeping issues. You know it is important to keep good records, but time hasn’t been your friend this year, or for whatever reason you put it off again. Maybe the thought of getting started is just too overwhelming, because after all, you got into this business because you liked to farm, not because you liked to do paper work.
Let’s look at it from a different perspective. You have a construction company that does remodeling. Your customers pay you when the work is complete. To get you through between projects you have a credit card that you use for material purchases and for living expenses. At the end of the job, when you get paid-you pay the credit card off and you are good until the next project is completed. Do you see any potential problems with this particular scenario?
Here are a few that come to mind:
1. How do you separate living expenses from business expenses?
2. What happens if material costs are more than projected?
3. What happens if the job takes longer than you thought, which delays when you get paid?
4. How do you make sure you are staying within your budget?
5. What if you have two jobs running at once? How do you keep them separated?
6. If you have employees, are they charging things too? How do you know they are business related?
I think you see the problem, as well as, the similarity with farming. Bookkeeping can’t be put off until you have time to get to it, or until the end of the year. Like it or not, you run a business which needs constant monitoring.
Here are a few resolutions for 2017 to help you get started:
1. Know your Costs – You can’t control what you don’t measure. Make it a point of categorizing expenses when they are received. Use the categories that are on the Schedule F of your taxes. Get in the habit of reviewing every bill and making a note of the expense category, initialing it if it is correct, and noting the date it needs to be paid.
2. Use a Bookkeeping Software – It takes a little more time in the beginning to set it up, but it will be a huge timesaver after the initial set up. An accurate set of books is one that is reconciled to invoices, especially co-op bills where multiple things are purchased. It is also helpful to code your expenses based on the crop in which it is used like corn, soybean, wheat, etc. This allows you to know your actual cost of production for each commodity.
3. Control Family Living – Family living expenses are the most underestimated expense on the farm. You estimate the fuel that it takes to plant and harvest your crop each year, but how do you estimate the fuel your family uses for personal needs? As you see farm earnings decline, you need to pull back on personal expenses as well.
4. Evaluate your debt load – It is a simple fact that you must be bringing in more income than you are spending. If you aren’t – you may need to look at selling some assets. More than likely, this will also mean that you will encounter increased taxes. Although that may seem counterproductive, it is a one-time expense. If indications are showing that you are in a prolonged down cycle, it is important to get your debt under control as soon as possible.
5. Be Mindful of Your Input Costs – Remember when the local equipment dealer talked you into buying that new combine with all the new monitors and gadgets? Are you actually using those devices to control your cost of inputs? Shop around for your inputs to make sure you are getting the best price. You will be surprised how much suppliers will sharpen their pencil when they realize they have competition.
6. Renegotiate Lease Agreements – Go to your landlords with numbers to support reducing the rent. It is hard to tell a landlord, whose taxes continue to go up each year, why you need to reduce the rent. There are no easy answers, and there is a good possibility that someone else is willing to pay more. Maybe their costs aren’t as much as yours, or maybe they have another motivation. But the bottom line is you need to remember you are farming to make a profit.
I think sometimes it is difficult for farmers and ranchers to realize the size of the business they are operating. A great deal of you are running million dollar enterprises with a fraction of the staff of a typical CEO. For that reason alone, you need to make the most of your resources when it comes to farm financials. I will leave you with what a mentor once told me. “You can’t control what you don’t know.” Make it a point in 2017 to learn more about what you can control.