Understanding Farm Business Records and Accounting Karisha Devlin

Understanding Farm Business Records and Accounting Karisha Devlin Agriculture Business Specialist

Worst Farm Job? • Hauling Manure • Fixing Fence • Bookkeeping

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 some ease 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? ü Where we stand individually and how we compare to the industry ü Allocation of income/expenses to analyze enterprises ü Internal analysis of our farm’s strengths and weaknesses

What else can our records tell us? ü Identify trends ü Red flag problem(s) ü Recognize limitations ü What potential strategies we want to explore for the farm business ü Where 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 • It is beneficial to you from chemicals and to keep production keep by crop. (crop and livestock) • Keep feeder records. livestock and breeding livestock in • Labor is labor and not machine hire or separate categories. something • Everything on an else. MFA (or others) ticket is not necessarily feed.

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.

Financial Management Tools Available to You. . . • 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 to tell you where your strengths and weaknesses are.

Financial Management Tools Available to You. . . • 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.

Financial Management Tools Available to You. . . • 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 keep this history, start now!

Financial Management Tools Available to You. . . • 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.

Financial Management Tools Available to You. . . • 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.

Financial Management Tools Available to You. . . • A partial budget looks at additional returns as a result of the change. • Conversely you must look at any additional costs that may occur. • It also looks at any reduced expenses or costs that could occur. • Finally, we must determine any reduced returns that could happen.

Financial Management Tools Available to You. . .

Financial Management Tools Available to You. . . • 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 different in your operation.

Financial Management Tools Available to You. . . • 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.

Financial Management Tools Available to You. . . • 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.

Financial Management Tools Available to You. . . • An in-depth Financial Management Tool that you can utilize is called FINPACK. • It is available from your Agricultural Business Specialist.

Financial Management Tools Available to You. . . • 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.

Financial Management Tools Available to You. . . • 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 livestock or selling some assets and cutting back.

Financial Management Tools Available to You. . . • FINLRB can look at almost any alternative you want it to. • Information is state specific to Missouri as well.

Financial Management Tools Available to You. . . • 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.

Financial Management Tools Available to You. . . • 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!