The Difference Between Being Reactive vs. Proactive During Unprecedented Times
Throughout 2020, federal, state and local governments enacted programs to help farmers weather the impact of COVID-19 on their operations. This article would be extremely long if we attempted to name all of the different programs, but a few of the more familiar ones from the CARES and HEALS acts are the Payroll Protection Program (PPP), Michigan Agriculture Safety Grants, Economic Injury Disaster Loans (EIDL) and potential Payroll Tax Credits.
What has been consistent with these programs? You have had to move fast to take advantage of them; and each has required significant quality financial information to qualify and apply.
We have seen that it’s much easier to obtain support with good accounting records! Many of the programs have asked for current year tax filings, current income statements and/or balance sheets, rest of the year financial statement projections, and year over year analysis of financial results to determine the impact COVID-19 has had on your business.
Farmers who are up to date on their financial reporting have been able to be proactive versus reactive to these opportunities, and have been able to make educated decisions in a much quicker manner.
So, if your operation’s books are in order – great. Keep it up! In the current agricultural economy and ongoing pandemic, farmers need to be players, not victims. If you’ve got work to do, here are steps you can take to be a player in this game:
- Have your records in order. Having an accurate set of financial records is critical, and a shoebox of receipts does not count! A computer program or a worksheet that reconciles back to your bank and debt statements is best. This is generally the first step in good financial planning and a piece that should not be ignored. If this is not something you want to do, have time to do, or have the ability to do, it may be best to hire a bookkeeper or accountant to assist you.
- Don’t procrastinate. Waiting until December to start your bookkeeping leaves you scrambling to complete activities to help your situation. While this is a always considered a tax no-no, this year poor recordkeeping could have also impacted your ability to apply for COVID-19 related grants and loans.
- Budget, budget, budget. A budget is a planning tool necessary for building a framework for your farm and its finances. Combining past trends with realistic forecasts for the upcoming year, a budget provides a detailed view of revenue expectations and how those balance against anticipated expenses. Budgets also help with setting goals and establishing priorities. At a minimum, farmers should look at their total farm operation and establish goals for the upcoming year.
Above is an example of how a multi-crop farmer can estimate revenue and expenses for the year. Goals should be established in granularity for the upcoming year, expense line item by expense line item, including the reasons and rationale behind any expected change in your cost structure.
For example, ask yourself:
1. Will expense line items increase by cost of living adjustments?
2. Are you going to outsource less custom hire work?
3. Do your rent agreements have escalations in the current year?
A detailed and realistic budget is one of the most important tools to guide your business. Providing the information necessary to operate within your family living means, and handle upcoming challenges, will hopefully help you record profitable results.
With a budget established, you’ll continually refer to it as a way of measuring performance against expectations. Next-level budgeting is when farms complete their budgets with multiple scenarios: worst case, most likely, and best case models are frequently identified. This helps farmers to mentally prepare for contingencies and identify potential changes from initial expectations. Completing budgets with these scenarios allows a farmer to be adaptive to uncontrollable events. Would your operation have benefited from this type of planning given what 2020 has thrown at you?
Regardless of whether or not your actual results and profitability are as strong as you would like, high-quality financial reports and budgets help provide clarity to the business and family living decisions you need to make. Reports demonstrate your commitment to increasing your profitability, and show your history of successful farm management to lenders and other capital providers. This allows them to be confident of the accuracy and completeness of your records.
Reach out to your local GreenStone tax and accounting professional if you need assistance with your bookkeeping. Our team of experts is ready to help you with your financial planning needs!