Many farmers are facing a volatile agricultural marketplace, balancing potential tax reform, potential economic reform, and the ups and downs in commodity pricing. Focusing on things that are uncontrollable might make you want to pull your hair out, and while there are many things that are outside of your control, there are also items that each famer should focus time and effort on to set themselves up for success.
If you are not fully utilizing accounting reports to help guide your farming operation, stepping up your record keeping game can help you:
• Manage your business operation effectively.
• Manage your tax liabilities effectively (and with less stress).
• Make family living budget decisions more easily.
Accurate and up-to-date financial records demonstrate your commitment to knowing your numbers and providing accurate historical results, which lenders and other capital providers appreciate. It allows them to produce lending decisions in a quick and more seamless manner.
It’s no fun scrambling around at the end of the year catching up on your record keeping to determine what you need to buy for inputs or equipment to minimize tax liabilities. Keeping your accounting completed throughout the year allows you more time to plan and shop for the best prices on any necessary purchases.
A few key financial statements to produce include:
• Balance sheet – This is your financial position as of a point in time. It’s a nice measuring stick to look at year-over-year to check your financial health. You always want current assets and total assets to be increasing quicker than liabilities – this means you’re creating net worth from your farming operation.
• Income statement – This summarizes your revenue, expenses and other gains and losses over a specific period. It’s important to be consistent in the recording of revenue and expenses to the line items that you choose. A schedule F provides a good mapping structure to follow – unless you need deeper or more detailed information.
• Statement of cash flows – This shows where all of your cash is going from your deposits and disbursements.
Being caught up on your accounting allows you to produce these reports at any point in time during the year and compare yourself to prior years, which can be invaluable.
In addition to completing your accounting timely and routinely during the course of the year, you should also complete a budget and track actual performance versus your budget. A detailed and realistic budget is one of the most important tools for guiding your farming operation and providing the information necessary to operate within your family living means, handle upcoming challenges, and hopefully record profitable results. During the course of the year, you should continually refer to your farm’s budget as a way of measuring actual performance against expectations.
How can you know what’s possible financially in the future if you don’t understand the historical results you’ve posted? The first step in the budgeting process is to make sure you know where your money has gone historically.
A budget is a planning tool necessary for building a framework for your farming operation and its finances. Combining past trends with realistic forecasts for the upcoming year, a budget provides a detailed view of realistic revenue expectations and how those stack up against your anticipated expenses.
Budgets also help with setting goals and establishing priorities. Like any business, farmers should, at a minimum, look at their total farm operation each year and establish goals for the upcoming year based upon their best guesses of what will happen.
Goals should also be established for the upcoming year. Review income statement expenses line by line, including the reasons and rationale behind any expected change in your cost structure. Will expense line items increase by cost-of-living adjustments or much more due to inflation? Are you going to outsource less custom hire work? Do your rent agreements have escalations in the current year? Does ground you have rented each year no longer make sense given where commodity prices are at today and projected through the rest of the year?
Occasionally, farms will complete their budgets with multiple scenarios: worst-case, most likely, and best-case models are all frequently used. This helps farmers to mentally prepare for contingencies and identify potential changes from initial expectations.
For example, assume a budget accounts for $4.15 corn and $10.00 soybeans. What if prior to planting is completed, soybean futures prices have dropped drastically, and you now expect that your sales price per bushel will be $9.00? How would that affect your operation’s break-even price for your expected corn production? Let’s look:
You now need to sell your corn for $4.77 to break even. Is that possible, and if it is do you sell it all when you see that price available, or just a portion of it? If it is not possible, you’ll need to consider where are you at to budget on other financial statement line items and determine if you need to cut expenses elsewhere, or possibly tighten the family living belt.
You are only able to answer these questions and make educated decisions if you understand your numbers and are up to date on your record keeping (tracking actual revenue and expenses and comparing them to what was budgeted). This also helps to ensure your farm is sticking to its plans. Budgeting offers an important means of identifying problems and opportunities.
To learn more about recordkeeping and accounting, contact your CPA or a tax accountant at your local GreenStone branch. GreenStone offers a full array of accounting services for farmers and business owners.
To view the spring 2025 issue of Partners magazine in its entirety, click here.
