With the new year upon us, now is a great time to make those yearly resolutions to get the farm financial records organized. We all make resolutions every year that fall by the wayside. For example, I still have a closet full of clothes that don’t fit and a junk drawer that is overflowing! However, resolving to organize your farm financial recordkeeping can be very helpful to your business and save you time in the future. Organized financial records provide the information needed to develop a balance sheet as well as other important financial measures that help gauge the financial health of your farm business. Contrary to popular belief, financial records are not just for tax purposes, and recordkeeping is important rather the farm business is large or small.
There are many excuses that have to be set aside as you are getting started. Thoughts like, “It’s too hard” or “I don’t have time” may be running through your mind. It will take some time and effort, but things worth doing often seem difficult in the beginning. Tackle the file cabinet, shoe box or your current recordkeeping system in small steps. An example would be to start with a particular enterprise and get that organized. Choosing a recordkeeping system that works for you is another important starting point. Computerized records may be an option for some, while others may use written records. If you are interested in getting started with the Quicken computer program, a useful guide can be found at http://ohioline.osu.edu/b931/. No matter your system, it will take some time to get it organized and in a form that works for you, so patience is also vital to this process.
Another common excuse for not spending time on farm paperwork is, “I’m not an accountant.” Most farmers I know are productionists and feel less comfortable with the recordkeeping end of the business. That means a competent accountant is important to most farm businesses. However, you will feel more comfortable with time and experience. Spending time with your accountant and setting up an organizational system that helps produce the numbers needed at tax time will make life less stressful for both you and your accountant, as well as assist with management of the farm business.
Increasing your comfort level and knowledge of the numbers that drive both the production and financial ends of your farm business, will help you make farm decisions beyond tax planning. Decisions such as adding a son or daughter to the business or determining if there is a need for off-farm employment can be aided by having complete financial records to review. Estate planning is another activity requiring sound financial records.
One last step to organization of the farm financials is to set-up a regular place to work, and the kitchen table doesn’t count! Dedicated office space and file space makes organizing paperwork easier. Some things to think about including in your office space include: computer, printer/fax/copier, financial software and spreadsheets, phone and internet access, filing space and most importantly work space to organize paperwork (or as in our farm office, the “to be filed” piles)!
Once the information is organized, it will be easier to pull out the needed numbers to develop financial statements that provide a picture of where the farm stands financially. Annual development of financial statements will be the yardstick by which the progress toward financial goals of both the farm and the family can be measured. Lenders are also interested in reviewing the farm business’s financial statements before extending credit.
One important financial statement to the farm manager and also one lenders will ask for each year is a balance sheet. The balance sheet is a snapshot of how funds are invested in the farm business (assets) and the financing methods used to purchase such assets (liabilities) at any one given point in time. Assets include items such as: fertilizer and supplies, livestock, stored grain, machinery, land, and cash. Liabilities are unpaid accounts, notes and mortgages. The farm’s net worth or equity is determined by the value of total assets less total liabilities.
Farm managers can use the comparison of balance sheets over several years to determine if the farm’s net worth is increasing or decreasing. Also, the comparison between total current assets to total noncurrent assets will help you determine if too much or too little capital is tied up in permanent investments. If your balance reflects primarily noncurrent assets, your business will be less flexible than one with sufficient current assets. Some flexibility is good for the business. These are just a couple of examples of how a balance sheet can be useful to your farm business.
The balance sheet is typically developed at the same time each year. What better time to put together your farm’s balance than at the start of a new year? Best wishes for a happy, prosperous and financially organized new year!