A wide spectrum of record-keeping techniques exists, from basic handwritten ledgers for tax purposes to accounting software for advanced management.
An increasing number of farm businesses find more detailed accounting systems allow them to make better, timelier management decisions, especially in years of thin profit margins.
Charles Brown, Iowa State Extension farm management specialist, said for farmers who keep records for tax purposes, “it isn’t that big of a leap to start looking into it for management purposes.”
Brown, a former farm business service administrator for the Iowa Farm Bureau Federation, estimated less than a quarter of farmers in the region use a cash basis- or accrual-type accounting system that can aid in timely business decisions.
The basic cash method of accounting only tracks income or expenses when they are received. An accrual or cash basis, on the other hand, considers all transactions, including changes in inventory.
“It doesn’t take a lot more time, and it’s not that difficult once you understand how it works,” Brown said.
Advantages of cash basis accounting include an instant understanding of how management decisions affect the bottom line (instead of waiting until tax season); a better understanding of overhead costs, such as fuel; and an improved ability to negotiate with lenders.
Kent Vickre is state coordinator of Iowa Farm Business Association, an organization started in 1936 to help farmers keep better records.
Back then, farm records and tax forms were a lot simpler.
He said farmers often pay closer attention to records when farm margins are tighter because they can’t afford a bad decision.
Most farmers still keep the basic level of records required for tax purposes. But Vickre said the organizations’ 3,800 members are proof of the benefits of accrual farm accounting.
Many farm operations are also increasingly demanding accrual-type accounting systems for labor requirements.
IFBA members who keep accrual accounting records can compare their operations to other producers in the state and country through benchmarking to see their strengths and weaknesses.
“We’re heading into a time in the farming sector where it’s going to be tough for farm profitability,” Brown said, and better records means more options.
No matter what type of records you keep, having a dedicated farm record-keeper is important. Brown said often this duty falls to a spouse who may be interested in participating in the farm operation.
“An accounting background is always helpful but not necessary,” Brown said.
In general, the record-keeper needs to understand where income and expenses are going to flow on a tax return and have an understanding of the farm business.
For larger operations or those with limited time, an outside accountant may be the best solution.
Avoid procrastination in record-keeping. Brown and Vickre said most farmers would prefer to be working outside. However, it doesn’t have to take that much time.
Depending on the size of operation, Brown said 30 minutes a day or a couple hours on a weekend should suffice to keep cash basis records updated throughout the year.
Brown said many farmers still keep records by hand, but he advises using a computer spreadsheet or farm accounting software to avoid adding or subtracting errors.
Many farm-specific accounting software programs exist. IFBA created and manages the PcMars farm accounting software. Vickre said it was designed with farmers in mind and has inputs, such as bushels and hundredweights, that are often lacking in generic accounting software programs.
Brown also recommended the FINPACK analysis software, created by the University of Minnesota’s Center for Farm Financial Management.
Initial software cost is usually the limiting factor for farmers choosing to start keeping cash basis or accrual-type records.
Whatever software you choose, Brown said farmers should be sure to consider the options for training and support for the software. University trainings or web-based video lessons can be a good way to learn new software.
(Source – http://www.illinoisfarmertoday.com/news/regional/better-records-mean-better-farm-management/article_e4659f4a-ca97-11e5-a400-b373fee0bdd4.html)