Understanding Farm Business Records and Accounting Karisha Devlin Agriculture Business Specialist

1. Understanding Farm Business Records and AccountingKarisha DevlinAgriculture Business Specialist

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

3. 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.

4. Cash vs. Accrual • The IRS allows farmers to calculate taxable income on a cash basis. This gives someease and flexibility for recording. Inputs can be prepaid to increase expenses for the current accounting period or income can be delayed

5. 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.

6. 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.

7. Farm Records Needed • Production • Crops: • Acres, Production, Inputs • Livestock • Births, Deaths, Weights, # Feed • Determine: • Yields • Calving %, Rates of Gain, Feed Use

8. Farm Records Needed • Production • Financial • Farm Business Analysis—Both! • Cost/Acre, Cost per Bu • Cost/Hd, Cost/Lb, Cost of Gain

9. 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

10. Utilizing Your Farm Records …To Assist You in Making Farm Business Decisions

11. What can our records tell us? • Where we stand individually and how we compare to the industry • Allocation of income/expenses to analyze enterprises • Internal analysis of our farm’s strengths and weaknesses

12. What else can our records tell us? • Identify trends • Red flag problem(s) • Recognize limitations • What potential strategies we want to explore for the farm business • Where we want to start implementing selected strategies

13. 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

14. 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.

15. Separate fertilizer from chemicals and keep by crop. Keep feeder livestock and breeding livestock in separate categories. Everything on an MFA (or others) ticket is not necessarily feed. It is beneficial to you to keep production (crop and livestock) records. Labor is labor and not machine hire or something else. Things to Remember on Your Records…

16. Farm Business Records,What to Include? • Cash Receipts, Cash Expenses • Track Loans • Beginning & Ending Inventory • Purchase & Sale Quantities • Cost/Market Values • Depreciation?

17. How? • Handwritten • Computer

18. Other Considerations • Farm Financial Standards • Guidelines & Standards: • Financial Reports & Values • Financial Criteria & Measures (Ratios) • Enterprise Analysis • Cost/Profit Center Analysis

19. Financial Management in Agriculture… Financial Management Tools Available to You

20. 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.

21. Financial Management Tools Available to You... • The first (and most important) financial management tool available to you is yourrecords. • Your records tell you about trends in your operation and can help totell you where your strengths and weaknesses are.

22. Financial Management Tools Available to You... • Remember that your records include yourfinancialhistory too. • 3 to 5 years of balance sheets, profit and loss statements, and production history are an invaluable financial management tool.

23. 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 keepthis history, start now!

24. 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.

25. 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.

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

27. Financial Management Tools Available to You...

28. 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 differentin your operation.

29. 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.

30. Financial Management Tools Available to You... • You can get these regional or state averages from your Agricultural Business Specialist or the University of Missouri. • Keepinmind that these are only averages and vary a great deal.

31. 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.

32. 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.

33. 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 and livestock or selling some assets and cutting back.

34. 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.

35. 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.

36. 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!