Farm & Ranch Business Management

1. Farm & Ranch Business Management Chapter #2 Record Keeping

2. Why keep records? • income tax reporting requirements • assist in planning and management • obtaining credit

3. What kinds of records need to be kept? 1) Cash Flow Statement: monthly cash inflows and outflows 2) Net Worth Statement: asset minus liabilities • shows financial condition of business • lists all assets & values, liabilities & values • also known as a balance sheet

4. What kinds of records need to be kept? 3) Income Statement: shows profit for a given time (1 year) • also known as a Profit/Loss Statement 4) Detailed Enterprise Analysis: identifies factors that affect the profitability and efficiency of the individual enterprises • Records allow you to compare past performance with present performance and future goals

5. What kinds of records need to be kept? • Cash Flow Projection: estimate monthly cash inflows and outflows • Whole Farm Budgets: compares alternative courses of action • Risk Management Plan: statistical calculation of the probabilities of success

6. What steps need to be taken to set up a record system? 1) select a record keeping system suited to their particular needs 2) select an accounting system suited to your business situation 3) select a method of reporting farm income and expenses 4) develop a procedure to get exactly the information needed from the records

7. What kinds of records are there? • Financial • receipts & expenses • net worth • income statement • cash flow • Physical • production records of crops/livestock • crop yield • birth, wean wt.

8. What are the types of accounting systems? • Double entry system: • each credit transaction must be balanced by a debit transaction • Single entry system: • no balance is maintained

9. What methods are used to report income and expenses? 1) Cash Method: records of actual cash transactions • income & expenses recorded in year that actually received or paid • no inventory kept for unsold products or supplies • cost of items bought for resale are not deducted until year actually sold

10. Cash Method • provides flexibility in choosing when to take income and deduct expenses • if the farmer shows a profit, cash is available to pay income taxes • expenses are not deducted until cash is paid • inventories must be made to compute financial statements • income may be erratic

11. Accrual Method • income and expenses reported when they actually occur • uses an inventory to match income & expense to the appropriate time period • levels out peaks and valleys in income • detailed and complex required • all items must be inventoried

12. Accrual Method • easier to determine net farm income and analyze the strengths and weaknesses of the farm business from year to year • work with abstract figures (may only show profit on paper) • actual cash position may be difficult to estimate

13. Record Keeping Procedures • learn about record keeping system before you begin • develop a habit of keeping record up to date • do most business through a bank account (also identify items on deposit slips: borrowed money, gift, bushels, pounds) • get the bank statement each month and reconcile the checkbook and record keeping system

14. Record Keeping Steps • enter the beginning of the year inventories (owned assets, accounts payable, beginning cash balance) • set up depreciation schedules • enter receipts, expenses, and production records • enter end of year inventories • complete the farm analysis (income taxes, financial statements, enterprise analysis, cash flow)

15. What is an Inventory? • list of all assets and values

16. Why keep an inventory? • get a true picture (on net worth statement) • beginning to ending inventory change • must use in accrual method • place a value on assets

17. What items are inventoried? • all unsold items at end of tax year • crops in storage • raised livestock • all items purchased for resale but not yet sold • livestock

18. What items are inventoried? • hedging contracts • crop and livestock supplies • capital assets • breeding livestock • machinery & equipment • buildings & land • accounts receivable & payable • liabilities

19. Guidelines for making inventories • measure quantities in commonly used units (bushels, tons, cwt., pounds) • group like items (cows, bulls, replacement heifers, calves)

20. How do you place a value on inventory items? • Cost minus depreciation • Cost minus depletion: value changes as resources are removed (gravel pit) • Market cost: actual cost (used within a short time, feed, seed) • Net Market Price: if you sell the product (wheat)

21. How do you place a value on inventory items? • Farm Production Costs: actual amount invested in crop • Actual Amount: value of liability owed

22. What are Cash Receipts? • cash flowing into a business • business income • crop sales,Government payments, patronage dividends (co-ops), resales (only net gain is taxed), cash rent, Crop insurance payments, raised nonbreeding livestock, capital sales, wages, dividends received, stock distributions, oil & gas royalties, interest received from savings, rental income, gifts, inheritance, life insurance

23. What are Cash Expenditures? • money flowing out of a business • business expenses • hired labor, repairs & maintenance, interest paid, feed, seeds, fertilizer & chemicals, machine hire, supplies (useful life <1 yr.), breeding fees, veterinary & medicine, fuel & oil, storage, taxes (real estate, personal property), insurance (on farm assets), utilities, cash rent, freight & trucking, items purchased for resale, capital purchases, money paid on accounts payable

24. Hired Labor Records • social security and unemployment taxes may need to be paid by employer