Record Keeping in Farm Management

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Record Keeping in Farm Management
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Record Keeping in Farm Management
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Record Keeping in Farm Management

• DO YOU WANT TO OVERPAY UNCLE SAM?
• DO YOU WANT TO HANDICAP YOUR BORROWING CAPACITY?
• DO YOU WANT TO KNOW WHERE YOUR BUSINESS IS GOING?

NO
NO
YES
There is only one person who can make the
decision to keep records on you operation
You!
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Financial Management Pyramid
Wealth Distribution giving it to your
chosen ones
Estate Planning
Wealth Accumulation
giving it to yourself
Childrens Education
Retirement Planning
Investments
Home Ownership
Building Long Term Wealth planning
financial future, goal setting, regular savings
plan
Basic Wealth Protection quit giving it
to others
Tax Management reduce income taxes
Risk Management protection against economic loss

Credit Management wise credit use, avoid credit
abuse, debt reduction

Cash Management record keeping,
spending plans, emergency cash reserve,
net worth and income-expense statements
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Record Keeping in Farm Management
Why, characteristics, and its Importance
Income Tax Reporting
Obtaining Credit
Reasons
Management Tool
Most farmers do keep records but primarily for
the first two reasons and not as a Management
tool
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Record Keeping in Farm Management
Why, characteristics, and its Importance
Income Tax Reporting
Good records are required for the preparation of
complete and accurate tax documents. Poor records
often lead to prepare income tax returns that
result in either underpayment or overpayment of
taxes. IRS audits.
Obtaining Credit

• Good records are essential for the preparation
  of current financial statements, such as Income
  Statement, Balance Sheet, and Cash Flow
  projections, which will be demanded by your Bank.
  It also represents a complete picture of your
  total business operation.

Management Tool
Good records provide the financial and
productive data that help you operate more
efficiently, thus increasing the profitability of
your farm. They enable you to pinpoint your
weaknesses and to act accordingly to correct
them. Decision making and planning.
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Record Keeping in Farm Management
Why, characteristics, and its Importance
Characteristics

• K.I.S.S. (Keep It Simple Stupid)
• Appropriate level of detail depending on the
  complexity of your business
• Records should provide essential information on a
  timely basis

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Record Keeping in Farm Management
Why, characteristics, and its Importance

• A business checking account to handle business
  transactions
• An income and expenses ledger by calendar month
• An inventory, physical counting and valuation
• A depreciation schedule, pro-rating original
  costs of assets Enterprise records
• Personnel records
• A net worth statement, balance sheet
• A cash flow statement to measure flow of funds
• An income statement to determine net profit or
  loss

They should Include
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Record Keeping in Farm Management
Methods
Two primary methods
Cash
All items actually received during the year are
included in gross income. Expenses are deducted
in the tax year they are paid

• INVENTORIES ARE NOT INCLUDED
• DOES NOT PROVIDE COMPUTATION OF ACTUAL NET FARM
  INCOME
• NO EFFECTIVE MANAGEMENT DECISIONS

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Record Keeping in Farm Management
Methods
Two primary methods
Accrual
Income is generally reported in the year
produced or earned, and expenses are deducted or
capitalized in the year incurred, not necessarily
in the year received or paid
INVENTORIES ARE INCLUDED BETTER MANAGEMENT
DECISIONS, BUT NOT THE WHOLE STORY
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Record Keeping in Farm Management
Phases of Record Keeping
3. Recording crops and livestock information
1. Recording receipts and expenses
4. Analyzing the farm business
2. Keeping and Using Inventories
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Record Keeping in Farm Management
Phases of Record Keeping
1. Recording receipts and expenses
Date, Customers or Vendor name and
address, Description, amount, method of payment,
check
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Record Keeping in Farm Management
3. Phases of Record Keeping
Actual progress in the farm business cannot be
determined from year to year without an annual
inventory
When changes in inventories are recorded, net
income can be calculated on an accrual basis
Provides fundamental information for Balance
Sheet and Income Statement
When? Generally December 31 each year
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Record Keeping in Farm Management
3. Phases of Record Keeping
What to inventory?
a) Money (receivables and payables) b)
Livestock, crops and supplies c) Property
i. Unsold production ii. Purchased
feeds, fuel, supplies iii. Financial assets
and liabilities iv. Depreciable capital
assets v. Land

• Market cost method
• Net market price method
• Cost or market, the lowest
• Farm production costs method
• Cost-less-depreciation
• Cost-plus appreciation

Valuation
Methods approved by IRS
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Record Keeping in Farm Management
3. Phases of Record Keeping
Be organized and methodical Create a complete
but simple filing system gt K.I.S.S What to
keep? Almost everything gt Field
Records Accuracy together with sound data
interpretation will lead to better decision
making
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Record Keeping in Farm Management
Summary of receipts and expenses as determined
for income tax purposes may give some indication
of performance. However..

• Very little indication is given of
• Where the income was produced
• The strengths or weaknesses of my farm business
• Returns for labor and management
• Trends in net worth
• Production efficiency

Records if properly kept, organized
and analyzed, can provide many answers needed
for better management decisions.
The result of the analysis and its sound
interpretation will call for corrective
actions.
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Record Keeping in Farm Management
FINANCIAL STATEMENTS
Balance Sheet a. Is a statement of the
financial condition of a business at a specific
time b. Shows what is OWNED and what is OWED.
Assets and Liabilities. The difference between
them is NET WORTH
c. Analysis of your financial condition through
ratios. i. Liquidity ii. Solvency iii.
Profitability
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Record Keeping in Farm Management
FINANCIAL STATEMENTS
Net Farm Income
a. Computed on an accrual basis. It takes
inventories into account b. Value of crops and
livestock produced is credited to the year in
which they were produced c. Tells you the
value of the farm production for the year even
though the production was not sold d. Farmers
who report on the cash method should also compute
their net income by the accrual method to
determine the true income of their farm business
that year e. Based and built with supporting
information SCHEDULES
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Record Keeping in Farm Management
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Record Keeping in Farm Management
FINANCIAL STATEMENTS
Statement of Owner Equity
The balance sheet shows the amount of owner
equity at a point in time, but not what caused
the changes in this value over time This
statement shows the sources of changes and the
amount that came from each source The table shows
an example of a statement of owner equity, where
the beginning owners equity of 598,566 is
increased to 668,412 at the end of the year. The
increase came from adjusting taxes paid,
increases in the current portion of deferred
taxes, net withdrawals from the farm, increase in
the market value of farm assets, and the
subtraction of additional income taxes
It pulls together accounting information from a
number of sources to document and reconcile the
reasons behind any change in owners equity. Any
failure to explain the changes indicates a poor
accounting system
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Record Keeping in Farm Management
FINANCIAL STATEMENTS
Cash Flow Statement

• A healthy Balance Sheet and a high net farm
  income does NOT necessarily mean you can meet
  your financial obligations
• You MUST know the flow of income and expenses
  during the accounting period to determine your
  ability to pay your obligations
• A cash flow statement includes non-farm items
  such as living expenses, government payments and
  non-farm income
• It can be defined as the SOURCES (cash inflow,
  receipts) and USES (cash outflow, expenses) of
  funds
• By comparing the uses and sources of funds you
  will be able to determine cash surpluses or
  deficits
• Extremely useful management tool

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Record Keeping in Farm Management
Choosing a record system

• Numerous kinds of farm record systems are
  available in the market
• Do a thorough research prior to buying one Choose
  the one that fits your business
• Choose the one that provides you with all the
  needed resources, not only financial but also
  managerial
• Examples (Brands) Quicken, Farm Notes, Farm
  Works, Easy Farm Accounting, FinPack, etc.

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Record Keeping in Farm Management
Information Organization and maybe a little
Professional Advice gives you

• Tax Records
• Financial Records
• Production Records

Add Sound Interpretation and you have
Informed Management Decisions
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Record Keeping in Farm Management
Though one decision alone probably won't change
your life radically, a series of them can have an
amazing effect. Every decision we make -- no
matter how small -- leads us in some way, either
closer to our goals and wishes or farther away
from them.---Unknown
Decision is a sharp knife that cuts clean and
straight. Indecision is a dull one that hacks and
tears and leaves ragged edges behind.---Jan
McKeithen
Security can only be achieved through constant
change, through discarding old ideas that have
outlived their usefulness and adapting others to
current facts .---William O. Douglas
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Record Keeping in Farm Management
SOURCES

• FARM BUSINESS RECORDS by Richard Carkner,
  Extension Economist, Cooperative Extension,
  Washington State University
• FARM RECORD KEEPING by John R. Schlender,
  Extension Agricultural Economist, Kansas State
  University IOWA STATE UNIVERSITY, Farm Financial
  Management
• FARM MANAGEMENT, 5TH edition by Ronald Kay,
  William Edwards, and Patricia Duffy
• U.S. Small Business Administration