Good records allow a business owner to make smart decisions that move the operation forward. That’s true for dairy farms of herd management records and certainly true of financial records.

Keeping detailed farm financials is important for three reasons, said agricultural business consultant Phil Taylor in a Horizon Farm Credit webinar. First, this information provides the data needed to generate useful financial reports like the balance sheet, income statement, and cash flow statement, which tell you if the business is making a profit or not and how. Secondly, they maintain information you will need for tax preparation.

Financial records also allow you to make decisions in areas like capital expenditures, transition planning, loan needs, and marketing. Having hard data allows you to understand the feasibility of business moves you may need to make.

Taylor described that for farm financial records to achieve these purposes, they must be:

• Correct — Accounts should be reconciled so your records match your statements.
• Complete — Record all necessary data and transactions.
• Consistent — Use the same labels for similar transactions.

Make the time

Developing correct, complete, and consistent records is possible for any farm business. Chad Rugh, an accounting officer with Horizon Farm Credit, provided a few tips for making the process easier, beginning by addressing the apathy some people feel toward financial records.

“Number one is we’re going to have a positive attitude,” he said. “Not everyone is passionate about farm records, but it is important to the future of your business to keep accurate records.” What Rugh referred to as “bookkeeper drudgery” often leads to not entering information or gathering materials, creating records that are incomplete and inaccurate.

He advised budgeting time to enter financial information to maintain accurate records. What information should be kept and recorded? “Basically everything,” Rugh said. “When in doubt, keep it!” This includes all receipts (especially those over $2,500) and invoices, deposit details, bank and credit card statements, loan documents, any real estate settlements, and payroll information. Most of the time, a receipt will have some value, he said.

There are many options for keeping farm records, ranging from paper to software programs. “If you just use Excel, that’s perfectly fine with me as long as you’re categorizing things,” added Rugh. No matter your system, establish a chart of income and expenses, with categories under each side. Those labels can be created by looking at your Schedule F form, he recommended. For example, income could include crop and livestock sales, custom work, and government payments, while expenses would include things like labor, seed, and fuel. Always use generic category names instead of vendors, Rugh noted. Also, be sure to keep track of loans in a separate place. “Loans are not expenses; loans are liabilities,” he reminded.

Unless you are a sole proprietor, Rugh urged farmers to keep separate business and personal checkbooks to avoid mixing money. “This is absolutely essential if you’re in a partnership,” he said. If you are in partnership with others, review financial records with them so everyone is on the same page.

Your financial records will ultimately help you have a better relationship with your accountant and lender. Rugh encouraged farmers to ask questions of their accountant when meeting with them.

When choosing a farm accountant, he advised farmers to find someone who is familiar with agriculture. Not all tax returns are created equal, he said. Then, consider this person’s reputation in your community, if they offer any specialized services like farm visits, and if they meet the needs of your family. They also must be someone you trust.

Most importantly, your accountant should want your farm to succeed and push your farm forward, he added. Financial analysis is a key component of farm viability, so with a good accountant and attention to detail on the owner’s part, these records can help ensure the farm is set up for the future.