GreenStone FCS | April 24, 2018
Are you wondering what the break-even cost is on your cattle operation? Are you unsure what market price you need on your crops to cover inputs? Questioning if you should buy that piece of equipment this year or next year to minimize income taxes?
Consistently making the right business decisions is very difficult without having accurate financial records and reports. Given the current agricultural economic environment, financial records are more critical than ever to ensure you are maximizing your earnings potential.
Financial records – including the balance sheet, the profit-and- loss statement and the statement of cash flows, along with projections for the coming season – helps producers understand clearly their operation’s financial position, including costs and profitability.
Farmers who are pinching every penny and making necessary sacrifices to maximize their returns are more likely to succeed. Having strong financial records enables producers to know their operation’s current financial position and where costs can be trimmed or additional revenues are needed to improve financial performance.
Another key benefit to having high-quality financial records: they can demonstrate to lenders and suppliers your viability as a customer and a business, showing how you are remaining profitable or the steps you are taking to maximize your returns. Especially for commodity producers who are price-takers, being able to clearly explain your costs per unit of production and how you are making informed choices to minimize them can help attract the capital you need to fund your operation.
Developing the discipline to maintain strong records and keep them current can be a challenge for producers, whose real passion and skill usually lies in managing their operations.
It is safe to say that most farmers would much prefer to be out on their land or with their herd than in an office. This is one reason some turn to an outside expert to maintain their records, while they spend their limited time and their own expertise where it yields the most benefits: on the farm.
An accountant or bookkeeper can serve in this role to provide general bookkeeping and checkbook accounting services, produce accrual-based financial statements, and prepare detailed cost accounting operational financial schedules to assist in business management decisions.
In addition to allowing a farmer to focus on farming, experienced financial professionals ensure the accuracy of financial reports so producers can be confident in their numbers and use them to make better decisions.
An outside expert brings objectivity to financial records, and holds the farmer accountable to the reality of their situation without emotional attachments.
Some farmers are hesitant to engage an outside expert because they fear that they will have less understanding of their financial picture if they do not build their financial reports themselves. However, working with an expert who knows the agriculture industry can deliver a clearer financial picture, with meaningful and accurate information on which to base business decisions.
For example, when records show that the cost to raise a cow from birth outweighs the income it will eventually yield, the right business decision may be to sell the calf.
Crop producers can look at the cost to plant and fertilize on a per-acre or per-bushel basis and compare that to their projected yields and price, and make an educated decision about what and how much to plant.
Fruit growers can analyze the costs to maintain a new tree over the time until it is productive and decide if planting is a wise financial investment.
Whether you create your financial records and reports yourself or utilize an outside expert, maintaining records on an ongoing basis, rather than only at year-end, provides real-time information to support educated decisions throughout the year, including tax planning decisions in advance of year-end tax filings.
This approach also allows you to compare your actual results against your projections, and to compare your results year-over-year at key points in your season to further strengthen your decision making.
Depending on the industry, reports should ideally be updated at least quarterly and preferably monthly.
Regardless of whether or not your balance sheet and profitability is as strong as you would like, high-quality reports help provide clarity to the business and family living decisions you need to make, demonstrate your commitment to increasing your profitability, and show your history of successful farm management to lenders and other capital providers, allowing them to be confident of the accuracy and completeness of your records.
If you are interested in learning more about using financial records or you are looking for help in generating reports, contact a local GreenStone branch. GreenStone offers a full array of accounting services for farmers and other business owners.
Zagar is VP and Managing Director of Financial Services at Greenstone Farm Credit Services.