A recent study conducted by the Agri-Food Management Institute and Farm Management Canada identified top management practices that have a direct link to farm success. Among the top drivers of farm financial success was the practice of using detailed, up to date accounting reports to make decisions. Nearly two thirds of successful farms indicated that they keep up to date records and use it for timely decision making.
Unfortunately many farms fall into the practice of putting off the book work in favour of outside work. Whether you do your own bookkeeping or hire a bookkeeper to do it for you here are a few tips to keep your books in good shape and always up to date.
Accrual vs. Cash Basis Accounting
A simple improvement that many farms can make is by keeping their books on the accrual basis rather than the cash basis. Cash basis accounting is more common with farms due to its simplicity and the fact that farms generally file their taxes on the cash basis. This method entails recording income and expenses once the cash is received or the expense is paid. Accrual basis entails recording income and expenses as they are incurred rather than when they are paid for. The accrual method involves keeping track of accounts payable, accounts receivable and inventory adjustments on a regular basis.
The benefits of accrual accounting is that it provides the producer with an up to date snapshot of their assets, liabilities and equity at any given time. In addition this method reflects the true earnings of the farm regardless of whether or not the farm has realized those earnings in terms of cash. Having this kind of information on hand makes it easier to analyze business decisions because the true financial picture is always on hand.
Details are important
Having adequate details in your accounting records is not only important for compliance with the Tax Act, but it will also prove useful for decision making and bench marking your farms success. I recommend organizing accounting records such that commodities sold and cost of goods purchased can easily be analyzed on a cost per unit basis. This would entail entering quantities sold and purchased for significant items such as commodity sales and crop inputs. Many accounting software programs will accommodate this type of information however there may be a learning curve to get the information entered correctly and to find the right reports. Keeping a scorecard of key measurements will help you identify trends over time.
Keep Things Timely
As the study indicated, timely record keeping is a big contributor to farm success. Having up to date information will help analyze the decisions you need to make today. If your records are more than a month behind, you are not getting the full value out of your accounting system. Your accounting system should become a living part of your everyday operations. Creating good processes and assigning responsibilities for various parts of your accounting system will go a long way to ensure the records are kept up to date.
Before the next rainy day, take a look at your accounting systems and ask yourself if you are getting the information and value you need to make informed decisions. If you are merely using your financial data for filing taxes, you are likely missing out on some tangible benefits leading to farm success. If you are looking for more ways to improve your accounting systems sit down and talk with an adviser today.
Ryan Vadnais is a partner at Price & Comin LLP. His area of expertise is helping family farms achieve the success they are looking for. Contact Ryan at firstname.lastname@example.org or at 403-388-5147 for more information on how you can achieve more success in your Farm Business.