It’s a new year and time for a fresh start in getting your important farm details in order. Alyssa Brown, a CPA from Olds, Alberta, is part of our coaching team. She grew up on the farm and now advises farmers on how to make life better. Here’s her encouragement to you at the start of a new year.
Financial organization is fuel for profitable decision-making. Making sure the farm is financially organized could be a key to running a successful and sustainable operation. Unlike many other industries, farmers are faced with unique challenges such as fluctuating market prices, unpredictable weather and potentially volatile cash flows. Ensuring you are aware of the current financial position of the farm by creating accurate and timely reports can allow you to make quick decisions when necessary. So, how can you improve your farm’s organization?
Keep accurate and detailed financial records
Growing up on the farm, I have experienced firsthand how difficult it can be to keep track of important documents. It was not uncommon to find loose receipts or invoices in most work trucks, particularly amid the busyness of harvest or seeding. Fortunately, the technology world is starting to catch up with the needs of farmers. For instance, advanced accounting programs have been developed that allow you to capture a photo of your receipts, and the software seamlessly records the transaction in your accounting system in real time. Yes, bookkeeping in the farm truck is now a possibility! It can be daunting when considering adding new technology to your operations, but a discussion with your accountant may be helpful to determine if some of these programs can help you stay organized and create new efficiencies.
Track every transaction
It may seem like a no-brainer to consider that your financial reports should be complete with all the relevant information before using them to make decisions; however, it can be easy to miss important transactions when documents are in multiple locations or when multiple bank accounts are used for paying bills. Consider taking a step back and applying your incomparable understanding of the farm operations to your financial statements – looking for things that may be missing. One often overlooked area to consider is those transactions that have taken place without any cash consideration. For example, did you trade a newer combine for an older tractor and sprayer? How do you expect your repairs and maintenance expenses to change in your cash flow projection for the upcoming year?
Going a step further: Track fixed versus variable costs
Identifying fixed costs, such as mortgage and equipment payments, and separating them from variable costs, such as seed, labour and feed, can help you determine your cash flow needs throughout the year.
Cash-flow management
Based on the historical cash flow data of your operation, creating cash flow forecasts with updated information, such as crop sale contracts for the year, can highlight potential cash opportunities in the upcoming year. This can be particularly important if you are considering significant cash outlays through the purchase of new equipment or expanding your herd.
Setting aside reserves for downturns
Establishing an emergency fund can be particularly useful for farms with fluctuating markets and opportunities for poor yields during drought conditions. While it is impossible to predict the future, consider an amount that could help your operation sustain through a tough year. A good place to start would be to set aside cash to cover a portion of your fixed costs identified above. As a word of warning, it may be wise to discuss this with your accountant to ensure your farm will remain onside of qualified farm property rules.
Manage credit and loans
Planning repayment of the farm’s debts can help protect against defaulting on fixed-cost obligations that could have an impact on the farm’s ability to obtain financing in the future. Avoiding an over-reliance on short-term loans with high interest rates can also assist in preventing unnecessary interest expenses for the farm.
Create a team of advisers
By default, most of your planning capacity may be consumed by the endless consideration between different crop inputs, crop rotation strategies or plans to strengthen your herd’s gene pool. This makes it particularly important to become a regular visitor with your accountant and other financial planners. There are unique opportunities available to farmers for tax savings and deferrals, but many cannot be appropriately executed without proper planning. Additionally, your accountant can ensure your farm is optimizing tax credits and staying up to date with new tax laws. This is particularly important if you are considering transitioning your farm to the next generation soon.
Consider the cost/benefit analysis in outsourcing your bookkeeping
I’ve met many farmers who are exceptional in operating the day-to-day business of their farm operation, but staying up to date on the books can be a major pain point. As a result, the books naturally fell by the wayside until the accountant came knocking on the door at tax time. While staying compliant with filing deadlines is crucial, this should be considered the minimum when thinking about farm organization. The upside potential is significant when timely information is maintained throughout the year. If this is a challenge for your organization, it may be a benefit to outsource the bookkeeping to make sure you are able to take advantage of the decision-making power that comes with having an accurate financial picture of your operation.
The continuous review, adjustment and proactive management of the farm’s long-term profitability and sustainability is critical. In my experience, farmers are particularly skilled in wearing many hats at the same time – sometimes to a fault. If financial organization is challenging, or perhaps you just wish to free up your time to focus on other areas of operation, it is acceptable to engage other professionals in your financial planning. Whether it be cash flow forecasts, debt management schedules or exploring new technology, having accurate data available is critical for effective decision-making.
