Country Accounting: Guidance for Beginning Farmers

Good bookkeeping is essential for the financial well-being of any farm business. It lets you, the business owner, see whether your farm is profitable, set goals and monitor progress, and most importantly, plan for the financial stability of your household. This guide aims to make basic accounting approachable, especially for those with little or no experience, and to encourage new farmers to develop strong recordkeeping habits from the start.

In addition to growing quality produce and caring for the land, farmers need to be adept financial stewards. Good financial management involves organizing your records, tracking all income and expenses, and understanding basic accounting principles.

For instance, being able to predict when major expenses will occur throughout the year allows you to ensure sufficient cash flow to cover those costs. This is particularly important for farmers, who often have high expenditures in the spring but don’t get paid until later in the year. An annual cash-flow budget can help manage this. If you've spent years building your farm without paying yourself for your labor, you might wonder what financial progress reflects your hard work. Reviewing several years of balance sheets can provide you with that insight.

Understanding your financial situation allows you to communicate effectively with lenders. Banks want to see that you have a realistic grasp of your finances and can repay loans on time. While strong financial management won’t guarantee success, it helps avoid unnecessary costs, expands your business predictably, and cushions against unexpected events.

Annual Cash Flow Operating Budget

Understanding cash flow involves tracking all sources and uses of cash throughout the year. An annual cash-flow budget helps predict months when you’ll spend more than you earn, allowing you to plan accordingly, whether that means securing a line of credit or adjusting payment schedules.

Creating this budget may be time-consuming, but it’s invaluable. It forces you to set income goals, price your products, and identify necessary expenses, helping you manage your farm more effectively.

Statement of Cash Flows

A statement of cash flows, often required for loan applications, shows how cash moves in and out of your farm from operations, financing, and investing. This is crucial for demonstrating to lenders that you can cover all expenses, including loan repayments.

Income Statement

An income statement details your farm’s profitability over a year by listing sales and expenses to calculate net income. This helps you understand the relationship between your revenue and expenditures, guiding financial decisions such as setting prices or managing costs.

The income statement allows you to see whether the farming operation is making money and to examine the relationship between gross and net income. In this example, in order to make $1,509 in take-home pay (or profit), the farmer had to sell $4,904 worth of flowers, vegetables, and poultry. This is a 30% income ratio (net income is 30% of gross income), which is a good rate. However, note that the farmers have not taken on any debt, which could increase their expenses, or hired workers or paid themselves an hourly rate for labor. These factors may ultimately limit their production capacity and how much income they can achieve through farming.

On the other hand, as they invest in the farm and figure out the production and marketing systems that work best for them, the farmers will become more efficient and will likely maintain or increase their ratio of net-to-gross income. A ballpark income ratio for farmers is 20% (net income is 20% of gross income), although this varies greatly according to the type of operation and how long it has been in business. Small, diversified, direct-market farms can achieve higher income ratios.

Depreciation

Depreciation accounts for the wear and tear on equipment, spreading the cost of replacement over its useful life. Accurately calculating depreciation helps keep your financial records realistic and ensures you're budgeting for future asset replacements.

For example, if a Farm owner purchase a tractor for $10,000, the first step toward calculating its depreciation would be to subtract its residual value from that price. (The residual value is the amount you expect to be able to sell the used equipment — or scrap metal — for when you no longer need it.) Dividing the result by the number of years they expect to use the tractor would determine its depreciation.

If a Farmers tractor’s residual value were $1,000 and the farmers expected to use it for 10 years, its depreciation would be $900: One thousand dollars (residual value) subtracted from $10,000 (purchase price) equals $9,000. Nine thousand dollars divided by 10 (number of years) equals $900.

The farmer gets to decide what to do with that $1,509 profit. Some beginning farmers would decide to invest all of this money back into the farm right away (by buying needed equipment, say, or building a pack shed) rather than take it out as “owner’s draw” or household income. Beginning farmers also may choose to put the profit into a reserve account for a future capital investment such as buying land. Keeping a comfortable buffer of cash in the farm checking account can keep you prepared for unexpected events, like a tractor breaking down or someone getting sick.

Balance Sheet

A balance sheet provides a snapshot of your farm's financial worth at a specific point in time. It balances your assets against your liabilities and equity, offering insights into your farm’s solvency and liquidity.

Equity is the amount of wealth you’ve built — your investment in the farm.

Some key information the balance sheet shows includes solvency, liquidity, and your financial progress over time. The latter is shown by comparing your equity (or net worth) from one year to the next. If you compare two or more annual balance sheets (always created at the same time of year), with luck you will see your equity increasing each year as you pay off your loans. Solvency refers to your ability to pay off all debt if the farm were sold today. We hear a lot about homeowners who are “under water” since the mortgage crisis. In other words, their liabilities are greater than their assets and they have a negative net worth. This would describe the condition of being insolvent. Liquidity, which refers to your short-term financial well-being, also is extremely important. It tells you whether you have enough money coming in from your business over the next 12 months to pay all your bills due in the same time period. A common guideline is that you should have roughly twice as much in current assets as in current liabilities.

Recordkeeping

Good recordkeeping involves collecting and organizing receipts and financial data, then entering it into a system regularly. This ensures your records are accurate and up-to-date, supporting better decision-making and financial planning.

Conclusion

This guide is designed to help you start strong with farm accounting. As you become more comfortable, you can develop more sophisticated accounting systems for deeper insights into your business’s health. Accurate financial records support better planning, decision-making, and long-term success.

By adopting these practices, you'll ensure your farm's financial health, making it easier to navigate challenges and achieve lasting success.

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