Proper bookkeeping really does enable better decisions
This is the last piece of the “farmer safety net,” and for many it will be the most challenging. Show of hands: who knows whether their farm was profitable last year?
Keeping on top of the books requires a skill set that many farmers don’t possess. I include myself in that count. In the early months of our company, Good Agriculture, my cofounder asked if she could use my farm’s books as an example for a class we were putting together. About a half hour after I shared the files, her response was, “This is a great series of one-off analyses and tax forms.” I, like many farmers, spent years going by the numbers in my bank account and reconstructed the essentials for tax season.
That being said, I’ve since outsourced my farm’s books to my company, and the benefits of knowing exactly what’s going on are huge. When you know, you can respond — I made the decision to cut the strawberry season short last year when I realized that my yields had dropped to the point that I was losing money paying someone to staff u-pick. I’d have figured it out eventually without accurate bookkeeping, but probably after several weeks had gone by, and possibly by not having the money to cover payroll. Instead, I was able to stop when the writing first appeared on the wall and could keep enough in the bank account to cover expenses for the rest of the year.
This practice of managing your finances requires a combination of patience, the ability to work through tedium, and the self-discipline to keep to it when there are almost certainly more pressing problems to tackle. It’s the study of what has already happened — not the forward-looking mindset that most farmers occupy. But what does it actually involve?
To start with, every month you need to reconcile and categorize your transactions. Go through your bank statements, sales records, credit card purchases and (ideally) cash purchases to make sure everything is accounted for and that you can trace the funds going in and out of your bank account.
Then, go through each transaction and put it in a category. If you want to make tax time easier, use the categories that are on a Schedule F. If you want more insight into where you’re spending and making money, create further subdivisions under the Schedule F categories. Just make sure to write down the categories you choose so that you can use the same terms from month to month.
Next, you’ll want to pull this information into a profit and loss statement. This summarizes your revenues and expenses, and it shows whether your farm was profitable or not over a given period. For most farms, there are months where we expect a loss; as a strawberry farmer, all my income comes during a six- to eight-week period, and my farm operates at a loss during the remainder of the year. Depending on how you choose to structure your profit and loss statements, you can use the categorizations you created in the previous paragraph to view the patterns in your farm’s expenses and identify potential inefficiencies or problems.
The final step is to create a balance sheet. To do this, you’ll add the profits and losses you tallied up in the last paragraph to information about your farm’s assets and liabilities. Your assets are things you own — equipment, livestock, crops in the field, land, cash on hand and funds that others owe you. Your liabilities are your debts. The balance sheet allows you to see past just the money coming in and going out to take a wider look at your farm’s financial health. My farm may be running at a loss in January, but when we consider the plants in the ground, the tractor, the land and infrastructure and the cash I have on hand, we’re just breaking even — a very different picture than the one painted by just the profit and loss statement.
Now, I’ll be brutally honest — this is something that I’ve outsourced without a second look back. It takes roughly forty times as much effort to take a poor skill to adequate than it does to take a strong skill to fantastic. Given how bad most farmers are at managing their books, it makes far more sense to pass the task off and focus on farming better than to try to shave off the edges of a square peg.
It’s also important to put your monthly books in the context of your goals for your farm. For example, after I had to move to a new location, I spent a couple of years putting funds into the farm to keep it running. A good farm business consultant is able to put my farm’s finances in the context of my goal to stop putting money into the farm. And when I saw the first indications that the strawberry season was peaking early, I could see it in the context of that goal and run scenarios showing what would happen if I continued to lose money by staying open.
Whether you start keeping your own books, outsource it to someone, or hire a friend, family member, or local ag accountant to tackle the task, knowledge is power. Building your own safety net as a farmer is a combination of building relationships that can support your farm and building knowledge and insight into your farm’s operations. By knowing where your money goes, you tie another knot in a safety net that gives you a better shot of landing on your feet when things go wrong.
| Want to take a shot at doing your books yourself? We’re happy to provide you with some templates — email me at kirsten@goodagriculture.com. |
Kirsten Simmons is the co-founder and Chief Farming Officer for Good Agriculture (goodagriculture.com), a company dedicated to helping farmers find funding, manage finances, reach new customers and get certified. She also farms at Ecosystem Farm (ecosystemfarm.com), the only u-pick strawberry farm inside Atlanta.
