“This Post Has Not Been Updated to Include Changes from the “Tax Cuts and Job Act” passed on December 22, 2017.”
There are three primary uses of financial information:
- To show compliance, such as with income and payroll taxes
- To access credit, showing operating lines and capital purchases, and
- To facilitate management to enhance the financial performance of your business.
Farm software varies in its capabilities. When evaluating whether a software product will adequately suit your needs, consider its ability to perform each of these functions.
Accounting for tax compliance purposes focuses on the agricultural business as a whole. Compliance-focused software serves as a checkbook and has a limited chart of accounts, which reflects those used to complete profit and loss on Schedule F and other forms required for your tax return. Reports that must be generated for tax preparation include a profit and loss statement, transaction register, trial balance, and general ledger. Compliance software providers may also offer an optional module to handle payroll.
When choosing compliance software, make sure the provider will update the software to assure continued compliance in the future. You may also want the ability to transfer your data directly to your tax or tax preparer’s software to simplify preparation of federal and state income tax returns. There is also farm software available that will allow you to file your own payroll and 1099 filings.
Agricultural businesses usually are required to provide financial reporting to satisfy a bank’s requirements as a part of a loan or credit monitoring. A financial statement lists the assets owned by the business, its liabilities, and the net equity of the entity as of a particular date. Cost basis balance sheets are a normal result of cash basis bookkeeping, but they are not particularly useful to agricultural lenders. For credit and management purposes, the owners and lender will want to review the market value of assets owned. So, be sure your software can generate a market basis financial statement. Additionally, agricultural lenders will want to see an accrual-based profit & loss statement.
Management of raised inventory can be complex. Software that automatically reduces inventory once it is fed or sold will make this process easier. Be sure the software allows you to amortize loans and will calculate key farm financial measures for liquidity, including current ratio and working capital and solvency, addressing your farm’s debt-to-asset and equity-to-asset ratios.
The next level of farming software provides management information through central analysis. This allows you to see income and expenses by cost and profit centers. Cost and profit centers allow you to evaluate the profitability of various business segments, processes, or production cycle groups (e.g., corn, beans, beef, and pork) for each yearly production cycle. Typically, using accrual accounting— matching expenses with the resulting revenue regardless of when income is received and expenses are paid—enhances managerial financial records. This allows the producers to better measure profitability and performance. Finally, effective managerial software should accommodate yearly and multi-year budgeting to help you measure and monitor your farm business over time.
AgriSolutions is a full-service agricultural financial management firm providing accounting, tax planning and preparation, financial consulting, and training to help you gain the knowledge and skills you need to better manage your farm operation. Our AgManager accounting software organizes all the information you need for compliance, credit, and management purposes. Click here to request a free demo, or click the link below to request a free consultation to assess your financial operation, identify challenges, and discuss how we can help you.