What’s your current process for producing farm financial statements?
Preparing financial statements is a critical task for the success of any business, and family farms are no exception. As a first step to ensuring your farm business is on the right financial track, ask yourself these questions:
Do you know the preferred way to prepare agricultural financial statements?
- Are you aware of the standards that are laid out by the Farm Financial Standards Council?
- Are your financials ACT financials: accurate, consistent, and timely?
- Are your financial accounts reconciled, and are they supported with relevant documentation?
Do you take ownership of your financials?
- Do you have confidence in your numbers?
- Do your financial statements support management decisions?
- Do they provide financial metrics for analysis and reporting against key business targets?
Monthly or quarterly reporting helps your farm stay competitive.
In the past, your focus has most likely been on year-end financials. This makes sense because it’s necessary for the tax preparer in completing your annual tax return as well as for your lender(s) to secure operating lines of credit. To remain competitive in this ever-changing ag economy, you need to change that focus to either quarterly or monthly financial statement reporting. Stay on top of your operational efficiency and financial performance. Manage financials in the present and not in the past, such as at year end when it’s too late to change results.
Basic Accounting 101 Financial Statement Flow
There are two primary perspectives in accounting:
- Financial Accounting (entity level)
Financial accounting focuses on reporting to external users who need a periodic overview of the operation results and financial position of the business.
- Managerial Accounting
Managerial accounting focuses on reporting to internal users for planning, monitoring, and controlling the business.
Your focus should be on creating consolidated/entity financial statements, which show aggregated financial results for multiple entities. These include the
- Balance sheet
- Income statement
Both of these documents can use either cost/cash or accrual basis accounting, and the balance sheet can also detail fair market values. Cash basis accounting revenues are recognized when cash is received, and expenses are recorded when cash is paid. Accrual basis accounting revenues are recognized when earned, and expenses are recognized when incurred.
Is there a standardization to follow or a financial template of proper disclosures?
Yes, there is. It’s the Financial Guidelines for Agriculture published by the Farm Financial Standards Council in 1989. There are two sets of guidelines to aid agriculture producers in capturing and reporting accurate, timely, consistent financial disclosures. These guidelines are updated and reviewed regularly.
Guideline #1: The Financial Guidelines for Agricultural Production provides recommended standards for format and content of financial reports, recommended financial measures common to all sectors of agriculture, and example statements and measures.
Guideline #2: The Management Accounting Guidelines for Agricultural Production responds to the ever-increasing need for consistent, reliable, and accurate management information systems to support day-to-day production decisions.
You can purchase your copy of the Financial Guidelines for Agriculture at https://ffsc.org.
Agricultural Financial Consulting
If you could use a hand getting control of your farm’s financial processes, the consultants at AgriSolutions can help. We can assist you with reviewing, preparing, analyzing, and applying financial data for the optimal success of your ag business. For ongoing updates with helpful insights for your farm, subscribe to Ag Advantage, the AgriSolutions blog.