Understanding Farm Financials

Category: Farm Accounting, Management, Farm Financials | No Comments

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agrisolutions 15 things to know about farm finances ebook

cornfield-edited.jpgTo be an effective business manager, it is important that you understand your farm’s financial reporting. Regardless of whether you personally are responsible for your farm accounting, employ a person as the bookkeeper for the farm, or outsource your farm bookkeeping, understanding your financial reporting is your responsibility. By generating accurate financials and understanding your financial reporting, you have an opportunity to become a more effective business manager.

The first step to understanding and using your financials is to know why various farm financials are used. We consider three primary purposes of financial information:

  • Compliance with income and payroll tax requirements
  • Access to credit to maintain operating lines and make capital purchases
  • To support management in improving efficiency and profitability

 

Compliance

For compliance purposes, the following entity-level reports will be important for you to understand and provide for income tax preparation and payroll reporting:

  • General ledger report (every 12 Months)
  • Cost basis trial balance (every 12 Months)
  • Profit & loss statement or tax reporting (depending on what farm software is used)
  • Federal & state payroll reporting

In addition to understanding your tax-related financials, you can benefit from using this level of reporting to be proactive in managing your business’s taxable income, regardless of whether your business is a cash basis or an accrual basis taxpaying entity.

 

Credit

For credit purposes, the entity-level reports below are crucial for management purposes as well as for presenting to your current or prospective lenders:

  • Profit & loss statement (both cash basis and accrual adjusted)
  • Cost & market balance sheet supported by detail schedules for asset, liabilities, and equity
  • Cash flow projections (entity-level, production cycle, and perhaps managerial)

To effectively communicate with and negotiate credit terms with lenders, it is extremely important that you understand what story your financials tell about your business and its past, present, and future financial conditions. As an effective business manager, you need to understand your financials to be able to present your business in the best light possible. Know what financial ratios that the lender deems important, and be prepared to discuss your results. Every business has strengths and weaknesses. You need to be prepared to accentuate your operation’s strengths and how those will lead to continued success. It is also important to acknowledge any weaknesses that may be evident in your financials and be prepared to explain what decisions you have made or are making to address those weaknesses as your business moves forward.

 

Management

The most important purpose of understanding your financial reports is knowing how to use them to make good decisions and improve the profitability of your agricultural business! For management purposes, use these entity-level and segmented reports:

Entity-level reports

  • Profit & loss statement (both cash basis and accrual adjusted)
  • Statement of cash flow (for all four parts of your business: operations, assets, liabilities, and equity)
  • Cost & market balance sheet (with detail schedules for asset, liabilities, and equity)

Segmented reports (entity-level information in smaller, more detailed pieces)

  • Individual commodity (e.g., beans, corn, wheat, beef, dairy, pork)
  • Activities within each commodity (e.g., equipment, general crop, irrigation, storage, labor)
  • General business activities (general and administrative, sales, and finance)
  • Individual locations (e.g. crops in farm or field, livestock at various sites)

It’s important that you understand the big picture and have an accurate analysis of the entity-level reporting before you can effectively drill down into the finer details. From the profit & loss statement, understand your major and minor income sources as well as key expenses. From segmented reports, understand the profitability of major and minor income sources. Most businesses have 4–5 key expenses that account for 50–80% of their total cash expenses By directing your focus toward these key expenses:, you can potentially make the greatest impact.

 

Where do you go from here? Do you have a proper understanding of your farm financials? If so, great! If not, get the training and knowledge you need to be an effective business manager. AgriSolutions provides assistance to family farmers like you, helping to keep more families on the farm through education and tools to improve your ag business’ financial practices. Click below for a free consultation, and learn how we can help your farm grow and thrive today and through future generations.

 FREE CONSULTATION

agrisolutions 15 things to know about farm finances ebook

 

Written By

Brian Bennett

Brian Bennett

Consultant

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