- How Farm Accounting is Different From Other Types of Accounting
- Essential Elements of Farm Accounting
- Top 6 Farm Accounting Tips to Improve Farm Management
How Farm Accounting is Different From Other Types of Accounting
Farm accounting is quite different from standard business accounting.The primary difference has to do with farming’s reliance on cash accounting, essential for tax purposes. Standard business accounting relies on accrual accounting, which farming also uses for financial reporting. In short, farm accounting requires knowing both accounting styles as well as how and when to use them.
Essential Elements of Farm Accounting
As noted above, cash accounting is an essential tool of farm accounting. However, agricultural accounting has other important aspects that are essential for accurate financial forecasting and reporting. In addition to cash and accrual accounting, farm accountants must consider:
Production and market cycles- Crop and livestock production cycles do not adhere to financial rules or financial calendars. As a result, one accounting year can have multiple cycles (last year, this year, next year) and accounting for that requires a keen understanding of agricultural accounting as well as the right tools.
Units of measurement- If farm accounting came down, simply, to dollars and cents, there’d be no need to call it specialized, but when it comes to farm management, there are many more details and measurements that matter when it comes to accounting. Agricultural accounting has to be able to segment by fields, cost centers, and groups as well as more specific units of measurement such as acres and application units.
Valuation- In more traditional businesses, owners can look at the products they have in stock and, based on purchase price, provide valuation. In contrast, valuation in agriculture also relies on the market value, not just the purchase price. Breeding livestock is a great example as valuation of breeding livestock is anything but simple or straightforward. Similarly, land value grows year over year, but in agricultural accounting, valuation must consider original value as well as market value.
Top 6 Farm Accounting Tips to Improve Farm Management
Given the nuances of farm accounting, it's essential to ensure that farm owners, farm accountants, and farm managers have an understanding of the most important elements. Farm accounting should be about being able to forecast, report, and strategize for growth.
The FBS Systems team is, first, made up of farmers and accountants with a keen understanding of how best to manage farm operations and finances. Additionally, at our yearly user conference we gather with farmers, farm managers, and farm accountants to share and assess best practices to improve farm management.
1. Be prepared for and understand tax needs
Anyone working with farm accounting knows that taxes, and tax information, can be complicated. Taxes in general are daunting, but when it comes to agricultural accounting and taxes, there’s quite a lot to consider, among them:
- Know what costs need to be capitalized, especially those associated with land improvement
- Know what you can and cannot deduct
- Know what needs to be claimed as income
- Know the difference between farm and rental income
- Know how deduct mileage and claim fuel credits
- Provide your tax accountant with year-to-date accounting data and projections
2. Keep your records current
Don’t wait until the end of the year (or later!) to post, reconcile, and monitor your financial performance. Farm management accounting is most beneficial when viewed through the windshield not the rearview mirror.
3. Enforce consistent coding
A farm accounting program can be a valuable communication link between the field and office only if accounts, centers, fields, and inventory items are clearly defined and consistently used. For example, the person paying the bills often must understand whether a product is a fertilizer or chemical and which crop it is used on. Coding every expense to “Miscellaneous” defeats the advantages of the software.
4. Don’t commingle accounts
While the temptation may be there, especially for a family farm, keep personal and farm accounts separate. All business transactions should be handled through a farm account. While farm accounting software can handle multiple profit centers, saving your accountant the time and trouble of categorizing payments from a personal account.
5. Track farm profitability
Farm profitability is the ultimate concern and focus for everyone in your organization so tracking it, which can be complicated, is essential. With the right farm accounting software, you can breakdown profit centers and strategize for the coming season and year. However, profitability should be tracked in multiple measures:
- Revenue per profit area- This metric measures revenue or profit per unit farmland such as dollars per acre. While a great metric, it shouldn’t be a standalone measurement as it typically does not include costs associated with land use or maintenance.
- Economic Farm Surplus (EFS)- EFS reports (accrual) calculate both the cash and physical profit performance of your farm assets including livestock and land. This is a great way of forecasting future performance and growth and can, often, help you see overall performance across profit centers.
- Month-to-Month profits- If you’re looking for a way to gauge current profits, but may not provide the long term view you need to strategize.
6. Invest in the right farm accounting tools
One of the best ways to improve farm management and your accounting processes is to invest in the farm accounting software that’s designed to manage and handle the nuances of farm accounting. The right agricultural software can not only help with your accounting but can also help manage inventories, track vendor relationships, track and monitor livestock and crops, as well as provide payroll and tax assistance. In short, the right farm accounting software can simplify and streamline operations and improve your financial performance, forecasting, and reporting.
Among the most important tools you’ll purchase for your farm, back office tools shouldn’t be overlooked. The right farming software can help you review the past, analyze the present, and prepare for the future. And if you’re looking for tools built by farmers, with farmers in mind, then look no further than FBS Systems. Talk to our team today and let’s start investing in the future of your farm through proper financial analysis and reporting.