COUNTY AG NEWS
Farm recordkeeping varies a lot from farm to farm. The need for keeping farm records is driven in most cases by the need to track income and expenses for tax purposes. Many farm businesses have a good system for tracking income and costs which satisfies the purpose of tax records but in most cases records can provide a lot more information. The big fluctuation in grain, vegetable, cranberry, and dairy prices over the past couple of years can cause a big impact on the profitability of a farm business. Whether you are looking at lower grain prices, lower cranberry prices or lower dairy prices your profitability can vary significantly depending on what you are producing.
Most farm businesses will produce and market more than one product. A vegetable producer may grow sweet corn, green beans and peas. A grain producer may grow field corn and soybeans and a dairy producer may concentrate on producing milk but may also feed out some steers. Each separate product that is produced is called an enterprise.
The easiest way to determine whether an area of your business is profitable is to track the income and expenses from that portion of the business. Since most producers use some type of accounting or bookkeeping to track their finances for tax purposes it is very simple to add one bit of information that allows the income and expenses to be tracked by an individual farm enterprise. Producers need to simply designate what area of their business the expense or income is from. Accounting programs have built in functions that allow this.
With QuickBooks this is called Class tracking, in Quicken it is called Tag tracking. In business there is what is called an 80/20 rule. This rule says that 80 percent of expenses will be from 20 percent of the items purchased and 80 percent of your sales will be to 20 percent of your customers. With this in mind if a farmer can track the major expenses for the operation he will have a good handle on his profitability.
I advise producers to set up their Class designation to fit the major items they produce and to designate one additional Class called “General”. Items such as electricity or fuel that may be used across all enterprises can be entered as a General expense and then at the end of the year those costs can be divided up and allotted to each enterprise based on an educated guess.
With this information accounting programs have built in report functions that will then be able to provide reports based on what you set up for your enterprise areas.
With lower potential income over the next year it will be important when applying for loans of any kind to provide records that support the profitability of your business.