Income tax season is a favorite for producers near and far (note the level of sarcasm in this statement). While it is a time to collect all the forms mailed to you, review all the forms you need to mail out and determine taxable income and deductible expenses, it is also a good time to evaluate the profitability of your operation.
If tax time is a stressful time of year for you, it may be time to make changes to your record keeping, and utilize your accountant to a fuller degree.
Bookkeeping computer programs line shelves at the electronics store. So, which one should you choose? First you will need to determine your needs:
- Do you want a program that records income and expenses only?
- Do you want tax planning assistance?
- Do you have employees or vendors requiring a W-2 or Form 1099?
- Do you want the ability to determine unit cost of production for livestock or agronomy products?
Your accountant may have recommendations for you as well, and is a valuable resource. They may base recommendations on the ability to create the financial documents needed for the operation, programs that follow industry standards related to tax compliance issues, ease of use and your understanding and ability with a computer program.
The answers to the above questions will help you choose a program that is right for your operation. If your current program has not prepared you for a meeting with the accountant, there are a couple of things to consider changing with the start of 2017:
- Do you have cost and income broken into appropriate categories?
- Do you take time to review “mixed” receipts to allocate expenses to the proper category? Example: Purchases made at “Farm Store” could include two salt blocks, one roll of barbwire and a bag of ties, bag of dog food, one pair of jeans for the wife and a candy bar. In this example, the receipt could be broken down into feed-cattle, repairs-fences, feed-pets, personal-clothing, and food.
- If personal and farm business electricity, water, phone or other utilities are paid from one meter, what percentage of these expenses should be designated to personal expenses? When adding electricity to new areas that will use a lot of electric power (i.e. a grain drying system or fans), install a meter to monitor the effect this addition has on the enterprise.
Categories allow for the breakdown of the income and expenses of the operation. The “Profit” and “Loss” from the farming form, commonly referred to as your “Schedule F,” provides a spot to begin. Examples of the categories from the Schedule F include Chemicals, Custom Hire, Feed, Rent, and Seed.
Recording expenses under a generic category like “seed” may function for Schedule F tax records, however; your bookkeeping system should be used for more than just tax reporting. If you have more than one crop enterprise, corn, soybeans, and winter wheat for example, recording all seed purchases under the category “seed” will not aid with enterprise cost analysis.
Accurate production costs are needed to evaluate the actions indicated and acted upon in the marketing plan, determine future costs, and evaluate marketing and production that may need to be changed.
Cost Centers (enterprises)
Cost centers or enterprises, should be utilized when recording transactions and will vary depending on your operation. Examples of enterprises could include cow-calf, feeder cattle and finishing cattle, and corn. Allocation of feed, bedding, veterinary expenses, medicine, marketing, labor, and other common expense categories, to these enterprises, will aid in meeting your operation evaluation goals at the end of the year.
Operations with the enterprises listed above are unable to evaluate the effect of an increase of pasture rent on the cow-calf enterprise, if the expense is included in feed costs or as a lump number under rent. This would include cropland rental fees as well.
Time and effort is going to be put into your bookkeeping efforts, so maximize the effort by using the data for more than avoiding or reducing income taxes.
Take control of your operation. Create your own balance sheets, cash flow statements and income-loss statements. Farm and ranch owners that prepare their own financial statements will have a greater grasp on the direction their operation is headed and have an enhanced opportunity to catch problem areas that will greatly affect the operation.
Use the data from the financial statement to monitor key financial ratios. Many ratios can be evaluated, however, monitoring one from each category may be sufficient to determine trends in your operation. Understanding the ratios and what they mean is a column in itself, and will be left for another time.
The Bottom Line
Making changes to operational expenses or decision regarding expansion or equipment purchases can be completed easier, and with a higher degree of accuracy, when good data is used to make the change. Guessing is one method of analysis. Profitable operations use the best data they can to make decisions. Investing time and effort into your bookkeeping efforts will provide the needed data.
Early in the year is the best time to make changes to your bookkeeping practices. For most producers time spent on bookkeeping does not provide the satisfaction found out in the barn or in the field; however; in today’s market situation producers that pay due diligence to their finances and monitor expenses will be the ones that survive to see market highs return.
Source: Heather Gessner, South Dakota State University, iGrow