By Juliette Enfield, Penn State Extension Educator, Warren Co
I recently met a farmer who said “I
got into farming because I didn’t want to sit in front of a computer!”, and I’m
sure she’s not alone. Oftentimes the farm accounting is at the bottom of the
list of farm chores. Farm accounting can be tedious and daunting to those who
are unfamiliar with spreadsheets, accounting terminology, and computer
accounting software. However, the fact remains that if you are not managing
your farm finances, you are unable to determine:
1. Whether or not your farm is
profitable, which can only be determined from an income statement
2. Whether or not you are increasing
your business’s net worth, which is evident from comparing several years’ balance
sheets
3. Whether or not you are spending
your money in the right place and at the right time, which is shown from a
monthly or quarterly cash flow statement
 |
| Farm accounting can be daunting. |
Fulfilling Legal Obligations-Tax Accounting
When I ask farmers what kind of accounting services
they use for their farm businesses, most tell me they use a tax accountant once
a year. Finding an accountant who is familiar with farm taxes (the Schedule F)
is essential.
According to the US Internal Revenue Service, most
farmers use the cash method (assessing accounts based on what is currently in
the bank) for their income taxes because they find it easier to keep records
this way, as opposed to the accrual method of accounting (assessing accounts
based on what is in the bank after all accounts receivable and payable are
calculated). This is because in agriculture expenses from one year may not
generate income until the following year when the crop is sold. In other
businesses, expenses and income cycle much more frequently, so the accrual
method is used to report income earned in a year. Agriculture is also allowed payments for certain practices such as
planting native trees and shrubs or keeping livestock out of streams by
building stream bank fencing. An accounting firm that works regularly with
farmers will be familiar with these incentive programs.
Some tax accountants offer auditing services for an
additional fee, in which they will represent you in case of an audit.
Find an accountant who is in support of you and your business, and who you can
establish a relationship with year after year. Talk to other farmers in your area
for recommendations on good accounting firms to work with. If you fail to file
your taxes, you will be fined and/or charged interest on the amount you owe,
and it will be difficult to get access to a loan or do business at all until
taxes are paid.
The Farm Bureau has a network of
accountants throughout Pennsylvania that work with farmers on tax
and payroll preparation, bookkeeping assistance, and financial consulting. If
you are a Farm Bureau member, you may be eligible for discounted services.
Going Above and Beyond-Financial Analysis
Taking care of your taxes is a legal
obligation, but analyzing your business finances is not. Tax preparation brings
you one step closer to being ready to analyze your finances. Your tax forms can
be used to create your income statement. Your receipts and sales records can be
used to create your balance sheet and cash flow statements. Penn State
Extension offers a course on understanding basic farm finance called Farm $en$e. This 4 session course helps farmers
understand basic accounting terms, how to prepare accurate records, and how to
use these records to better manage the farm.
 |
| Be pro-active about your farm finances. |
If you are not sure that you will
have time to learn how to use accounting software or you don’t feel comfortable
doing your own financial analysis, you can hire a consultant. This service can
range from $30 an hour to $150 an hour, depending on what your needs are and
the consultant's level of expertise. The amount of contact you make with
the consultant depends on the state of your business, your level of
understanding of farm finance, and your commitment to making your business
financially sustainable. You could arrange meetings monthly, quarterly,
or yearly. As with tax accounting, financial analysis also requires some level
of expertise in your industry. This person should understand how your business
operates and how it compares to others in the same industry. AgChoice Farm Credit is one source of accounting services with agricultural
expertise.
In conclusion, the best place to
find a tax accountant or a financial consultant for your farm business is by
talking with other farmers in your area or in your ag industry. Be pro-active
about your farm finances. If you don’t want to, or are not able to understand
your farm’s financial situation, hire someone to help you look at the big
picture. Accounting services are different at every practice, so be sure you
understand the range of services offered before signing a contract. Shop around
for pricing that you can afford, as well as an accountant that you feel
comfortable working with.
