I’ve enjoyed some really interesting farm visits in the past couple of weeks, both crop “inspections” and a visit to a dairy.
It is easy to see and sense the pride farmers have in growing their crops or looking after their animals.
Inevitably, however, we find our way back to the house or the office and to the, relatively speaking, more mundane discussion about financial management.
I get really interesting responses when I ask the students I teach in Winnipeg what is more valuable, an hour in the office or an hour on the tractor or in the barn? It’s difficult to compare the two aspects of management because they’re so different.
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The business of farming is changing. Farmers have new ways to capture and apply information to their decision-making processes. I wonder if this information includes financial information.
Are your financial management practices keeping pace with the advancement in other areas?
I believe that for many, the answer is no.
Financial management starts with record keeping. Good records provide a foundation of information from which to work, just as soil testing provides a good basis from which to develop a fertility program.
Do you use record information purely for compliance purposes, such as filing tax and GST returns and government program applications?
If so, a simple recording of income and expenses on a cash basis is adequate.
Or do you use the information to analyze financial performance to help make management and investment decisions, including supporting loan applications?
If this more closely resembles your situation, you must have a more detailed system, which enables you to make adjustments that provide a more accurate picture of your farm’s financial performance.
Whatever system you use, it should be no more complicated than what you need. I’ve seen a wide range of systems, from completely inadequate to overkill, where excessive detail is captured but the information isn’t used.
Talk to an accountant, a lender or a farm management consultant for advice if you aren’t sure what information you should record or how you could use it.
Systems can range from hand-written ledgers or notebooks to generic computer programs to specific farm management programs such as AgExpert. The most suitable program for you lies in your answer to the above questions.
Garbage in equals garbage out when it comes to record keeping. If you want to use the information for management purposes, you must have total confidence in the information your system is generating. Making important decisions with flawed or inadequate information is a disaster waiting to happen.
The person doing the record keeping often does so by default because no one else is willing or able to do it. This is far from ideal, especially when the intent is to use the records for management purposes.
For example, if you keep records simply to file a tax return, then how you categorize expenses is not that important and it doesn’t matter if your inventory has or hasn’t changed from the previous year.
However, if your intent is to analyze financial performance, the way you categorize entries can make a huge difference in the ratios that are calculated for analysis.
As a result, it is important that the person doing the record keeping has the interest and ability to do the job that’s required. Spend time looking at options. Skill set development for the record keeper can help. Outsourcing is also an option.
One of the most common challenges I see in intergenerational transition is the question of who will do the books in the next generation. Choose carefully because some of the next generation want to pursue their own non-farm careers and aren’t that interested in being the record keeper.
I worked with a lot of farms in the 1980s in a lot of severe financial situations. Families would say that they wished they had known where things were at financially because they might have been able to do something about it.
I’m not suggesting that we’re going back to those times, but one thing is unchanged: knowing where you’re at requires good financial information, and that starts with good record keeping.
