Young farmers are the future of the agriculture industry, and although working the land and tending cattle is the main part of the job, it is also important to educate oneself on the financial side of farming.
For a lot of young farmers this can be the hardest part of running an operation. In the beginning, you will be in charge of accounting for what happens on your farm, so it is important to understand how money flows through the operation.
By making this a priority you will create a financially healthier operation, be able to manage your money more efficiently and create more opportunity for growth.
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Here are key areas that require careful consideration.
Choose your method
You must decide which accounting method will best fit your needs. The accrual accounting method states that you need to record any income or expenses incurred in that period regardless of whether received or paid. It’s important to note that when using the accrual method, it is necessary to keep a list of the inventory you have at year-end because this will be included in part of your income calculation.
Alternatively, there is the cash accounting method, which many farmers prefer. The cash method records income and expenses in the year that cash is received, or the cash is paid. This method can be more straightforward for those who work in agriculture and can be easier. It is up to you to decide what works best for you and your operation and implement that method consistently.
Why is this important?
Accurate and up-to-date books will deliver many benefits to your operation. Being involved in the financial aspect of the farm creates an awareness that allows you to make educated decisions for the future of your farm. This kind of information allows you to understand your cashflow, identify where you can cut unnecessary expenses and where you can afford to incur more. It also creates awareness about the financial state of the operation, while allowing you to have informed conversations with your lender or accountant.
Up-to-date and accurate records will allow you to make further monetary decisions and create the opportunity to utilize more tax breaks.
Tax benefits
Farm operations have numerous opportunities to maximize tax benefits. One of the main benefits to note as a young farmer are the many expenses that can be deducted. Some of the more common expenses that can be deducted are feed and bedding, fuel and oil for farming machinery, livestock purchases, equipment purchases and crop inputs.
There are many other deductions that can apply depending on the nature of the expenses your farm incurs.
It now becomes more important than ever to keep track of expenses to make sure you are taking full advantage of these benefits.
Overall, there is a lot to learn about the financial side of farming. For most young farmers running the operation is second nature. Therefore, the learning curve of your new venture will be how to properly and effectively account for the transactions that take place throughout the fiscal year.
These are just a few things to keep in mind when navigating this side of your business, but the more time you put into understanding how your operation works financially, the more profitable you will be in the future.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. He would like to thank Karrie Geremia and Kassie Miller of KPMG for their assistance with writing this article.
