Avoid these 5 common mistakes in financial record-keeping

There are good reasons for keeping precise track of the money that flows in and out of your business every month

As a certified public accountant, I work with farmers and ranchers across five Midwest states. I don’t simply help them prepare taxes or review financial statements or handle accounting functions. My goal is to help each of those businesses thrive, whether it’s improving their financial health, growing their operation or protecting their estate.

But none of those objectives can succeed if farm or ranch numbers aren’t accurate. Accounting for every dollar is how you quantify whether you’re headed for profit, loss or break-even. That requires owners and managers to keep precise track of the money that flows in and out of their business every month. Success demands it. Unfortunately, I don’t always see that taking place. As a result, I often find businesses don’t know their true production costs or other key metrics.

In my experience, these are the most common mistakes farms and ranches make in keeping track of their finances:

1. Not keeping timely books and records. Too many business owners don’t have procedures in place to make sure financials are updated every month. That puts them behind on important tasks such as reconciling cash accounts, tying out hedging accounts and reconciling operating loans. Some of it is done but not consistently.

2. Not utilizing accrual-based books to make financial decisions. Accrual accounting is used to truly track where a business is by matching expenses and revenues in a crop cycle. In a 12-month period, for example, you will receive revenues and pay expenses for different crop years, depending on how long you are storing grain. With accrual-based accounting, you record revenues when they’re earned and expenses when they’re incurred. As a result, accrual-based accounting offers a more accurate picture of a crop’s profitability and, thus, the business’s profitability. Many farmers and ranchers use cash-basis accounting, which records revenue and expenses upon receipt or payment of cash without considering the crop cycle. Since most expenses can occur in the year before revenues arrive, that can make it hard to accurately project growth, allocate next year’s budget and make long-term financial decisions.

3. Not including all expenses in a break-even cost. Break-evens need to include all costs incurred by the farm. Sometimes a farm or ranch will exclude external costs, such as personal living expenses and vacations. But if the farmer or rancher has no additional sources of income, then all expenses need to be absorbed by the farm operation.

4. Not utilizing production budgets or failing to compare budget to actuals. At its most basic, budgeting allows you to balance your spending with your income. It’s essential for keeping your finances on track. Following a budget ensures that you will always have enough money for what your farm or ranch needs and for the things that are important to you. Ignoring that plan can result in spending more than you earn and falling into debt.

5. Not developing a marketing plan. If you aren’t using the tools available to you to help market your production, you leave yourself exposed to big risk. For example, a weather scare can reverse the market. Or you can fail to make your expected yield, forcing you to go out and buy the bushels or volume you lost. Hoping the market will offer profitable prices when it comes time to buy or sell is not a good strategy. Instead, by proactively marketing your production, you can manage price risk and have a better idea of when your cash will be coming in. Moreover, lenders like to see pricing protection plans. Showing that you’ve locked in a price, left flexibility for opportunity or simply taken precautions to avoid large losses is a smart strategy for your farm.

To tackle these common mistakes, I encourage you to seek the help of an accounting professional. He or she will not only help you fix them and better understand your business but position you to make the decisions you need to move forward.

Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].