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Xero accounting for farms

Farming is a huge part of the New Zealand business community and in many provincial accounting firms, farms make up more than 50% of the clients. This coupled with the work we have been doing with Federated Farmers, prompted us to undertake some research to better understand the needs of accounting for farmers, from both the accountant and the farmer perspective. The biggest inefficiency we saw was rekeying transaction based data – a similar problem to that experienced by city accountants.

Here’s what we’ve learnt:

  • Farmers don’t do accounting – they manage their farms.
  • As a general rule, farmers don’t keep an electronic record of stock. They just know how many stock units they have. You ask them and they will tell you. They don’t need a computer.
  • At end-of-year the closing stock calculations are prepared by an accountant.
  • There are two stock valuation methods available for tax purposes, National Standard Cost or Herd Scheme. Both are reasonably technical. The necessary calculations and valuations are done on a spread sheet with the help of an accountant.
  • Farmers don’t do monthly stock takes.
  • Some farmers receive a bi-monthly cash basis management report from their accountant, but this is not widespread.
  • The accountant generally takes care of the GST requirements for the farm.
  • Accounting is generally on a cash basis and farmers rarely create invoices. Most accounts receivable invoices are buyer created.
  • Most monthly bills are on account at PPG Wrightson, Farmlands or RD1.
  • Farms have term debt against the land asset and this is reasonably large.
  • Banks offer an improved lending capacity and lower interest rates if the farmer produces monthly accounts that demonstrate good financial awareness and management. Farmers are now taking monthly accounts more seriously, especially those buying a farm.
  • The banks also require a budget and most farms now prepare these. Best practice is to prepare an annual budget, but to make quarterly forecasts and then compare actual to the budget and forecast.
  • The key performance metric for a farm is the “Economic Farm Surplus”.  This is used by farmers and farm consultants as a basis for improving the financial performance of the farm.
  • Having broadband is reasonably common in the farming sector, especially among dairy farms.

What can Xero do?

  • Include quantities at the transaction level and a stock reconciliation which ages stock correctly so as to help the accountant prepare the end-of-year stock calculations and journals.
  • Provide for cashflow budgeting and the ability to have multiple budgets to allow for the annual budget and the quarterly updated forecast.
  • Provide the Economic Farm Surplus Report as a standard report that can be customised in Xero.
  • Provide the end-of-year accounts formats for farms, including the correct notes to the accounts.
  • For key purchasers in the supply chain, make it possible for their buyer created invoice to automatically appear in Xero.
  • Arrange for daily data feeds from the on account trade merchants.

We’re still gathering information, so if you do have any requests please let us know. As you can see there’s lots to do and we’ll be working on it over time, releasing features as we go. A top priority is to enable the quantity capture and data feeds as early as possible, so the accountant can use Xero for monthly reporting, GST and data capture for end-of-year.

The other stream of work we are doing with Federated Farmers is look at how various software suppliers can work together to improve rural productivity. For anyone who wants to join that discussion we’ve set up a LinkedIn group.

 

25 comments

Andrew Haynes
28 April 2010 #

Fantastic! Great to know you’re working on this, have been holding back on recommending Xero to our farming clients until we have the ability to post quantities and end of period stock journals… sounds like it will all be a dream soon.

Steve
29 April 2010 #

Great post, thank you.

David Kime
29 April 2010 #

Most of this will translate to the UK as well – looking forward to the Xero revolution hitting the agriculture sector here too

Hank
29 April 2010 #

I hope these stock features will be available to non-farm subscribers. We’d love to have stock management.

Lorette Astwood-Davidson
29 April 2010 #

Great to see Xero is making a start on the Farming side of software.

I read the info on the web which you sent the link for, and have the following feedback:

1. It mentions farmers don’t keep an electronic records of stock, as they don’t need a computer.
They do keep an electronic record of livestock, however it is generally not within their main accounting system!

2. It mentions two livestock valuation methods for taxation – There are actually three livestock valuation methods – market value/replacement cost is the third!

3. The key performance indicator is definalty economic farm surplus – however a very common indicator used is also “working costs to milk solids”.
It would be great to have something in the software whereby you plug in your total milksolids and it spits out your working costs ratio.
This working costs to milk solids indicator has become a huge focus for farmers over the past several years, as its the one thing they can control!

4. Daily downloads – you mentioned RD1, PGG & Farmlands – would be great if you could include Allied Farmers also?

Hope you don’t mind me giving this feedback! I am slighly over passionate about this, being a dairy farmer and accountant myself!

Rod Drury
29 April 2010 #

Thanks for the comments.

@Lorette -those are exactly the sort of insights we are looking for. Much appreciated.

@Hank – Stock is one of our big projects this year. We know that is a hole in Xero right now for many businesses.

@David – great feedback

@Andrew – we aim to please. Plenty to do.

dav0
29 April 2010 #

would be really cool for dairy farmers for budgets if they could simply key in their actual and forecast production by month and the system automatically put the related estimated future income into the budgets. And if a farmer could do waht/if based on keying the change in per kilo price.

Even better if a feed from fronterra could automatically feed estimated and confirmed future income by month taking into account known grades and other adjustments.

I am amazed how many young contract milkers dont have a handle on projected income cashflows, they think in terms of production by month, rather than cashflow / month. (perspective of IT employee within accounting firm from a farming community)

Annabel
29 April 2010 #

Hi
Can Farmlands statements be included in the bank feeds please,
thanks

Campbell Brenton-Rule
30 April 2010 #

One of the challenges we face is to do with the aging of livestock. and stock reconciliations.
Farmers age stock according to either birth date (cattle) or their teeth (sheep).
These don’t match the IRD system which is all based on financial year. A typical sheep and beef client might be a June balance date. The IRD don’t recognise Lambs on Hand so these get classed as Hoggets. So we commonly have farmers code lamb sales in July August September for example that are in fact Hogget sales for tax purposes. The farmer calls them lamb sales because they haven’t cut their teeth yet (this might take till October). This aging issue replicates itself in cattle whereby the balance date might be June so for IRD purposes stock age 30 June. But in the farmers eyes they age in September once they hit their birth month.
So whilst you are working through your stock reconciliation ideas be aware that the aging of stock could end up a real mess if you leave it up to farmers to determine the age classes of their sale and purchases. As farm accountants, we have to analyse the farmers classification of stock very carefully and for tax purposes we might treat them differently which affects the closing stock value when using the NSC Scheme.
Clear as mud?

Sam State
30 April 2010 #

“Stock is one of our big projects this year.” – wow this a huge revelation!

Hamish Edwards
30 April 2010 #

Dav0 – Cool ideas, thanks for posting them.
Annabel – yes we will look to include Farmlands too.
Campbell – I have had this explained to me before and we will be mindful correct aging for IRD purposes.

Raewyn
2 May 2010 #

I’m a farmer not an accountant so probably see Cloud in a slightly different light to the number-crunchers.
EFS is usually referred to more by accountants, consultants etc, but if you ask a grass roots dairy farmer they will refer to costs as $/kg/ms or $/ha – that is a more useful measure to them.
It would be useful if you could add Ravensdown and Ballance to the monthly downloads.
On dairy farms it would be fair to say that it is women that are mainly concerned with dealing with the financial aspects of their business e.g. banklink data, cashflows, budgets etc. Dairy Women’s Network (www.dwn.co.nz) maybe a useful contact for you for feedback. But I would suggest you rephrase your first two comments. Some women would argue that while they may not ‘do accounting’ in the very strictest sense they do keep financial data that their business refers to – e.g. budgets, cashflows. And we do need computers -try keeping the breeding/calving/ancestry data of a herd of 400+ cows by a manual system ;-)
Beware that the Fonterra calculators for estimated monthly income are not always accurate!
While I can appreciate what you are hoping to achieve with the Cloud system and I am aware of the work you have/are doing with Feds, you will only get buy-in from farmers if it is priced right and they believe that they are getting value for money. Currently there are options such as banklink and specific farming software available so Cloud will need to prove a point of difference that is great enough to get farmers to switch. Personally I have found that accountants usually do not encourage farming clients to use software unless it is what they sell, and in the past these programmes were more suited to accountants than farmers needs.

The stage in life a farmer is at will often dictate their attitude to keeping track of financial data. 30 years ago I kept a manual multi-column cashbook, did budgets and cashflows that were referred to every month – but then I was what today would be called an accounting technician. Currently I code bank, RD1 and Fonterra statements via banklink the file of which is then emailed to my accountant. This is very simple and cost effective and I receive bi-monthly reports from my accountant. Having a keen interest in computers I trialed the Lincoln Uni ‘Kelloggs’ farming software back in the early 1980′s. I have seen a big improvement in farming software and the use of it by farmers.

DavO – dairy farmers ALWAYS think of production per month ;-) – no production or a drop in production translates to no income or drop in income. There are many young people out there who have never had the exposure to learning about cashflows etc. This is one area that Dairy Womens Network is working on by holding skills days whereby women can go and learn about software available (usually CRS as it is a Network Partner) and they also have held information days about
• Calculate your farm income from production data;
• Deal with major categories of expenditure;
• Develop smart ways to record information for relevant use;
• Build and cashflow your budget;
• Use your budget/cashflow for informed decision making.
So young farmers are now getting exposure to these. One problem with this is of course that these courses are only available to women!
I will follow with interest the work you are doing re software suppliers.

Gaylene Findlay
3 May 2010 #

Hi,
In reply to your findings, as Lorette pointed out there are more than two stock valuation methods. Reasonably technical could probably be changed to “very technical” as even many chartered accountants find it difficult to get there heads around these valuation methods and how they should be using them for each of the individual clients circumstances. The calculations would be completely done by the accountant (with little input from the farmer other than providing the stock numbers!).

Some Farmers are using programmes such as Minda online to record their stock records.

It mentions that Xero can provide for cashflow budgeting/budgets etc and a quarterly updated forecast – can it provide monthly and bi-monthly to align to GST period reporting?

We would continue to use Xero as a management reporting tool to support our clients rather than preparing financial statements and having all the correct notes etc. By adding some quantity fields and having the ability to add extra codes/descriptions would suffice in the interim. From our experiences we don’t see how the client would value the functionality of full reporting/notes to the accounts.

Nora
11 May 2010 #

Re: cash basis sales/accounting; I am not a farmer, but I conduct most of my transactions in person, at the time of service (I’m an acupuncturist with a high-volume sliding-scale practice – and yes, the sliding scale is an accounting headache too). I probably only need “invoices” for 5% of my transactions – the folks who forget to bring cash or checks; I also need an easy way to deal with crediting folks who pay for a treatment in advance (not very common, but not rare either). I do like to keep track of individual patients’ accounts in case they decide they want a receipt down the line.

In most cases, patients are paying cash at the time of service, and it would make my bookkeeping *much* faster if I could record a payment at the same time as I record the “invoice” amount, instead of having to wait for the program to save the invoice and the screen to refresh before I enter payment. It’s a little thing but, again, with a high-volume business it would be a big time-saver.

Thanks!

Richard.Field
12 May 2010 #

@Nora,

Really appreciate your thoughts and comments on this.

As an alternative to creating an invoice for your customers who pay cash at the time of service, you could create a receive money transaction from the customer.

If you would like to explore this further, or have any other questions around this, please email support@xero.com and we’d be happy to assist you.

Richard, Xero Customer Care

Nora
17 May 2010 #

Hey Richard, thanks so much for your response. My problem is that there doesn’t seem to be a way to do a receive money transaction AND use price list items (in my case, services – I have different price points on my sliding scale set up as separate items). It’s nice, though not essential, for me to track that. But since I’m using price list items on invoices I’d like to be able to use the same ones for time-of-service transactions (receive money). I’m pretty sure I contacted support about that when I was setting up and there was no good workaround at the time. Do you know if this is in the works?

Richard.Field
18 May 2010 #

Hi Nora,

We did note your original request about the ability to use price list items on receive money transactions. I’ll follow up on where this has got to and respond to you directly.

Northland
21 July 2010 #

Please add Fruitfed to your list of future data-feeds. It would also be good if Xero somehow integrated with Minda. Minda is a herd records system provided by Livestock Improvement. It would also be great if AFFCO et al could somehow be encouraged to add age/sex/quantity to the description fields when they direct-credit to farmers’ bank accounts so deposits could be automatically coded.

Our farming clients all receive regular cash basis management reports if we do their GST. A significant number of them do their own GST and pretty much all of them use computers.

One thing to keep in mind with farmers, especially when setting up reports, is that they may be running a number of different operations all at the same time – dairy, beef, goats, avocados, bloodstock…

Renata
26 November 2010 #

Great news!, bring it on. Could there be an option to roll the reconcilled payments back into the next years budget?. We have very similar and seasonal patterns. If it cound also be more than just the number- say you could scroll over it and the list of the invoices behind it appeared? and you could then delete one or add a budget item to the list and update it. I find the monthly invoices to be a data mine for future cashflows.

Philip
12 January 2012 #

Was wondering how far along this farming side of things has come

Rod Drury
14 January 2012 #

@Philip, our reporting codes work is a key foundation block for farm accounting. Making good progress http://blog.xero.com/2011/08/report-packs-boost-accountant-productivity with another big step forward in our next release. You’ll also not we’ve added more rural feeds lately and more to come in 2012.

Donna
30 January 2013 #

Could we have an update at where Xero are at with farm accounting?

Rod Drury
31 January 2013 #

@Donna we’ll have a full update at Xerocon next month

Martin Rees
5 July 2013 #

Hi Rod
Any further news on Xero for farmers? I am presenting at a Tasmanian Farmers conference next Thursday 11th July and am speaking on cloud accounting, woudl like to mention Xero but am looking for livestock bolt on?
Regards
Martin

Rod Drury
5 July 2013 #

Hi Martin, funny of you to ask. We had a workshop this week with a number of Industry players and rural accounting specialists BDO to map out the data flows between the new farming portals that are in development and Xero.

There are a number of companies working on this. For example AgHub, FarmIQ and MyFarm. We’re also have a good discussion with some of the good traditional farming software providers.

Essentially the hand off point will be the stock reconciliation.

We’re just completing an integration guide to map out how best farming solutions should interact with Xero so the solutions work seamlessly.

The areas we are identified to specify are are:
Planning – setting budgets, input modelling and forecasts
Transactions – daily data flows into farms such as bank feeds and rural invoices
Stock Reconciliation – Have accounting accurately reflect what’s on the farm
Management Accounting – Regular monthly reporting
Compliance (EOY) Reporting

Also making progress with invoice feeds from rural suppliers.

So lot’s of work underway and hope it comes together this year. A few cats to herd though.

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