Accounting for the way you run your farm
Farming is unique. There are few other types of business that rely on living produce, whether it's crops or livestock. That makes farm accounting more complex than other businesses when it comes to assets, liabilities, costs and revenue.
Depending on the country you’re in, farming can be quite a regulated and subsidized industry. Then there's the weather, of course, which can have a dramatic effect on profit and loss.
Accounting for all these factors is far from straightforward. But with a little thought and planning it's possible to get into a routine of managing the finances for every aspect of your farm's operation. Here are ten important points to bear in mind about farm accounting.
1. Your land is an asset
Properly managed agricultural land shouldn't depreciate – it might even go up in value. But mismanaged land can take many years of careful nurturing to return to productivity, especially if it's become highly acidic or drained of nutrients due to over-farming in the past.
The cost of maintaining your land should always be accounted for.
- Fertilizer: This is an unavoidable expense if you want to keep your fields productive
- Irrigation: Nothing grows without water, and irrigation is a major cost in dry countries
- Drainage: Soil that doesn't drain well will rot crops and harm livestock, and improving drainage is a costly process
- Soil pH management: Different plants require different pH levels and careful analysis is required in order to add the correct nutrients to maintain soil pH at the appropriate level
- Weed removal: Whether it's manual extraction or spraying, weed removal is an ongoing expense
- Pest control: If you're growing crops you'll need to manage pests and this can be a continuous fight with natural selection as pests develop resistance
If looked after well, good quality land should remain productive year after year. So whatever it costs to keep your land in good condition it is likely to be money well spent. Make sure you account for all these expenses.
2. Stay up to date with government subsidy schemes
Farming is a critical industry. If a country doesn't have the resources to feed itself, it will have to rely on imports to keep its population alive. For that reason, most governments provide subsidies to farmers to help them out during the lean years, to make particular types of farming more appealing, and to ensure that the country never runs out of food.
These subsidies are different in each country and they often change. One year you might find there's a big subsidy on cheese production, another year it might be beef that's subsidized. Quite often governments get it wrong, leading to surpluses that drive down prices too far. The so-called "butter mountains" and "wine lakes" in Europe towards the end of last century were partly a result of poorly-managed subsidies.
Today subsidies are managed more efficiently, but that can mean they change more often too. So make sure you keep track of subsidies and account for them, especially if they're made as direct payments. The more knowledge you have about subsidies, the more you can plan your farming strategy to make the most of them.
3. Adjust your farm accounting calendar to suit the government's
When is a cow not a cow? When the government decides it's a heifer. Farmers know that nature doesn't follow strict timetables. For example, if cattle are born early, late or out of season, they might not fit into the government's rigid definition by age. This can cause long-term headaches if you're trying to keep a tally of the animals on your farm.
Resolving this can be a problem, particularly when farming breeds of animal that reproduce all year round or outside the usual seasons. Usually the simplest solution is to go with the government's definition of significant dates and livestock ages when doing your accounts. It may not always be factually correct, but it'll save you going through more complex calculations in the future.
4. Record changes in land use
As economies change, so does the type of farming that's carried out on the land. For example:
- Pasture to crop production: A shift towards a more vegetarian society can lead to pasture being given over to cereal, fruit or vegetable production
- Arable to native bush and plants: Some governments may pay farmers to return farmed land to its "native" state by planting indigenous species and letting them grow wild
- Carbon capture schemes: These pay farmers to change land use to forestry, as a way of "locking up" carbon in new tree growth
- Forest to livestock: In some parts of the world forests are cleared to make way for meat production, mainly beef for sale to burger chains
If your use of land changes, even if it's just a few fields, be sure to record it in your accounts. Make sure the land value (the asset) is adjusted if necessary and that you account for the sale of any stock that was on the land before. Or, if moving to a livestock farming model, be sure to record the cost of buying stock.
If you record these changes as they happen, it will make it much easier to keep your business accounts up to date.
5. Know your stock
Most farmers will know how many animals they have, of what type, breed and age, to within a small margin.
But animals breed and die, so the number will not remain static. And the old saying – where there is livestock, there is also deadstock – still applies, especially during cold winters and lambing or calving season.
So your stock numbers will change over time and it's important to record these changes in your accounting software. Every head has a value, and that value should be recorded.
6. Understand depreciation
In most countries, the cost of new equipment can be offset against tax. And its value will depreciate over time as it becomes older, wears out or is made obsolete by newer technology. Make sure you understand the rules for depreciation in your country, because the value of your equipment will affect your tax bill.
- Tractors, trucks, harvesting equipment and other farm machinery: Built to last, but undergo heavy use and wear and tear in all weathers. Good quality equipment may hold its value but new technology is moving fast in this area, making older machinery less valuable.
- Computer equipment: Increasingly essential for managing a farm efficiently, computers depreciate faster than almost any other type of equipment.
- Hand tools, machine tools and repair equipment: Often long-lasting with a long depreciation tail, though low-quality items can fail sooner and be a poor investment.
Keep track of what you buy and account for its depreciation each year.
7. Account for loss
Farming is dependent on the weather, and sometimes the weather wreaks havoc. A hot, dry summer might be great for wine growers but it can be catastrophic for dairy farmers. Unseasonal storms can destroy an entire wheat crop and unexpected rain can leave hay rotting in the fields.
It's important to record any losses in your accounts, because that will reduce your overall tax bill. You won't want to be taxed on something that's been destroyed, or on a profit that you haven't made.
8. Keep track of your profitability
Farm profitability can be difficult to measure. There have been various attempts to do so, including:
- Economic Farm Surplus or similar schemes: Favored by accountants, this uses various farm accounting metrics to give an overall performance rating
- Month-to-month profit: A useful quick guide to how your farm's performing right now, but no help in predicting future cash flow or profits
- Working costs to milk solids: A popular one for dairy farm calculations, though be sure to keep your figures up to date and based on current milk solid prices
- Revenue or profit per unit area: A measure of how much revenue or profit is generated for each unit area of farmland, for example dollars per hectare. While this gives a good idea of current farm performance, it doesn't always take underlying costs into account. Almost any farm can appear temporarily profitable if it's had enough recent investment.
The only way to truly understand farm profitability over time is to use good quality farm accounting software. The additional benefit of doing this, is that you can use it to make forecasts and predictions based on past trends.
9. Use the internet and the cloud
Most farmers have some form of internet connection these days. It's not always fast – rural life has its downsides – but it's usually enough for the basics. Some uses for the internet in general and the cloud in particular include:
- Checking stock prices and trends: Keeping up to date with these numbers can help farmers decide how best to utilize their land
- Accessing kill sheets, tracking milk solid prices, etc: Usually faster and easier than getting this information by mail or word-of-mouth
- Long-range and short-range weather forecasting: Vital, required knowledge for just about every type of farm
- Using cloud apps: These new tools offer much faster access to information, accounting tools, resources and bank accounts
With the internet, and especially cloud computing, farmers can take advantage of the latest farming software. Good farm accounting software will have direct feeds in place for banks and farm suppliers. This means you can manage all your resources, suppliers and partners from one place.
10. Consider hiring an accountant
It is possible to manage the accounts of a small or even medium-sized farm on your own, but the time and complexity involved mean it will be hard work. If you're running a family farm then you may be able to designate one member of the family to handle the accounts while another looks after the day-to-day running of the farm. However, there will still be a steep learning curve.
A good accountant can take most of the fiddly detail work off your hands, leaving you free to run your business the way you want to.
Although the expense might seem high, good accountants will be able to save you money in the long run. With their understanding of tax legislation they may be able to reduce your tax bill, perhaps enough to cancel out the cost of your accountant's bill.
Account for every aspect of your farm
As we've seen, farm accounting is a big topic. Every farm is different and we've only scratched the surface in this guide.
Luckily, for farmers who want to go it alone there's now a range of good quality software, most of it cloud-based, to help simplify the accounting process.
Even if you do hire an accountant, you'll still need to keep some important financial information at your fingertips. When you and your accountant work together in the cloud so you can both access the figures, it'll help your farming business run much more efficiently.
Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.