As you sit down to wrap up the books on another year, do you find yourself having thoughts of “Déjà vu?” Another year has come and gone and you are still struggling with the same bookkeeping issues. You know it is important to keep good records, but time hasn’t been your friend this year, or for whatever reason you put it off again. Maybe the thought of getting started is just too overwhelming, because after all, you got into this business because you liked to farm, not because you liked to do paper work.
Let’s look at it from a different perspective. You have a construction company that does remodeling. Your customers pay you when the work is complete. To get you through between projects you have a credit card that you use for material purchases and for living expenses. At the end of the job, when you get paid-you pay the credit card off and you are good until the next project is completed. Do you see any potential problems with this particular scenario? Here are a few that come to mind:
• How do you separate living expenses from business expenses?
• What happens if material costs are more than projected?
• What happens if the job takes longer than you thought, which delays when you get paid?
• How do you make sure you are staying within your budget?
•What if you have two jobs running at once? How do you keep them separated?
• If you have employees, are they charging things too? How do you know they are business related?
I think you see the problem, as well as, the similarity with farming. Bookkeeping can’t be put off until you have time to get to it, or until the end of the year. Like it or not, you run a business which needs constant monitoring. How can you adjust to changing conditions if you don’t know where you stand at any given time?
I was recently told by a young producer if he had been monitoring his finances all along he would’ve done things differently. He is now trying to dig out of the hole. Make 2017 the year you quit digging and the year you start building your platform. Here are a few resolutions for 2017 to help you get started:
Know your Costs – You can’t control what you don’t measure. Now more than ever it is dangerous to keep doing what you’ve always done without knowing if you are making money. Make it a point of categorizing your expenses when they are received. Use the categories that are on the Schedule F of your taxes. You can get more detailed if you want, but this is a good place to start. This will be a big help if someone other than you is doing your bookkeeping. Get in the habit of reviewing every bill and making a note of the expense category, initialing it if it is correct, and noting the date it needs to be paid.
Use a Bookkeeping Software such as QuickBooks - It takes a little more time in the beginning to set it up, but it will be a huge timesaver after the initial set up. Talk to your CPA to see if someone in their office can help with the initial setup. They may even be willing to keep track of it on a monthly basis for you. An accurate set of books is one that is reconciled to invoices, especially co-op bills where multiple things are purchased. It is also helpful to code your expenses based on the crop in which it is used like corn, soybean, wheat, etc. This allows you to know your actual cost of production for each commodity. If you custom farm for someone else be sure to code those expenses separate from those expenses for your farm.
Control Family Living – Family living expenses is the most underestimated expense on the farm. You estimate the fuel that it takes to plant and harvest your crop each year, but how do you estimate the fuel your family uses for personal needs? As you see farm earnings decline, you need to pull back on personal expenses as well. If you are not already doing it, look at putting your family on a budget and drawing a salary. A $3 Gatorade or $7 at McDonald’s adds up quickly. When you have easy access to operating notes for personal expenses it is easy to overlook the impact.
Evaluate your Debt Load – It is a simple fact that you must be bringing in more income than you are spending. If you aren’t- you may need to look at selling some assets to reduce your debt load. More than likely, this will also mean that you will encounter increased taxes. Although that may seem counterproductive, it is a one-time expense. Don’t get caught in the “let’s wait another year and see what prices do” cycle because we all know how that story ends. If indications are showing that you are in a prolonged down cycle, it is important to get your debt under control as soon as possible. Remember, everyone else will be waiting it out too, and more than likely the market will be flooded when everyone decides to move at once.
Be Mindful of Your Input Costs – Remember when the local equipment dealer talked you into buying that new combine with all the new monitors and gadgets? Are you actually using those devices to control your cost of inputs? The added cost for the enhancements is probably still being felt when you make your equipment payments. Make it a priority to learn what they are telling you and how you can use the information to reduce input costs. Shop around for your inputs to make sure you are getting the best price. Can you increase your buying power if you partner with a neighbor when making big purchases? You will be surprised how much suppliers will sharpen their pencil when they realize they have competition.
Renegotiate Lease Agreements – Go to your landlords with numbers to support reducing the rent. It won’t be an easy discussion, but neither is the discussion you will need to have with your vendors when you can’t pay. It is hard to tell a landlord, whose taxes continue to go up each year, why you need to reduce the rent. There are no easy answers, and there is a good possibility that someone else is willing to pay more. Maybe their costs aren’t as much as yours, or maybe they have another motivation. But the bottom line is you need to remember you are farming to make a profit. Do you think McDonald’s would continue to sell the Big Mac if they were losing money on it? Check your ego at the door and get rid of land that is too costly to rent.
I think sometimes it is difficult for farmers and ranchers to realize the size of the business they are operating. A great deal of you are running million dollar enterprises with a fraction of the staff of a typical CEO. For that reason alone, you need to make the most of your resources when it comes to farm financials. I will leave you with what a mentor once told me. “You can’t control what you don’t know.” Make it a point in 2018 to learn more about what you can control.
Kathy Daily is the Senior Vice President of First Financial Bank’s Farm and Ranch Division. (www.ffb1.com) Mrs. Daily has been an agricultural lender for over 25 years. To contact her, phone 888-398-4119 or email her at firstname.lastname@example.org.