Do you have the information you need to make solid management decisions? If not, would you be able to verbalize what type of information would help?
Ultimately, if you cannot measure your farm's performance, how will you ever know if you are slowly headed for failure -- or progressing and growing? Whether it's your time or expertise in accounting that's the problem, it is crucial you identify and work toward fixing it.
At a minimum, these three steps should be implemented to start you on the path of receiving good management information for better decision-making:
1. Invest some time and money into measuring the position and performance of your operation.
• Buy accounting software best suited to your needs
• Make sure it will provide the level of detail you need
• Make sure the person entering the transactions is willing to invest time and energy toward learning the program and using it to its capability
2. Use the software regularly
• Consult with an agricultural accountant on setting it up properly so that it will provide both tax and management information.
3. Make sure your balance sheet is updated and reconciled at least once each year.
• Reconcile bank accounts, inventories, fixed assets, and loans
• Accounts should be held at cost for management purposes
Impress your lender with accrual-adjusted financial statements! It shows you have made an effort to provide yourself with accurate information. Not only would that likely translate to loan renewal, but maybe even a lower interest rate. Your lender will want to see your assets at fair market value, but once you have the list at cost, it is simple to add a column (in Excel) for fair market value.
Your tax accountant can easily provide you with management (straight-line) depreciation, while also maintaining tax depreciation.
If you are already at the level above, it is time to move to a more advanced level. To make management decisions, you need to know your true cost of production.
If you wonder what I mean by "true cost of production," visit Money Matters next week for Part two of this blog series.
Brought to you by Farm Financial Standards Council. The opinions of Brenda Duckworth are not necessarily those of Farm Futures or the Penton Farm Progress Group.