What You Need to Know for Farm Accounting and Budgeting
Updated: Nov 7, 2022
Accounting may not be the most fun part of your work week but it is a very important part. Understanding and adopting farm-specific accounting methods can mean the difference between living your dream or just dreaming about it. At the end of the day farming is a business and accounting (for better or worse) is a big part of that. Read on for some tools, tips and key agriculture accounting standards to adopt for your farm or ranch.
No matter what type of business you're running, it's critical to keep detailed records of our income and expenses. So whether you keep your farm records in a spreadsheet, online accounting system (like Quickbooks or Xero), use a farm management system or farm accounting software keeping detailed financial records is critical to understanding the health of your farm business.
Farm Budgets for a Profitable Farm Business
Budgets are crucial to making sound agricultural decisions. They help you evaluate your business venture before committing to them. They also provide the framework to keep on track as you move through the season. What is this magic I'm describing? Why it's a budget.
There are two types of budgets that small farms and ranches use the most often. They are:
1) An operating budget— budgeting for cash flow.
2) An Enterprise Budget — budgeting for a new agricultural product/project.
Farm Cashflow Management
Cash flow refers to the net balance of cash moving in and out of a business at a specific point in time. This could be monthly expenses or saving for the future unknowns. All of this goes into a cashflow budget.
One way to get your budget in check is to write out a budget or add one to an online app. There are lots of free resources out there that can help you with this. What's important is that you write down your income (in) and expenses (out) to make sure you're covered for the month.
It's important to get all the spenders in the household involved in this process. Then (hopefully) there won't be any oops moments where you overspend and can't pay something important.
It's also great to have multi-streams of income in case the market dries up or you aren't able to sell an item.
Here are a few ways to keep the cash flow streaming on the farm:
Offer a CSA- It doesn't have to be a year long CSA (Community Supported Agriculture). You could choose a weekly, monthly or bi-monthly CSA. This keeps funds rolling in (even in the winter).
Sell seasonal items (plan ahead) Like seedlings or holidays gift items. (Christmas trees or pies anyone!?)
Sell greens (all year long)
Sell herbs or flowers: Get creative about what might grow well in your area. (Dry the flowers and sell dried bouquets in the winter.
Grow some garlic and scapes
Start a herd share or breeding services
Add some online or in-person classes. You also might offer both for folks that can't make it to you. (This might broaden your reach.)
Rent a barn stall or two
These are just a few ideas but there are a ton of ideas that could help keep the funds rolling in for your farm all year long. Think about your market and listen to what your customer wants.
Evaluating The Next Greatest Thing
One of the most addictive parts of farming is dreaming about all the possibilities. Before you take that leap into the next market or next great idea be sure to run your idea through an enterprise budget exercise.
Should you build a new hoop house for early tomato production? Should you sell pastured chicken eggs? How about adding turkey this year? Or what about adding flower production to your vegetable farm?
While the opportunities for new income streams are exciting, it is also incredibly easy to waste a lot of time and money on a new venture that may end up being unprofitable and just cost you money.
Enterprise budgets are a way of helping you break down the expenses and income that come with a specific crop/livestock project. They have been developed by agricultural producers, extension specialists, government agencies and financial institutions to help farm and ranch managers evaluate new agricultural opportunities. You can use them to help find a budget that matches the crop or livestock you may be considering. Here is a link to some free enterprise budgets.
Enterprise budgets were initially created for large-scale farms, but many have been developed for small, specialty operations. Most land-grant universities have a selection of enterprise budgets to choose from.
Go HERE for more information on using budgets for agricultural decision-making.
Understanding your Farms’ Profit and Loss
Your farm’s income statement (aka profit and loss) allows you to determine whether the farming operation is making money. It also allows you to evaluate the difference between your gross income (total sales) and net income (gross sales after expenses).
Your P&L includes the same income and expense categories as your annual operating budget minus capital purchases with the addition of depreciation expense and interest.
Once you determine what your “profit” is, it is up to you to decide what to do with it. Some beginning farmers will put all that money right back into the operation, electing to grow the efficiency of the business, investing in new equipment or building a packing shed, for instance. Others may take that income out as an “owners draw” for household income. Finally, some may hold that money in reserve for future investments or cover next year’s expenses.
Preparing for Taxes — Your Schedule F
Ranchers and livestock, including poultry farmers, vegetable and fruit growers, nursery owners and even fish farmers running a business need to report their net profit or loss for the tax year using a Schedule F (Profit or Loss from Farming) form.
A Schedule F also allows you to take advantage of farm-specific deductions. The income (or loss) from your Schedule F will then be carried over when you file your personal 1040.
Most farmers will find it easier to employ a tax professional to finish their annual Schedule F. However, the record-keeping of income and expenses will need to be kept and gathered to provide to the hired accountant. Paper receipts may be provided, but most farmers find it is easier to use software developed for farm accounting to keep track of income and expenses. If you categorize your income and expenses through out the year, the same information used to formulate budgets, keep track of your cash flow and run your P&L will also fill out your Schedule F when tax time comes around. If you'd like to find an easier way to do this give Farmbrite a try! We help you just print out that Schedule F at tax time.
Learn more about accounting needs for small farmers and ranchers.
We hope you found this introduction into farm budgeting and accounting helpful! In addition to helping farmers and ranchers keep track of their crops and livestock, sell online, run reports and analytics and issue work orders, Farmbrite offers farm bookkeeping and accounting functionality that streamlines your farms' taxes and bookkeeping needs.