What’s really going on?: Farms still don’t have good records

I have taught the benefits of current, accurate farm financial and production records since I started working with dairy management students at the Agricultural Technical Institute (ATI) in 1974.
Each dairy technology student at ATI was required to take a course in farm records and analysis as part of his or her degree requirements.
In addition, Charles Stock and I wrote and taught a course in dairy farm management that included budgeting and planning for the financial and production performance of the farm business.
In eight years of teaching the Farm Business Planning and Analysis Program at Mahoning Career and Technical Center, I worked with more than 150 farms, teaching managers how to complete, analyze and make decisions with farm records.
Each year we conducted an analysis of each farm’s business and used the results to make decisions for improving the performance of the farm.
From 1986 to 1991 I operated a farm accounting service for farmers in Mahoning and Columbiana counties, offering farm business accounting and records analysis services, plus farm income tax preparation.
Since I returned to extension in 1991, we have offered workshops in farm record keeping, farm financial management, and how to become the chief financial officer of your farm business.
We have done numerous individual farm financial analyses and assessments as part of our Dairy Excel Dairy Profitability and Expansion Initiative.
Care to guess what is the most serious management deficiency on Ohio dairy farms today?
In my opinion, the most important reason farm managers do not reach their profit potential in their businesses is a lack of information about the performance of their overall business and its component enterprises.
Enterprise records. Many farms have good records and are making good use of them in making decisions, but the majority of good record keepers still do not have enterprise records on individual crop and livestock profit centers.
The major reason small- and medium-sized farm businesses have financial records is they are required by Internal Revenue Service in order to prepare tax returns.
Very few farms would have any information available to managers, lenders and other farm advisers regarding financial performance of the business if they were not required to prepare tax returns.
Lenders require reporting of farm performance, but that is usually based upon the tax returns.
The unfortunate fact is that most farm managers manage their finances to minimize income tax.
Then, when things get a little short, or the bank starts putting pressure on them because prices are low and there is a cash flow problem, all I have to work with are those tax returns designed to show minimum profitability.
There are no crop production records, no idea how much it costs to raise a heifer, and no idea what these costs should be.
Managers do not know anything about what is really going on!
They don’t know what crop yields are, how much it costs to produce a hundredweight of milk or a ton of forage.
Tax returns (cash basis) don’t even give a true picture of what income and expenses belong to a particular year.
Making decisions. In view of the above, how are decisions made on today’s dairy farms?
I believe most purchasing decisions are made without the use of accurate financial projections.
Instead, managers listen to salesmen, their advisers, neighbors and lenders and make many “uneducated” guesses about how or whether to employ new technology, new crop varieties and new strategies in crop or animal management.
Farmers often ask me whether they should adopt new techniques, products or management strategies.
I almost never have the information I need to help them with these questions, but in most instances, the information simply is not available to anyone, because the records are not kept.
How to do it. What should a good farm records system keep track of?
Balance sheet. You need an accurate balance sheet that shows what you own and what you owe.
The balance sheet must include accurate inventories of cash, crops, feed, livestock, machinery and real estate.
The liabilities side of the balance sheet must include all accounts payable and all balances due on open accounts, credit accounts, operating loans, as well as intermediate and long term debts.
Income, expense. Here is where the minimum records required for a tax return are not adequate for profitability and productivity analysis.
Cash basis accounting requires only that you keep track of income received and expenses paid.
If any income is received or expenses paid last year or next year for activities in the current year, the income statement must reflect the “accrual” or true profit for the year.
In the same way, the accrual value of production and expenses for each crop or livestock enterprise must be calculated in order to truly know whether it is a profitable or unprofitable activity.
It’s not hard to do.
You or someone in your management team needs to get help to set up the accounts you need, whether it is in a paper-based or computer-based system.
Separate fertilizer, fuel, repairs, heifer feed and hired labor into enterprises as you record the expenses into the system. Record crop yields as crops are harvested.
It takes extra detail in the system, but the benefits far outweigh the investment in time and effort.
At the end of the year, allocate overhead expenses such as interest, insurance, taxes and depreciation to the various enterprises and then figure out whether the effort was profitable using relevant cash prices for the commodities produced.
Now you have meaningful numbers for making decisions!
Getting help. It would be my privilege to assist you in converting your tax-based income and expense records to enterprise accounts.
I’ll help you to analyze the records and assess the profitability of overall farm, crops and livestock enterprises, too. Contact me or your local extension office for details.
(The author is an agricultural extension educator in Columbiana County. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)