Just as it is important to keep records of your farm finances, it is important to have a record of your personal finances. It is even more important to record them separately. Here are five reasons why.
1 Determine profitability
Family living expenses such as personal utilities, food and medical expenses, can distort financial statements. Keeping personal and business costs separate gives you a more accurate reading of how your farm business is doing financially.
2De-stress tax season
Taxes can be stressful enough. Having separate processes for personal finances in place and farm finances will reduce the likelihood of errors in your farm tax return. Errors mean penalties and interest charges.
3The corporate veil
Having a separate legal entity for your farm business reduces the chance of having your personal investments compromised. If personal and business finances are not kept separate, farm owners run the risk of being personally liable — putting personal assets, investments and bank accounts in jeopardy in order to pay the farm business debt.
4 Bookkeeping
You may think it sounds easier to keep all your records in one book, but it mostly creates a bigger financial headache for your bookkeeper. Mixing expenses makes it harder for the bookkeeper to separate them out later. Organized records help you know where your business stands financially.
5Building credit
Establishing a bank account and Employer Identification Number for your farm business helps the farm build its own credit history. If you, as an individual, have a poor credit score, it may make it harder for your farm to obtain loans. Personal debt like mortgage, student debt and auto loans can drag down your farm’s credit history.
Source: Darren Frye, CEO, Water Street Solutions, 5 reasons to keep the farm business books separate and Ohio State Extension.
(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)
More Farming 101 columns:
- 5 things young farmers should know about finances
- The farm balance sheet
- 5 items for your farm’s cash flow statement
- What to include in your farm business plan
- How to approach a lender: Tips for getting a farm loan
- How to use microloans to get your farm started
- Saving for the future: 6 tips for young farmers
- How to create a farm safety kit
- 5 tips for child safety on the farm
- 6 tips for livestock safety
- 4 tips for transporting livestock
- 5 ways to better understand tractor stability
- 6 farm equipment hacks
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