Mark Dikeman Associate Director KFMA

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1 Mark Dikeman Associate Director KFMA

2 Tedious requires attention to detail Complex some knowledge of accounting (and farm accounting) is needed Time consuming when more than tax records are needed A valuable decision making tool 2

3 For Uncle Sam Income tax preparation Work with a lender Balance sheet or cash flow projection Management/decision making/planning Bookkeeping for decision making requires effort and dedication Good intentions don t cut it 3

4 Schedule F Farm income and expenses Raised sales are grouped together Records should separate breeding livestock and equipment sales from grain or market livestock sales 4

5 Form 4797 page 1 Sales of business related capital assets Records should differentiate raised and purchased breeding livestock When possible, refer to your depreciation schedule to identify assets sold 5

6 Form 4797 page 2 6

7 Form 4562 Depreciation Records should identify the full purchase price of capital assets Entries are complicated when purchases are partially or fully financed Transactions (and reporting) is complicated when a trade is involved 7

8 Where they at right now, financially Their long-term goals for the farm business What is required to reach those goals What they can measure and manage Their financial strengths and weaknesses What financial performance measures say about their farm business How they can use records in decision making 8

9 Accrual income statement Accrual balance sheet Cash flow statement (or projection) Enterprise analysis (cost of production) Ability to compare to peers (benchmark) 9

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11 Accrual income statement Counts income when earned and expenses when incurred Provides a better measure of profitability compared to cash basis accounting Differs considerably from taxable income Most accounting programs will not provide a true accrual income statement 11

12 Accrual income statement Accrual income = cash sales + end inventory beg inventory Bushels Price Value Corn Inventory 1/1/19 50,000 $3.00 $150,000 Corn Sales in ,000 $2.75 $137,500 Corn Inventory 12/31/19 60,000 $3.25 $195,000 Cash income = $137,500 Accrual income = 137, , ,000 = $182,500 12

13 Accrual income statement Accrual expense = cash purchases + beg prepays end prepays Value Seed prepaid in 2018 for 2019 $45,000 Cash seed purchases in 2019 $55,500 Seed prepaid in 2019 for 2020 $50,000 Cash seed expense = $55,500 Accrual seed expense = 55, ,000 50,000 = $50,500 13

14 Accrual income statement Tax depreciation expense rarely reflects reality Assets are depreciated to zero remaining basis Depreciation can be accelerated Some method of management depreciation is needed Percentage of market value? Decrease in value from beginning to end of year? Second or alternative depreciation schedule? 14

15 Accrual income statement Generally, an accrual income statement accounts for only business income and expenses Cannot ignore non-farm income or family living expenses Either segregate non-farm items on an accrual income statement or develop a separate non-farm income statement 15

16 118,029 accrual farm income 54,814 taxable income before depreciation 16

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18 Accrual balance sheet A snapshot of net worth at a point in time Assets = liabilities + equity Be aware of different methods of valuation Cost valuation = initial cost + improvements depreciation Value of raised grain, calves, etc is zero using cost valuation Market valuation = current market value of assets Using market value may indicate net worth that cannot be realized May result in inaccurate accrual income statement Modified cost/hybrid valuation = market value on current assets, cost value on longer term assets? 18

19 Accrual balance sheet Prepare annually at about the same time of year Use consistent valuation methods Include all inventory, payables, and receivables Make sure values are honest and reasonable 19

20 A balance sheet trend tells a better story than a single balance sheet at one point in time A point in time balance sheet is probably more valuable to your banker than you Change in net worth (beginning to end) should equal net income from income statement If ignoring unearned inflation in asset values If including non-farm income and family living expense 20

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23 Cash flow statement For non-farm businesses, reflects cash in and cash out of the business, usually annually Differs from income statement Excludes accrual adjustments and depreciation Includes principal payments, new borrowing, family living For farm businesses, a monthly cash flow can help determine how much current borrowing might be needed (and when) Use history to project the future 23

24 Cash flow statement Helpful to compare projected to actual May help evaluate feasibility of new enterprises 24

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27 Enterprise Analysis Allocation of income and expenses to a segment of the farm business over a period of time Calculation of cost of production Current year actual or future projections are valuable for marketing decisions Focus on direct inputs (seed, chemical, fertilizer, cash rent, crop insurance, etc) and direct income 27

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30 Benchmarking Comparison to others Helps identify your strengths and weaknesses 30

31 Benchmarking 31

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33 Work with your tax preparer to get started They may have experience with different systems They will likely want input on your chart of accounts Select a system that meets (most of) your needs No single system will do it all Work regularly on your books Develop a habit Reward yourself Nothing happens auto-magically How good is your memory? 33

34 Reconcile to your bank statements An absolute must for accuracy!! Track (and reconcile) loan balances Be consistent Wal-Mart or Walmart? Start small Don t bite off more than you can chew Make sure you understand the basics before adding too much 34

35 Keep accrual records Accounts payable and accounts receivable For example, use bill and invoice features in QuickBooks Keep enough detail to provide adequate information but stay out of the weeds As your skills improve, add more detail Identify profit centers or cost centers Enterprise analysis Most accounting packages make it easy to track but its difficult to analyze 35

36 Use records to manage income tax Building wealth requires paying tax Plan ahead to target taxable income In the long run, tax is minimized when paid at a consistent level Tax savings should never be a primary reason to purchase equipment (especially if financed) Rarely to farms go broke paying tax 36

37 Write down your business goals and objectives Regularly evaluate progress towards goals Measure non-farm performance (family living expenses) Envelope system 37

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