Let’s take a moment and daydream about what it’s like to be a farmer. Imagine turning the soil in preparation for planting rows of squash, potatoes and carrots. Feel the warm summer sun on your back as you get your hands dirty harvesting tomatoes, melons and beans. Listen to the conversations at the farmers’ market where you are able to connect and share your produce with local consumers.
As your heart begins to warm and a sense of accomplishment fills your soul, you look down at the kitchen table and there are piles of receipts, bills, bank statements and paperwork in front of you. Your first instinct is to set it aside and say “I’ll take care of this tomorrow” or “The next rainy day, I’ll catch up on all these papers.” STOP.
Recordkeeping, although not nearly as glamorous as working in the dirt, is just as important of a task to help your business succeed. It’s important to establish a recordkeeping routine in the early stages of your business, when the business is smaller in scale and less complex.
I admit, it can be tedious and make your brain hurt, but how else do you know if your business is profitable or not? It isn’t just about whether or not there is money in the checkbook at the end of the month. It’s about knowing that your business is headed in the right direction. Did you really make 50 cents on the head of lettuce you sold to Mrs. Jones? Are you selling that pint of strawberries at a price that covers the cost of planting, caring for, harvesting and marketing them to Mr. Smith? Are you making enough to cover the taxes and other expenses on the products you are selling? Can you afford that new cultivator you need? Do you need to borrow money or can you pay for it from my profits?
Now the heartwarming daydream I depicted earlier is lost. Your mind is spinning. Maybe you’re even beginning to worry about how to get your records in order.
Take a breath. Tackle one thing at a time. The best starting point is to establish an income and expense statement that fits your operation. Keep it simple and let it evolve as your business evolves. Keep in mind that this statement is only as useful as the information it contains. It can be used for operational management of the business: What crops should you grow or what markets should you sell at? It can also be used for financial management: How much sales or income tax do you owe?
How do you know if this statement is right? If you are using the records for financial management, the net income figure should reconcile to your checkbook balance. “But I don’t deposit everything,” you might say. Although a best practice is to run as much as possible through a bank account because it automatically sets a paper trail, as long as you are reporting ALL income earned, whether deposited or not, and ALL expenses paid, whether paid from an account or not, you should get the same result.
If you are using the records for operational management, do you feel confident that you can use this information to profitably increase production from 25 to 75 acres? Do you feel confident that you want to, for example, discontinue your CSA memberships to focus on directly marketing to a retail outlet?
When in doubt, don’t stress too much over the paperwork. While you are daydreaming about being in the field, we at Farm Credit East are daydreaming about the numbers. It is extremely important that as a business owner, you understand and use the information, but we can help you pull it all together. Contact your local Farm Credit East office to learn more about how we can help you get your records in order and effectively use them to stay on track. Learn more about Farm Credit East's record-keeping services