Understanding the levels of accounting can help you organize your finances and make better business decisions
When it comes to managing the various aspects of your farming operation, sometimes it’s easier to visualize the different layers in order to organize the many elements involved. Numbers can get confusing, jumbled or simply overwhelming when you try to tackle everything at once.
Here's how Paul Neiffer, a certified public accountant with CliftonLarsonAllen LLP and the author of “The Farm CPA” blog, explains the various levels of accounting on the farm, using a clever analogy.
According to Neiffer, there are four basic levels of farm accounting.
- 30,000-foot view. This is a high-level overview of your operation. It consists of three basic elements: revenue, expenses and bottom line. This level isn’t broken down into crops or machinery; it is simply a look at overall revenues, overall expenses and your bottom line.
- 10,000-foot view. When you drop down to the 10,000-foot elevation, you begin breaking it down by crop. How much did the corn crop make? How much did the soybean crop make? These types of questions are answered at this level.
- Field view. Neiffer describes this level as hovering over the fields with a drone. You begin to look more closely at your operations, looking at your farm operations by quarter-section or similar breakdown. This is the level where you get more detailed and determine which fields perform better than others.
- Ground level. Technology and big data are getting us closer and closer to this level. Neiffer predicts farmers will soon be able to dig all the way down to the soil level and know how much they make given a certain soil type. “The data is available now to the farmer,” Nieffer says, “it’s just a matter of the software catching up to it.” He believes farmers could do this now, but the cost/benefit ratio just isn’t there yet.
What level of farm accounting do you feel most comfortable with? What level is most challenging on your farm? Let us know in the comments.