By Peter Martin
Whether your operation is in growth or survival mode, the capital at stake and the swings in commodity prices create risks that demand more sophisticated financial information and reports. The right accounting system can also make you more competitive in a tough market.
Let’s start with the basics of the accounting system.
While all operations should consider accrual-basis versus cash-basis accounting, it is especially important for farms that are growing and need more accurate information. Under the accrual basis of accounting, expenses are matched with the related revenues and are reported when the expense occurs, not when the cash is paid. One of the key outcomes is an income statement that better measures the profitability of an operation during a specific time period. This all sounds good, but the downside is the complication that comes with the accrual method. I’ve witnessed many farms embark on accrual accounting only to abandon ship because the team is not prepared for the challenge. To convert to the accrual method, you’ll have to invest in people, training and software.
There is an awful lot of attention focused on systems, software and hardware to capture information. The right answer for collecting data is finding a system that works today, yet can adapt to where the operation intends to go. Data on a napkin won’t cut it, yet neither will the fancy system no one uses. The key is devoting the effort to knowing what technology exists, what works for you and staying current so you don’t miss out on an opportunity to better your operation.
Generating more powerful information can come in handy when faced with decisions. Imagine making marketing decisions if you truly understood your total cost of production. Imagine having a dashboard that could provide you with a real-time look at your key performance indicators. These are attainable outcomes that can be reached by investing in your finance and accounting system.
Again, whether growing your operation or trying to survive, your lender will require additional information. While I firmly believe good financial statements should be used first and foremost to better an operation, they are also important to your lender. Today, you might be getting by with limited reporting, however, that reporting will become more thorough and complicated as your operation changes and grows. Meeting these additional requirements will undoubtedly require an investment in the finance and accounting function of your business.
Historically much of the farm finance and accounting work has been tackled by a spouse or other team member. Today, I see more operations hiring a chief financial officer or outsourcing the job to an experienced accounting professional. The point is, operations must ensure they have a team that can accurately capture and interrupt the information necessary to be competitive. One way to quickly assess this is to ask your accountant a candid question: Is the quality of my financial information up to par? If the answer is, “No,” you have some work to do.
My colleague Kathleen Walton commonly uses the saying “what gets measured, gets managed.” Having the right team and system in place makes it easier to generate the right kind of information. It allows you to create benchmarking information and dashboards that summarize your financials and give you great insight. You can track expenses and revenues in real time against projections, allowing you to make decisions on the fly. You can automate bookkeeping and accounting practices, using technology to do more in less time. With an efficient technical infrastructure, you can access more meaningful financial information, making it easier to run your business.