Keeping Good Farm Records Can Improve Profitability

— Written By and last updated by Patricia Burch

In order to be a successful farmer, it is important for farm managers to have in place a complete and accurate farm records system in order to make informed management decisions that will help maintain or improve farm business profitability. Records systems have four functions: (1) as an indicator of progress; (2) as a planning tool; (3) as a diagnostic tool for identifying strengths and weaknesses; and (4) to assist in reporting to the Internal Revenue Service and other taxing entities, creditors, other farm asset owners, and to others who have a vested interest in the financial position of the business.

Records can also help the manager plan and implement farm business arrangements and do estate and other transfer planning. Furthermore, farm managers can use records to determine what the efficiencies and the inefficiencies are, measure progress of the business, and plan for the future. A good records system will assist managerial decision-making and be a source of personal satisfaction.

The degree of complexity of a farmer’s records system depends on management objectives. The farmer seeking a simple tax record needs only to use expense, income, payroll, and depreciation accounts, with no allocation of transactions to specific commodity enterprises. To provide financial information for lenders, the farmer will, at a minimum, need to inventory all asset and liability accounts and prepare basic financial statements annually.

A few years ago, farmers generally had only two bookkeeping choices: (1) keeping their own record-books or ledgers and (2) using bookkeeping services provided by accountants or farm organizations which provided the farmer with financial reports monthly, quarterly, or annually. However, personal computers provide farms with computerized bookkeeping that was previously available only to large corporations.

Selecting accounting software and computerizing recordkeeping or accounting systems must involve the key players – farm manager, on-farm accountant, and the farm’s public accountant. There are different types of computer software to assist farm managers in keeping records. There are several that provide detailed record keeping while others help farmers learn how to evaluate the consequences in their farming operation. N.C. Cooperative Extension can provide information about what software is available and how it can be applied.

With new technologies, the value of computerized farm management tools depends on how conscientiously and wisely they are used. For a computer system to reach its potential, the farm manager must be willing to record data on a regular basis and use the resulting information and analyses in making crucial farm decisions.