Good Farming Accounting Pays Off in the Long Run BY LEIGH GLENN Imagine: You grow vegetables. It’s winter and, reflecting upon what will help you become a better grower in the coming season, you consider buying a roller-crimper. But do you have the cash flow to make it happen? Or this: You attend three markets. What’s the value of each? Would it be worth it to drop one and put your time and energy toward developing wholesale channels? Without good accounting, you may feel loath to take action or, conversely, you might jump in without context and lose money. Maintaining accurate financial records can feel like a pain, but doing so helps farmers better understand their business — including what’s working, what’s not, who might need more training and where and how best to allocate precious resources. In other words, what’s measured is easier to manage. Most farmers know whether they’re profitable, says The Farmer’s Office author Julia Shanks. “The question is do they know how, and what can they do to improve profits?” Further, despite the knowledge of profitability acting as a “Why, bother?” drag on keeping financial records, doing so can help farmers maintain profitability over the long run. Among her farmer and grower clients, Shanks has seen three common barriers: Farmers aren’t at a desk all day and regular bookkeeping takes more than five minutes here and there; it means sitting at a desk. Second, most farmers serve as CEO, COO and CFO, and what makes farmers good at farming is not necessarily the same as what makes a great bookkeeper or a skilled accountant. Third, “numbers are scary.” If those same folks were as intrigued by numbers as compost, they’d probably have chosen a different line of work. “If you look at an income statement, it’s just a sea of numbers with no meaning,” writes Shanks. “So, what’s the point of bookkeeping if all you can get out of it is figuring out how to pay taxes? So people avoid them.” But when the importance of the numbers and what they mean hits home, then what? Keep your eyes on the prize — what do you want to learn from the numbers? Expect an initial slog, and plan to pay for outside help. Count on not knowing what to ask until you’re in the thick of it. Adjust accordingly. Farmer Lee O’Neill didn’t go from 0 to 60 overnight. O’Neill and her husband Dave run Radical Roots Farm, Keezletown, Virginia. Their operates includes a CSA, wholesale accounts, a farmers’ market and plant sales. O’Neill had been keeping records in Excel before switching to the desktop version of QuickBooks. (Note: she did not transfer her numbers from Exel, which she felt was too complicated.) With Excel, she couldn’t easily “manipulate the data.” The longer she has worked with QuickBooks, the more she’s been able to home in on the information she seeks — where is income coming from, what are the expenses, how are they consistent from year to year or how do they change? “Or I can look at each customer and study that as well at any point in the season. ‘Oh, this customer is this percentage higher in sales,’ and I can look at each item they order — is that up or down? You think you’ll know, but you can’t know without diving in there.” Shanks doesn’t push any particular type of accounting software, but says that QuickBooks is robust for small businesses and allows farmers to get a better picture of what’s going on than a simple paper ledger or Excel because it does the math. Accrual lets farmers see the whole picture. TRACKING INCOME, TRACKING EXPENSES By far the best step O’Neill took was to hire a QuickBooks expert to set up the system. It cost $500 but saved her hours of work. First, they created a chart of accounts (CoA) for each enterprise, which she says would have been hard to do without any experience. Elaine Lemmon, staff consultant for Kitchen Table Consultants in Philadelphia, said setting up a proper CoA is important when getting started because it will later help farmers to see what they budgeted or planned for versus what actually happened. KTC’s guideline for CoAs is to assign categories only to those items that make up more than 1 percent of revenue. If sales are $250,000 annually, then anything $2,500 or less would not have its own category because it would not show any sort of trend well. But, she adds, farmers who want a more “granular” CoA would still be able to have that in QuickBooks, where the information could be collapsed for a quick view or expanded into the details. Shanks recommends grouping expenses into five categories: cost of production, labor, general and administrative, repairs and maintenance, and occupancy. As the farm business grows, these five can then be tracked across each enterprise. Shanks recommends tracking expenses that are greater than 0.5 percent of total revenue. Otherwise, “if you get too detailed, the benefit diminishes.” For example, she said, it’s important to know feed expenses for different livestock (meat birds versus layers versus pigs), but the different kinds of feeds for specific animals is not important. Shanks always proceeds with the following in mind: “What questions will I be able to answer by tracking an expense separately? And does it really help my business?” Both Shanks and Lemmon mostly recommend tracking on an accrual basis because it’s easier to match revenues and expenses. The trick is to do so in the same time period, which gives the best evaluation of profitability, and may mean adjusting the fiscal year so that all related expenses and revenues are recorded at the same time. For example, says Shanks, a farmer with a CSA may get his money in one calendar year and incur the production expenses in the next. A livestock farmer could incur all her production expenses in one year and not gain income from sales until the following year. Accrual lets farmers see “the whole picture,” says Lemmon, yet doesn’t prevent them from running cash statements. Gaining this information can help farmers better project what their expenses will be when so they don’t incur heavy expenses they aren’t prepared for. “Cash budgeting for agriculture is particularly vital because of the long business cycle,” says Shanks. “For vegetable farmers, you’ll start investing in seeds and supplies in January and you may not see your first sale until May or June. You’re hemorrhaging cash for five to six months before it starts to trickle back in. If you don’t budget for cash, how do you know you’ll be able to get through this period? For livestock farmers the business cycle can take as long as two years from the time you get your first head of cattle until you make a sale. For an orchard, it can be five years.” THE FRUITS THAT FOLLOW For O’Neill, the CoA she started out with in 2013 is not that much different today, but the items tracked have changed as the farm quadrupled its wholesale business. She has found tracking in that arena invaluable because it lets her look at each wholesale customer. “Are basil plant clamshells really worth it? $5,000 last year — it’s worth it. I can do that for each item I create,” she said. When she reconciles at the end of the month, O’Neill looks at the profit and loss (P&L) statement, comparing season over season, to see how income and expenses stack up. This has allowed Radical Roots to drop certain crops — like okra — that cost more money than they yield and even to drop markets that weren’t serving them well and to ramp up wholesale. This included a market in Washington, D.C., a two-hour drive one way. Instead of the additional vehicle, fuel and added labor, they focused more on wholesale. One wholesale customer to whom they sell a clamshell mesclun mix was at a certain price point. After speaking with the customer, Radical Roots tweaked the price and doubled sales. Over time, O’Neill has gotten better at knowing how to tag expenses, — such as separating out nursery expenses from expenses related to the farm, including how much potting soil goes to each in the spring. At krauts-maker and fermented-juicer Farmstead Ferments in Scottsville, Va., founder Dawn Story said the expense categories do not include every type of raw green or vegetable that goes into the krauts because the bookkeeper is on-site once a week and that would be too much. Instead, there are bulk expense categories for greens, for packaging, for labeling and more. Income categories include a couple of area farmers’ markets, wholesale via farm stores, groceries and other markets throughout the Mid-Atlantic plus a few other states, as well as what is sold through its storefront, Farmstead Ferments Mercantile in Scottsville. Story, who also owns and operates New Moon Apothecary, switched to the online version of QuickBooks in 2019, despite the difference in price, because updates are automatic and information can be accessed and entered remotely, if needed. Farmstead Ferments grows as much of its own produce as it can, but does have to buy produce from area growers, especially in the winter. Naturally, Story expects those expenses to rise at that time. Though she admits she could make deeper use of the numbers, she regularly checks the P&L statement to see what’s going on. “Say we lost some money,” she said. “I would look at expenses to see if any account looks inflated more so than the norm.” She would also look at sales to see, “Who didn’t order this month? Are we missing a major client?” This approach came in handy early in 2019 when Story incurred larger advertising expenses. All the bills for advertising came in at once. She was able to negotiate to pay in installments on some of the larger invoices. She isn’t sure she needs records to tell her that, but tracking expenses over time has led her to order the most expensive supplies — jars — once a month. In a five-week month, she can adjust her ordering. Story also likes to use QuickBooks to manage payroll. Analyzing that data has led her to conclude that it’s better to have more full-time employees and fewer part-time employees because of the tax burden. And speaking of taxes, she suggests that any software a farmer uses include different line items for local, state and federal and, in the Mercantile’s case, meal taxes related to sales. Keeping accurate records can help farmers avoid tax mistakes. Last year, one of Shanks’ clients had a snag in his bookkeeping that caused him to overreport his revenue. But at tax time they caught the error, saving him $3,500 on his annual taxes, she said. And among farming couples, proper financial record keeping could save a marriage. Lemmon, who farmed for 15 years, including a decade before joining Kitchen Table Consultants, says that one partner often handles the books while the other handles production, and they need to have a shared, data-driven basis for discussions. KTC consultants “spend a lot of time inserting ourselves between people” — with a one-page P&L statement, rolling cash flow and balance sheet, which shows assets, liability and equity — so that “nobody has to feel emotional, except to say, ‘I’m scared about our cash gap.’ There’s no blame. The piece of paper tells the story,” and they can make a decision together. This article appeared in the February 2020 issue of Acres U.S.A. magazine.