Take control of your input costs with one of these farm accounting options.
In a year when margins are tight, every dollar counts. And keeping accurate financial records can be key to getting a hold on your expenses and making smart input buying decisions this coming year.
There are basically three ways to get there. That's assuming you've already graduated from the Hushpuppy method of keeping books where you keep all your receipts in a shoebox and pull them out in December in a mad scramble to do your accounting records before visiting your lender the first of the year.
One way is to buy off-the-shelf small business accounting software. A second way is to get an ag-specific accounting package, commonly called a farm management system. The third is to hire an accountant or service bureau to do your books.
Here's a look at each of these accounting options to help you decide which one is best for your situation.
Off-the shelf software Greg Wolf, ag consultant with the financial firm Kennedy and Coe, says that if there's one thing worse than the Hushpuppy method, it is choosing a system that is beyond your means or capabilities.
For that reason, Wolf and many other experts recommend you start with a mass-market small business accounting software package such as Quicken, QuickBooks, or Microsoft Money. "It doesn't mean [this approach] is my favorite," Wolf says. "But there are a lot of producers who are not ready to make the commitment to a more complex system."
How do you know if you are one of those producers? Wolf says it comes down to general computer literacy and whether you have any knowledge of double-entry accounting, which recognizes both sides of a business transaction by debiting the amount to one account and crediting it to another account so the total debits equal total credits.
QuickBooks, for example, is technically a double-entry system, only you don't have to understand accounting terminology or debits, credits and general ledgers to balance your books. It works like a checkbook register in that you simply enter all the data for your business on forms that you are already familiar with, such as checks, bills, invoices and purchase orders. QuickBooks takes all the information you enter and does the accounting for you. You can then generate basic accounting reports, such as profit and loss statements, cash flow and forecasts. The numbers can be used in federal and state tax reports to ease filing.
One downside with this option is that you may be limited to the amount of information you can put into the program compared with an ag-specific package. For example, the program may allow you to enter dollar amounts of each transaction but not quantities, which would enable you to determine your costs of production on a per-bushel or per-acre basis.
However, a software package designed specifically for agriculture, called ManagePlus by Flagship Technologies, works as an add-on to Quicken and QuickBooks to solve that. Contact Flagship Technologies, Dept. FIN, Box 130, Madison, MO 65263, 800/545-5380.
This category of software also is a good, low-cost way to determine what you want in a software package. Packages generally cost less than $200 and can be purchased at most computer or discount stores.
Ag-specific software However, if you do decide to start with a mass-market software program and later decide to move to a more ag-specific package, transferring the data is not easy and sometimes not even possible, warns Mark Machtemes, agricultural product manager with Red Wing Business Systems. "There are too many versions out there, and the data may not be compatible," he says.
For that reason, Machtemes recommends that if you know you want to do more than track expenses and income, you should start with ag-specific software.
Four big names in this category are Red Wing Business Systems, FMS/Harvest, Farm Business Software (FBS) Systems and Agro Systems, although there are other smaller, regional companies. The software produced by these companies costs a little more than mass-market small business software, typically $500 or more. But it has more power and flexibility to fit the business of farming.
Ag-specific software can do everything that the off-the-shelf products can do plus the following:
* Track information to a per-unit basis to get at cost of production on a production-cycle basis. * Track multiple quantities for each transaction, such as number of head and weight. * Track both book and market balance sheet information and do comparative analysis between the two to determine how you are performing given current market conditions. * May provide up to 16 specialized financial ratios defined by the Farm Financial Standards Council, such as asset to liability and short-term to long-term debt. * An accrual option allows you to see how changes in crop and livestock inventories, prepaid expenses and accounts receivable affect both your balance sheet and income statement. Having this information is the only way to tell if you are making money, and it makes planning purchases easier and more accurate.
On the downside, ag-specific packages take more time to learn because they are set up as double-entry accounting. The learning curve can be as short as two months to as long as six, depending on your level of commitment, according to Mike Fassler, vice president of Salisbury Management Services and a reseller for Red Wing software.
Dale Nordquist, faculty member of University of Minnesota's Center for Farm Financial Management, says a farm management class offered by your local college can help ease the transition.
Connie and Steve Webb, owners of Computers and Technology and resellers of FMS/Harvest products, recommend that, before purchasing any system, you should try a demonstration version or arrange for a free limited use period, which is typically 30 days.
During that time, try to learn the system and see if it meets your needs. Also, make a point of calling the software company and asking for support. "See how long it takes to get a response," offers Connie Webb. "See if the person is friendly and knowledgeable. Do they make you feel as if you are competent at what you are doing?" Such checks are important, she says, because you need a support person who "is going to be that lifeline to help you when you think you are drowning."
Service bureau Maybe you feel you just don't have the time to learn any software system and key in all your receipts each month. Or maybe you don't like computers. Yet you still want to have good financial records.
If that's the case, then hiring a professional to do your books for you may be your best bet. This service may be provided by an accountant or a service bureau. Costs will vary, but expect to pay at least $100 a month, according to Salisbury's Fassler.
All you basically do is collect your receipts and send them into the bureau once a month. You will then get financial reports such as profit and loss statements, accounts payable and receivable and other forms you request.
The time it takes to collect your receipts about equals the time it would take to enter them yourself into a computer software package like Quicken. For that reason, Salisbury says many customers eventually opt for software that allows them to do it themselves.
Another consideration is that you may become less in touch with your numbers because you are not working with them directly. Experts stress the importance of studying the numbers once you get them back not only to stay in touch but to make sure the reports are accurate.
Larry Johnson, president of Johnson Computer Consultants in Clara City, MN, says a service bureau is a good option for farmers who have two or more business operations, such as farming and a repair garage.
"One of our farm clients has 10 different businesses, scattered all the way from sugar beets to corn to motels and cattle," Johnson says.
He adds that if you're still unsure of which option to use, ask your accountant. He states, "If they have been doing the farmer's work for a number of years, they should have a good idea of what he or she is capable of doing."
Which option should you buy? Off-the-shelf small business accounting software
Capabilities: For the farmer who wants to do basic accounting, primarily for tax reporting purposesCost: Less than $200Brand names to look for:* Quicken , QuickBooks, and Microsoft Money
Contact: Your local computer software or discount store
Ag-specific accounting software
Capabilities: For the farmer who not only wants to do basic accounting and tax planning but also collect farm management information
Cost: $500 and up
Agro Systems, Dept. FIN, Box F, Jerseyville, IL 62052, 618/372-3000.
Farm Business Systems (FBS), Dept. FIN, 1855 55th Ave., Aledo, IL 61231, 800/437-7638.
FMS, Dept. FIN, 1105 E. Lincoln Hwy., New Lenox, IL 60451, 800/992-2814.
Red Wing Business Systems, Dept. FIN, Box 19, Red Wing, MN 55066, 800/732-9464.
Capabilities: For farmers who want to keep good financial records but don't have the time to do it themselves, don't like computers or run more than one business operation
Cost: Typically $100/month or more
Contact: Your local accountant
*Only a partial list of brands/companies