Understanding Farm Financials

Running a successful farm requires more than just hard work in the field—it also takes a solid understanding of your financial reports. Whether you handle the farm’s accounting yourself, have an in-house bookkeeper, or outsource your bookkeeping, understanding your financials is essential. By generating accurate reports and knowing how to interpret them, you can make informed decisions and become a more effective business manager.

Let’s break it down into three key purposes of financial information:

1. Compliance
2. Access to Credit
3. Management

Compliance

Compliance with income and payroll tax requirements is a fundamental aspect of farm management. The following reports are essential for tax preparation and payroll reporting:

• General Ledger Report: Reviewed annually to ensure all transactions are accounted for.
• Cost Basis Trial Balance: Provides a detailed snapshot of your financial position.
• Profit & Loss Statement: Tailored for tax reporting based on your farm’s software.
• Federal & State Payroll Reporting: Keeps your payroll processes compliant.

These reports aren’t just for meeting tax obligations. They’re also tools for proactively managing taxable income, whether your business operates on a cash or accrual basis. Staying on top of these documents can help you avoid surprises and make strategic tax decisions.

Access to Credit

Securing credit is often vital for maintaining operations and making capital investments. Lenders rely on specific financial documents to assess your farm’s financial health:

• Profit & Loss Statement: Provide both cash basis and accrual-adjusted versions.
• Cost & Market Balance Sheet: Include detailed schedules for assets, liabilities, and equity.
• Cash Flow Projections: Break these down into entity-level, production cycles, or even managerial views.

To negotiate the best terms with lenders, you need to know what story your financials tell. Understand the key financial ratios your lender values, and be ready to discuss them. Highlight your farm’s strengths and explain how you plan to address any weaknesses. Being transparent and prepared can build trust and confidence with your lenders.

Management

The ultimate goal of understanding your financial reports is to make smarter decisions that improve profitability. For effective management, focus on these key reports:

Entity-Level Reports:

• Profit & Loss Statement (cash basis and accrual adjusted)
• Statement of Cash Flows (covering operations, assets, liabilities, and equity)
• Cost & Market Balance Sheet (with detailed schedules)

Segmented Reports:

• By Commodity: Track profitability for crops like corn, soybeans, or wheat, as well as livestock like beef or pork.
• By Activity: Analyze equipment, irrigation, storage, labor, and other activities.
• By Business Function: Examine general administration, sales, and finance.
• By Location: Review crop performance by field or livestock health by site.

Start with the big picture from entity-level reports. Identify your main income sources and expenses. Then, drill down into segmented reports to uncover opportunities for improvement. For example, focus on the 4-5 key expenses that account for the majority of your costs. Adjusting these areas can have the biggest impact on your bottom line.

What’s Next?

Do you have a clear understanding of your farm’s financials? If so, great! If not, it’s never too late to get the training and support you need to become a more effective business manager. At UnCommon Farms, we’re here to help family farmers like you succeed. Through education, tools, and personalized guidance, we aim to keep more families on the farm and build a legacy for future generations. Contact us to learn how we can help your farm grow and thrive, now and for years to come.