Record-keeping with Accrual and Enterprise Accounting

No one that I know (other than some accountants) actually likes to keep records.  Even fewer people actually like to file, sort, and organize records.  I mean, why isn’t a shoebox good enough?!   A shoebox is a decent start, but your record system should allow you to access the information that you need in a timely and accurate manner, in the form that you need.  The information in your records can be a GREAT help to you in making management decisions and analyzing your operation.

Your record system should help you gather useful information related to:

• Legal Issues
  • Deeds, titles, contracts, bylaws, licenses, certifications, transition plans, estate plans, buy/sell agreements, partnership agreements, labor policies/handbooks
• Production Issues
  • Pesticide use, herd health, nutrition, genetics/breeding, cattle inventories, feed inventories, supply inventories, crop yields, soil tests/surveys, customer lists, supplier lists
• Financial Issues
  • Balance sheets, income statements (P&L), cash flow budgets, enterprise budgets, accounts payable/receivable, break-even prices & yields, insurance policies, debt documents, repayment schedules, financial ratio analysis, retirement & investment statements
• Personal Issues
  • Wills, power of attorney, advance medical directives, emergency contacts, income tax records, credit card records, household records, birth certificates, passports, Social Security cards
• Credit Histories

Farms and small businesses should try to incorporate 2 main features into their record systems:

Accrual Accounting

This is a much more accurate method of recording incomes and expenses.  It only requires beginning and ending balance sheets – which you should already be preparing!  Most agricultural lenders prefer to make their analyses using accrual accounting or accrual-adjusted accounting.  This helps them to get a clearer picture of the actual profitability of the operation – basically, it removes the impact on profitability from tax moves that are common with cash-based accounting systems (prepaid expenses, build-up of accounts receivable, etc.).

Enterprise Accounting

This is HUGELY important to managers!  It is a method of allocating incomes and expenses directly to the appropriate enterprise (corn, hay, cow/calf, etc.) rather than just recording totals for the entire farm.  This allows managers to see the profitability of each aspect of their farm or business.  It also allows them to calculate breakeven prices and yields for each enterprise.  Enterprise accounting is one of the most powerful tools available to managers!

Well, an organized record keeping system can be your best friend over time.  But it’s one of those friendships that you really have to work on for it to last.  It takes time, practice, discipline, and consistency.  It takes a little trial and error to figure out what works for you and what doesn’t.   Here are a few tips to help you develop a usable, accurate, not-too-time-consuming record system.

Consult with an accountant who has experience with agricultural or small business operations to set up your system properly before you get too busy.  Get the accountant’s recommendations on setting up an efficient system that will meet your needs.  It’s much better to do it correctly the first time rather than having to go back to correct your mistakes, or worse yet, make decisions based off incorrect information.

• Find a system that you like and understand, AND are willing to use consistently.  If you don’t like the system or don’t understand it, you won’t use it – and you’ve just wasted valuable time and effort.
• Start simple and gradually improve your system.  This means that you should start with a system that covers the absolute minimum requirements for your operation.  Once you are comfortable with that system, slowly improve it to get more useful information from your records.  Do NOT try to implement a comprehensive system right away – it’s too intimidating and you will make too many mistakes.  Keep it simple! 
• Assign the record keeping responsibility to one person in your operation.  This helps to keep things from falling through the cracks.  It also cuts down on inconsistency, redundancy, and common errors.  However, EVERYONE in the operation needs to work with this “record keeper” to be sure he/she gets the information needed, in the manner that it’s needed, in a timely manner.  Trust me, this will reduce everyone’s headaches!
• Look at your record system as a management tool rather than a “must-do” for taxes and lenders.  There is an ocean of powerful information sitting in your existing records that can help you make more-informed decisions.   It can help you determine: where you are making money and where you are losing money; the minimum price you need to receive to cover your costs; your financial strengths & weaknesses; potential problems you may be facing, etc. 

Your record keeping system can provide you with invaluable information that will help you become a better manager.  Try not to treat it as a necessary evil – instead, treat it with the same seriousness as you do with production planning for your crops and livestock.  It may not seem like a lot of fun when you are putting the records into the system, but you will have a blast using the information that is sitting in your records!

This post is written by Dr. Alex White, Adjunct Professor – Dairy Science at Virginia Tech.  You can reach Dr. White by email at axwhite@vt.edu.