Farm Accounting Is A Lifelong Learning Experience
February 22, 2016 Farming is a complex business. Keeping ahead of pests and diseases is an ongoing battle that tests the skills of good growers. Not to be lost in the day-to-day trials of growing a successful crop is the importance of managing the business, building a solid balance sheet, and generating a profit.
Clay Worden
For GenNext Growers, getting educated on the business and accounting side of farming is just as important as knowing the difference between a good bug and a bad one. Clay Worden, a partner with RSM US LLP in Orlando, says accounting skills should be on the checklist of young growers about to head off to college.
“In preparing yourself for the future, it is important to understand that farming is not unlike every other form of business,” Worden says. “Being successful in business takes accounting and business skills. It is not uncommon to see businesses fail not because the owners or operators were not great at the trade, but because they did not understand some of the basics of running a successful business.
“Farming is no different, the fact the land has been in the family for years or that you are a great grower does not guarantee success. It’s simply one leg of the stool. An acute business acumen is evident in most, if not all, successful businesses.”
Worden suggests college students enroll in general business classes that teach both financial and managerial accounting. “Agricultural economics classes are a must and marketing classes should not be overlooked,” he says.
Why is honing business and accounting skills so important in agriculture today? As an example, Worden says consider farm inputs, which are at all-time highs. Those high inputs create significantly higher risks. Understanding what is necessary to recoup capital outlays, but also make a profit is essential for successful farming.
“The price volatility seen in recent years is likely here to stay for the foreseeable future,” Worden says. “Managing your costs and generating a profit takes effort and know-how. The right accounting and business skills gives you the ability to compete successfully in today’s economy.”
Get Smart
Whether a young grower chooses college or not, learning business skills should be a lifelong pursuit. Worden adds college is no guarantee of success.
“I know a lot of very successful individuals that have very little formal training,” he says. “Success comes from know-how. So my advice to younger farmers is learn something new about the business every day and ask questions. Why are things being done? How much do they cost? What results have been achieved? How will the products be marketed, and once sold, was a profit realized?
“Everyday decisions are made, time and resources are deployed, and in the end, those decisions create success or failure. Understanding the linkage between decisions and results builds business acumen.”
Dos And Don’ts
Worden says growers should think about accounting in broader terms than just a checkbook. He says understanding all the reasons why the bank account balances out the way it does is vital to a well-run business.
“Yes the checkbook is an important aspect, but often times the production data is just as important,” he says. “Understanding production and the cost associated with that production is very important. Understanding there are general overhead and selling costs that might not be tied directly to the production is key. Understanding the importance of cash flows and the cost of bank financing and knowing your break-even point also is critical.”
He says growers should keep, read, and interpret financial reports and production reports and learn to correlate these two sets of data, which can prove to be a very important skill set for inexperienced farmers.
“It is important to take time to work on your business, as opposed to spending all your time working in your business,” Worden adds.
Younger growers can learn a lot from their elders who farmed the land before them, but also they can bring a lot to the table when it comes to new ideas and technology. Most of all, he encourages young growers to be open to change.
“Just because it used to work does not mean it will always work,” Worden says. “Don’t rely on hearsay; validate the facts, prepare your own budget, and then measure yourself against the expectations.
“Most farmers don’t plan to fail, they simply fail to plan. I would say the biggest pitfall I see is farmers that do not understand their true cost structure. Farmers that don’t correlate production data and cost data.
“There is no silver bullet to ensure success, but I am confident in the ability of the younger farmer to learn, grow, and contribute to the continued success in farming enterprises.”