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Raising your accounting game

Raising your accounting game
'Main Street' accounting programs are a great start, but rising complexity forces the need for higher-level support for your farm.

Your operation is an increasingly complex business, with rising demands to manage your operation across many enterprises. The result is a greater need for good accounting information about your business on a day-to-day basis.

Many farmers have turned to what are called “Main Street” accounting programs designed for use by “everyone” to balance the checkbook or manage a small business. While these programs increasingly have add-ons, agriculture brings along some complexities that may require you to consider moving up. How do you know when it’s time?

“I think it comes from one of our customers who was using one of the ‘Main Street’ programs,” says Ken Hilton, president, Red Wing Software. “He was making it work, but told me that he had to do this other thing on another piece of software, and this other task in a spreadsheet. If you’re doing all these things outside the software you’re using, that software isn’t working for you.”

That’s the first step. Is your accounting program filling your needs, and for agriculture’s special nature of using cash accounting for tax purposes but accrual accounting for trend analysis? That could be a challenge. But there are other issues you may want to consider.

Larry Hatfield, CEO of Vertical Solutions — makers of EasyFarm, a farm-focused program — says many issues stall the farm accounting conversation, but the one most often encountered is that “the last thing farmers want to do is accounting in the first place. They need something that’s preset for farming, and an easy and fast way to do it.”

For example, in Easy Farm, prepaid chemical services aren’t a problem for the system. However, this is an issue for most popular non-ag accounting programs. Just knowing how to account for those purchases is critical, and makes the best use of the little time producers have to do their books.

EasyFarm isn’t designed to just push out accrual accounting reports, but its full-farm focus does get more of your information in shape so you can work with an adviser to manage those issues, Hatfield says. “That’s not the focus of the software. Among other things, it’s a tool to collate the appropriate information so focused discussions can happen between the producer and his financial adviser.”

Norm Brown, founder of FBS Systems, along with Mike Boggs, FBS  director of professional services, talked with Farm Industry News about accounting as well. Brown explains there are two types of accounting — a retrospective historical financial record, and the other as a dynamic management platform. “That’s two different worlds, with two different goals,” Brown says.

Accrual accounting and trend analysis

For larger farms working on many enterprise areas, tracking those accurately is key. Hilton notes it’s impossible to do farm trend analysis without true accrual accounting. Red Wing has created CenterPoint Software, which manages details across the whole farm.

Accrual accounting allows you to count the cost of something spent in one year to the actual year of use. Best example is that fall application of nitrogen in 2016 for the 2017 corn crop. You may account for the cost in 2016 for cash accounting, and tax purposes; but for true cost-of-production analysis, you need to have that nitrogen cost linked to the 2017 crop. “You really can’t do a good job of trend analysis with cash,” Hilton says. “You can’t do trend analysis from your Schedule F.”

And for programs like CenterPoint and FBS Systems, accrual information is just part of the reports you can generate. Every farmer is told that the best way to manage a marketing program is to know your costs. Accrual accounting makes that a reality.

Brown adds that with managerial accounting, the ultimate objective is to manage inventories and costs, so you can know profitability and work out production efficiencies. The next step is to integrate incoming information from a number of sources to better manage the numbers.

Making connections, managing profit

One key trend for major ag accounting programs is rising connectivity. A longtime challenge is getting the information you have from other parts of the operation into that accounting system. Entering daily application information into the system is challenging, but a necessary part of managing the business.

Yet accounting software companies see the value of making connections to other systems to gather information more easily. FBS, for example, has a connection with Conservis, a comprehensive program for managing work done, inventories and other processes on the farm.

With that connection, work done can flow into the accounting software for better inventory management. For example, if an employee sprays 500 gallons of glyphosate on a Tuesday, that information should flow into your system and reduce inventory by that amount, or account for that cost on your soybean or corn crop quickly. That’s a small example.

“We can use that information,” says FBS’ Boggs. “We can drive allocation of products used to cost of production, and you have more detail for analysis.” The FBS-Conservis relationship is the first application program interface (API) for the accounting software maker, but it won’t be the last.

The key is that information from those other programs, as API access grows, can flow into the managerial accounting program easily and swiftly. “We’re accumulating the dollars on purchases and income from sales,” Brown adds. “There are so many ways that farmers are accumulating data.”

Flowing that information directly from field to accounting may not be desirable for some, Hilton warns, noting that he’s found customers that want to manage that information first. “People need to trust that data enough to let it into their accounting program,” he says. “Data from sensors, or as-applied systems, are great for field analysis, but some don’t trust that data well enough to just put it into their accounting program directly.”

He explains that this information will need to be managed first, to make sure the data are accurate. That means creating a “middle piece” of software or a process to make sure the data coming in are reliable. This is an evolving issue for farmers with high-tech systems.

And of course, those in-field systems, if they’re going to flow data toward your accounting program, will need to be calibrated from the start to help with this accuracy issue.

Multiple businesses

Rising complexity in agriculture makes managerial accounting more necessary, but also more challenging. For example, farms that are divided into multiple entities like trucking, equipment and farm operations have costs attributed to the three businesses. But to make decisions on the farm, you need a way to pull all that together.

“You have a standard old financial statement for each entity, but you need to be able to take those financials into a single statement,” Brown says. “We’re getting more support calls about doing this very thing. You want to drive the cost information right down to the bushel for each of those entities.”

Managerial accounting means having a lot of information in one place, allowing you to make better marketing and purchase decisions for your farm. Big data computing, cloud-based information, and new connections from field to farm office will allow even more precision for the future.

If you’re struggling with a main street accounting program today, it might be time to reach out to a higher-level, farm-focused program for your business. While the upgrade process may be challenging, the result will allow you to know cost of production on a much finer basis, for improved future decision-making.

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