by Deborah Jeanne Sergeant

People farm for many reasons, from continuing their family’s heritage to caring for the land to doing what they love best. But ultimately, they need to make money at it, especially if they don’t work off the farm. Frank Wardynski, Michigan State University Extension educator, presented “Novice Farm Financial Management: the Next Level” as a recent webinar to help farmers better understand how their money management affects their ability to continue to farm.

Wardynski said it’s important to separate the business finances from the family’s personal finances with separate bank accounts and credit card. Keeping them mingled is a mistake he said that many beginning farmers make.

“It’s hard to keep track which are farm business expenses versus personal expenses,” Wardynski said. “If you can’t track it with receipts, it makes it difficult to justify taking expenses as deductions.”

He admitted that at home, he’s a “terrible organizer” yet he keeps his farm financial planning files tidy because of their importance. Each paper receipt is filed by month so he can readily find what he needs.

Going with an accounting system can help farmers stay organized, too, including handwriting records in paper books.

“If you don’t have a lot of transactions, this is a perfectly acceptable way to do it,” Wardynski said.

But one of the problems with handwritten systems is that it can take a lot of time to transfer information. Math mistakes, transposing numbers and legibility can also contribute to errors. That’s where software offers distinct advantages.

“Quickbooks does all the math,” Wardynski said. “There’s no danger of transposing a number from one sheet to the other. To save time and accuracy, an electronic accounting system becomes important.”

He advises farmers to fill out balance sheets annually to “show how much money we spent and how much we take in to fill out our Schedule F and see how much money we made.”

A balance sheet should include assets — all the things the farm owns — and liabilities — debts. Debts are divided among short-term, intermediate and long-term.

Short-term are assets kept less than five years, such as goods and animals easily liquidated and cash. Intermediate are 5 to 10 year items. Possessions like land and buildings are long-term.

Ideally, the farm should have increasing assets than liabilities.

Farmers should ask themselves three critical questions, according to Wardynski: Is the farm profitable? Does the farm cash flow? and What happened to equity and net worth?

“If we’re only marginally profitable and there’s no reason why, can we cut expenses?” he asked.

Farmers should also look at whether or not they’re making enough money to pay for debt and cover expenses.

“With low grain and milk prices, a lot of dairy and grain farmers are struggling right now,” Wardynski said. “Over the last few years, there are a lot of farms that haven’t cash flowed. You can restructure debt, take out more operating loans. The balance sheet will change a lot there.”

He likes to keep an eye on working capital, the sum of everything the farm has like cash, hay in the barn, corn in the bin and calves for sale.

“It’s a good indicator if we’re going to make our expenses,” Wardynski said.

That may not happen right away, if the farmer is raising hogs that finish in the fall, but “if your current ratio looks right, you should be able to make it to the better part of the year,” he said. “Lenders have more confidence in a producer, that they can make payments over a long period of time because they can show them” financial information.

Looking at assets and liability early in the year can help farmers weather the leaner times of the year and borrow in time for the greatest benefit.

Wardynski also wants farmers to look at their entire operation to compare it as an investment. If they were to invest the value of their ag operation in a CD or the stock market, would they be further ahead financially?

“It’s a motivating factor,” Wardynski said. “We want to do as well as we can.”

By better tracking finances, farmers can tell whether their investment in themselves and their farm is paying off monetarily.