JohnC. Bscksr
Themes A. Brewer
Jeese Q. Ceeper
VirgU C. Crswtsy
Larry C Jenkins
BY VIRGIL E. CROWLEY
Extension Agricultural
Economist
Many fanners _
take what records f jk
they have to their I Jak
tax preparer or ,><** W
their accountant W
so their income
tax returns can be
prepared
filed. If they MBB ■■
prepare their own tax returns they
use the records for that purpose
and then all too often, regardless of
who'preparcd the tax returns, the
farm records are filed away. “Filed
away” often means they are put in
some obscure place, and never
looked at again unless the farm
business is audited.
This is unfortunate because,
records have many uses and while
they are essential for filing tax
returns that should not be their
only use, indeed it should not be
the most important use.
The first and most important
function of farm records should be
to provide data for the farm opera
tor to use in making management
decisions. It is very difficult for a
fanner to make good management
decisions without accurate infor
mation about the past performance
of the farm business. Good records
will provide the information
needed for nearly all farm manage
ment decisions.
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I I
term “good records.” This is
because farm management deci
sions must be based on both finan
cial and production information.
For example suppose the financial
data for a farmer’s com enterprise
showed that the variable cost of
com for 1986 was $2 per bushel. If
this is the only information that the
farmer has it really doesn’t give
enough information for the farmer
to make a good decision.
Sure it tells the farmer that he or
she lost money on com in 1986 and
that it could have been purchased
for less than it cost to grow it, how
ever, it doesn’t tell the farmer why
it cost $2 per bushel to grow com.
The farmer needs additional infor
mation: when was the com
planted, what variety was used,
what and how much fertilizer was
used per acre, had the soil been
tested, how much rainfall was
received and when, what was the
yield potential of the com fields,
what herbicides were used and
were they effective, were tempera
tures normal or excessively hot or
cold, and was the crop affected by
disease or insects. These are exam
ples or information that tells the
farmer why the per bushel variable
costs for com were $2.
We have indicated two impor
tant uses for farm records, addi
tional uses of farm records include
the following; obtaining credit,
planning and budgeting, resolving
legal issues that affect the farm
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business, and guide to determining
farm policy alternatives.
Not many farm businesses are
able to operate without ever having
to use borrowed money. Thus cre
dit is very important for most farm
operations. Farm records are
important to the lender for several
reasons.
First and perhaps most impor
tant, records provide the data
necessary to prepare a balance
sheet, or what many of us call a net
worth statement This document
lists all of the assets of the farm
business and the claims that other
people have against those assets --.
the liabilities of the business. The
lender can use the balance sheet to
determine how much of the farm’s
assets are available to provide col
lateral (protection) for the loan the
farmer is seeking. The balance
sheet not only tells the lender how
much protection is available for
the loan, a series of balance sheets
over a period of time also helps the
lender determine the management
ability of the farmer.
While the balance sheet is a key
document that most lenders
demand, additional information
that many demand is the income
and cash flow of the farm business.
The income statement tells the len
der if the farm generates enough
income to pay family living costs
and service debt. A cash flow
statement tells the lender when the
farm business would have cash
available to make payments on a
loan.
While we have emphasized the
importance of records to the lender
we need to recognize that these
records are equally important to
the farmer. They are the principal
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source of information required to
manage the farm’s finances.
For example the cash flow state
ment not only tells the farmer
when cash is available for debt
payment, it also tells him or her
what periods cash will not be avail
able for paying bills. The balance
sheet essentially tells the farmer
how strong his or her financial po
sition is. The larger the farmer’s
equity (that is the portion of the
business the farmer owns) the bet
ter he or she is able to withstand
disaster such as a crop failure,
severe livestock losses, etc.
Planning and budgeting are
important to the long run survival
of the farm business. While
budgeting is essential for long
range planning it is also a tool that
can be effectively used to evaluate
annual adjustments in the farm
business. There are several diffe
rent types of budgets and good
records are a necessity for all of
them.
One of the important things
about budgeting is that it gives the
farmer an approximation of how
changes in the farm business will
affect net income before actually
investing money in land, build
ings, and equipment. Planning is
essentially the road map the farm
operator develops as a guide to the
goals that have been established
and the budgets establish the
boundaries for the map.
Usually people can readily see
how records are essential to the
things we have already discussed
such as filing tax returns and bor
rowing money. However, they
often fail to recognize the impor
tance of records in legal matters.
Yet, some of the most bitterly con-
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tested legal battles emerge as the
result of the breakup of a partner
ship. Regardless of the reasons for
dissolving the partnership the dis
pute usually arises concerning the
distribution of assets. A good set of
records established at the begin
ning and maintained during the
partnership would essentially
settle any questions that might
arise concerning distribution of the
assets.
Records also provide a record of
the value of farm business assets
that might be destroyed or lost in a
disaster such as flood or fire. They
would be very important in the
event that a question of amounts
and value arose that resulted in leg
al action. Also good records would
provide information concerning
the use of herbicides and insecti
cides. Chemicals used improperly
for either of these purposes could
result in legal action from sur
rounding property owners.
Therefore records are important
to document what materials were
used, how much was used, when
they were used and what the
weather conditions were when
they were applied.
Finally records are a source of
information that is often sought by
the USDA and people studying
farm policy and how certain poli
cies might impact farm production
and farm prices. While farm policy
never pleases all farmers and is
often criticized by many, there is a
strong possibility that policy may
be based on faulty or inadequate
information. Many farmers don’t
have sufficiently detailed records
for policy decisions.
Clearly records are important
for many purposes other than filing
tax returns and they also provide
the information necessary for tax
management. Records supply the
farm operator with the information
needed to plan and manage the
farm to reach family goals. They
help prevent bitter arguments
within partnerships and they pro
vide the basis for obtaining and
using credit to improve the net
returns of the farm operation.
Finally, they can provide informa
tion that will help policy makers
develop a sound and equitable
farm policy.
In the future remember that your
records can be used for many pur
poses other than filing tax returns.
They are the basic guide to a more
prosperous farm operation.
<*l
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