Good farm records are a key component of a good farm management system.

This article will outline some of the key considerations when selecting a record-keeping system for the farm business.

Farm records are important. There are four primary reasons for keeping records. These are:

1. Tax reporting
A good set of income and expense records is necessary for annual state and federal income tax reporting. Records of capital purchases and sales, such as the purchase or sale of real estate, are also important for estate, inheritance and capital gains tax reporting.

2. Working with lenders
When borrowing money for capital purchases or to finance operating costs, a lender will expect to see evidence that the money lent will be repaid. Most financial institutions will want to look at certain financial statements which would likely include a balance sheet, income statement and a cash flow statement. Good financial records which go beyond the level of detail required for tax considerations will be necessary in developing these statements.

3. Management decision-making
Good farm financial and production records assist in making key decisions about current and future production and management practices on the farm. When you use actual farm production and financial performance data to make adjustments and changes to farm practices, the net result is more reliable than if only instinct or intuition are used.

4. Accountability
In today’s increasingly regulated farming climate, it is becoming more and more important to keep records of farm practices that will protect you from regulatory issues. There are laws that require farmers keep records of certain pesticide applications, nutrient applications and even records of the transport of hay and feeds. Good farm records can help a farmer avoid legal concerns in the event of an accusation of mismanagement by an environmentalist, animal welfare group or even a regulatory agency.

Tips for selecting a record-keeping system
Work with your accountant or tax preparer to choose a financial record-keeping system that will meet both of your needs. This is particularly important if considering a computerized record-keeping system. You should select software that is compatible with the software system used by your accountant or tax preparer.

Keep the system simple enough for you to use easily. A record-keeping system will only help to organize your records if you are willing and able to use it regularly and effectively. Choose a system that you are sure you will be able to understand and will actually use. If your children have to remind you how to check your e-mail on a weekly basis, then you probably should not be using a computerized record-keeping system. Find a good paper-based system to keep your records.

If you are looking for a record-keeping system that will “do it all” for your records, you will likely need to develop most of it yourself or pay someone a lot of money to develop it for you. Select the system that most closely matches your information needs and management level.

The more specific a system is to your type of operation (i.e. a dairy record management system versus a general financial record-keeping system), generally the less flexible it will be in what type of information can be included. More flexible systems give you the ability to customize the system to your operation better, but they also require more time to set up.

Use multiple components for an overall record-keeping system. You may not be able to find a suitable computer program or paper-based ledger that will allow you to keep all of the records that you find necessary or desirable to keep. You may need to use multiple systems together to form your overall record-keeping system. For example, you may need to use a stand-alone financial record-keeping software package in order to keep the tax records that you need and to maintain compatibility with your accountant or tax preparer, while using a separate system for keeping farm production records, such as crop yields, cow performance, etc.

Understand your system before you start to use it with records that matter. It can be very frustrating for you and your farm advisers to try and sort out mistakes that were made in a record-keeping system when you use the “I’ll learn it as I go” method of learning. A preferred method of learning while you go would be to use a previous year’s records to practice with before starting with the “real” records. This will enable you to make mistakes without bad consequences.

A good farm record-keeping system can make you a better-equipped farm manager. Take time to select the system that fits your skills and needs. Use the advice of your farm advisers to help select a system that works for you and will assist them in their job of helping you. Do your homework, and then start working at improving your records. Above all, make sure that you keep up with the system you are using, and make sure that it works for you. PD

—Excerpts from Penn State Dairy Focus newsletter, December 2008

Keith Dickinson
Ag Business Educator
Penn State
krd16@psu.edu