Accounting is important for your farm as it allows you to monitor your financial performance and make informed decisions. We understand that managing all the numbers can sometimes be a lot of work, and if you don’t stay on top of it, the costs add up at the end of the year.
If you relate to this and wish to feel more confident and in control of your accounting, or if you need some extra tips, you've come to the right place!
With Paige Wyler, Product Operations from Ambrook, we’ll navigate you through enterprise accounting best practices and help you get the best out of your sales data in Local Line.
We also co-hosted a workshop with Paige to help farmers manage their finances. Watch the full recording!
First, let’s define enterprise, which is simply the different aspects of your business (e.g., your chicken operation vs. your CSA vs. your cattle operation).
Enterprise accounting means tracking your income and expenses towards your enterprises. In the context of a farm, it helps you understand the different types of things that you're doing for your farm, and makes sense of what is doing well and what isn't.
The ‘tracking’ part of enterprise accounting comes from record keeping–a process that involves recording all monetary transactions to provide a clear overview of your financial health (i.e., assets, liabilities, profits, losses). Record keeping is important for filing taxes as well as understanding your business (i.e., where you make money, how the money is spent).
You’ll generate an enterprise profit and loss statement (P&L) through enterprise accounting. This statement tells you if your farm is profitable and where specific aspects of your farm is making money.
Below is an example of an enterprise P&L for Spring Acres Farm. It showcases revenue, cost of goods sold, gross profit, and net income for different enterprises (i.e., corn, vegetables, and cattle).
Now that you understand enterprise accounting and the importance of record keeping, let’s first explore the five enterprise accounting best practices.
Build chart of accounts (i.e., income/expense categories) that are important and make sense to you and your farm–not based on someone else’s chart of accounts.
Better familiarity with your chart of accounts speeds up record keeping and reduces errors that might occur (like miscategorization of purchases).
Paige provides a great example below. An accountant might suggest an account called 'off-road fuel', but the problem is the client doesn’t know what off-road fuel is. Instead, the accountant should work with the farmer to create accounts that are familiar and make sense, such as dyed-fuel in this case.
A good practice is to tag your expenses to specific enterprise categories. Making this a habit will allow you to clearly and accurately see how much you are spending within each enterprise.
For example, if you raise chickens you’ll have chicken feed as an expense. Rather than put your chicken feed expense towards a general category like ‘animal feed’, tag it towards 'feed for chicken'.
You might face situations where certain expenses would be better in an overhead category. Overhead categories can be used for any expenses that may remain if you were to stop your enterprise(s).
To illustrate, if you have a mortgage payment and decide to stop your chicken enterprise–you’ll still have a mortgage expense to pay so put it towards your overheads.
Avoid using an 'other' category for expenses that don’t fit into your regular categories. Instead, categorize expenses in a way that will allow you to identify areas where costs can be reduced to increase your farm's profitability.
Even if the cost is infrequent or unpredictable, allocate expenses to specific categories. If you're unsure about how to categorize an expense, simply save the receipt or any relevant information and take the time to categorize it properly later.
For example, if you pay a parking fee at a farmers market, don't classify it as an 'other' expense. Save the receipt and sit down later to assign it to a more appropriate category, such as 'travel’.
Record your transactions as soon as you can. Note down what happens, when it happens, and save your receipts. This will ensure that things don’t pile up at the end of the year, allowing you to focus on other things, such as going on a well-deserved end-of-year retreat or spending time with your family for the holidays.
Here’s a scenario: When you go to the store to buy something (e.g., farm tools), get proof of your purchase like keeping the store receipt. Don’t wait around and record it somewhere as soon as you can after making the purchase.
An internal transfer recognizes a movement of value from one enterprise to another even when cash doesn’t change hands. This is useful for farmers who have multiple enterprises and can help them not miss out on potential revenue.
For example, a rancher may raise cattle and also grow crops to feed them. It can be challenging to separate these enterprises and accurately track where the business is making money exactly. If the feed that is grown is not accounted for, there’s a risk of missing out on potential profit from the cattle, as the crop should also be considered in the overall revenue. This is where internal transfers come in handy.
Paige’s example from our workshop displayed an internal transfer credit of +$1,000 for the selling of hay and an internal transfer debit of -$1,000 for feed for the cattle–which is all tracked under the ‘feed for cattle’ enterprise category.
When you’re selling online, you get access to a plethora of sales data. With Local Line alone, you can access 50+ reports and analytics. But, how do you transform that into data you can import into your accounting platform?
In this section, we’ll outline our four best practices for effectively using your Local Line sales data to track income and expenses for your enterprises.
The first best practice is to set up your sales categories to match the type of enterprises you want to track. Doing so makes it easier to extract rich and relevant insight that can help you make informed decisions for your farm. Below are examples of categories you might see on your own or someone else’s Local Line storefront.
In Local Line, each of your product (e.g., strawberries, carrots) is associated with a category (e.g., fruit, vegetables) and you can track how much money is coming from each category. From there, you can take this Local Line sales data and easily map it to an accounting tool like Ambrook to get your enterprise categories. Paige provides an example below of matching Local Line categories into Ambrook.
Another helpful tip is to review your sales data monthly to categorize any payments made. You can utilize the orders report from Local Line to gather information on the orders you have sold, which will help you organize your payments.
This report allows you to understand the various payment methods that were used, the different products you have sold, and the associated categories. This information can then be replicated as sales invoices.
Payment reconciliation involves comparing expenses and/or sales with the payment methods used. Knowing which payment method was used helps to reconcile what you see deposited or withdrawn in your bank.
Your farm may receive or pay for transactions using different forms of payment (e.g., e-transfer, cash). To avoid confusion about which payment was used for each transaction, reconcile the payment methods and separate fees, discounts, and taxes to give you full visibility into your sales and expenses incurred.
For example, let's consider a pork retail business enterprise. This enterprise receives payments through various methods, such as e-transfers and cash, which add up to a total invoice amount of $150. You can use Local Line's order reports to see the orders and payment methods used and check if they align with the total amount ($150 in this case). This way you’ll know that the payment methods and amounts equal the total sales made.
Now that you know all your payment methods, match it up to what you have in your Local Line sales invoice. This process is called matching, where you align the sales invoice with the payments from your bank. This helps in keeping a record of all the payments made and ensures you don’t lose track of any sales. Even if it’s cash, creating a cash transaction for any cash income helps keep track of this stream of revenue.
In Paige’s example, she matched a payment of $200 to a ‘farmers market cash’ category from her sales invoice.
And there you have it! Our best practices for enterprise accounting, plus how you can leverage your Local Line sales data to make accounting easier.
If you’re interested in learning more about getting your farm finances in order, reach out to our friends over at Ambrook. Ambrook builds financial software for farms, a friendly finance platform tailored to your business needs. To learn more or for a live demo of their product, check out our workshop recording with them!
Find habits that work for you to get it done. This could mean setting up specific times (i.e. Fridays) during each week to get your record keeping done. Or it could be over your morning cup of coffee. Think of it as bundling things together so you can chip away at it piece by piece so you don’t feel overwhelmed at the end of the year.
A common hurdle is getting the right insight level. If you’re doing diversified veggies, for example, doing every single product is going to be a lot of work and maybe not something you want to tackle immediately. Instead, figure out what would actually help you make decisions at the end of the year. Are there some higher-level decisions that you can start with to keep those enterprises a little bit more broad?
Figure out what’s realistic and feasible for you. It’s more of a conversation about the best way to get that information out of your system and into an accounting tool.
