What is farm financial management and why is it important?

Farm financial management refers to the strategic planning, organization, direction, and control of financial undertakings in a farm business. It involves budgeting, accounting, financial analysis, and decision-making based on accurate financial data. Effective financial management helps a farmer make informed decisions about production levels, capital investments, hiring, and expansion. It also allows a farm owner to respond proactively to market volatility, regulatory changes, and environmental challenges. Without a solid financial management plan, a profitable operation can suffer due to poor cash flow management or a lack of foresight into costs and revenue cycles.

What financial records should every farm keep?

A farm should maintain comprehensive records that include:

• income statements, 

• balance sheets, 

• cash flow statements, 

• loan amortization schedules,

• inventory records, 

• detailed accounts of both variable and fixed costs. 

These records not only provide a clear picture of the farm’s financial health but are also essential for filing accurate tax returns, securing financing, evaluating risk, and making operational decisions. Keeping records updated throughout the year is critical—not just during tax season—to enable timely decision-making and reduce the risk of financial missteps.

How often should I review my farm’s financials?

Financials should be reviewed monthly at a minimum. Monthly reviews help identify trends in cash flow, highlight areas of excessive spending, and ensure that revenue projections are on track. More frequent reviews may be necessary during peak planting or harvesting seasons, or when the farm is undergoing rapid changes in operations. Year-end financial analysis is also important to evaluate performance, set benchmarks, and prepare for tax obligations and future planning.

What are the most common financial mistakes farm owners make?

While it is easy to point out the negatives there are several financial mistakes made by farmers. These include misclassifying expenses, poor recordkeeping, bank reconciliation errors, poor budgeting, improper cash flow management and transposition errors in data entry. These are common mistakes that affect many business owners regardless of industry. However, if errors continue to occur then it’s a sign that additional help may be needed. For example, when poor recordkeeping practices and bank reconciliation errors persist, it can threaten the integrity of data in financial statements. This makes it very difficult for management to rely on this information when making decisions about purchases, investments, etc. 

What role does budgeting play in farm financial management?

Budgeting provides a framework for planning and controlling the farm’s income and expenditures over a specific period. It allows the farmer to allocate resources efficiently, predict financial needs, and prepare for contingencies such as equipment failure or poor crop yields. Budgets also serve as a benchmark for evaluating performance. Comparing actual results with budgeted projections helps pinpoint where adjustments are needed in pricing, operations, or cost management.

What’s the difference between cash and accrual accounting for farms?

The cash and accrual methods of accounting are two different systems governing how and when a business recognizes income and expenses. The cash basis records income when it is received from customers and expenses when incurred. This makes it easier to manage cash flow and understand short-term financial status. The accrual basis of accounting records income when it is earned and expenses when they are incurred, giving a more accurate long-term view of profitability. 

Depending on the size of the farm and financial complexities, one type of accounting will be more beneficial than the other. For example, the accrual method of accounting is best suited for medium to large size farms with complex financial transactions and a high number of monthly transactions. The cash method of accounting is ideal for smaller farm businesses with simple financial structures and a low volume of transactions. There are advantages and disadvantages to each and selection should be made in consultation with an accounting professional. 

Should I work with a special farm CPA or accountant? 

Yes. There are important advantages to working with a CPA firm (such as Dermody Burke & Brown) that focuses on serving farmers, ranchers, and agribusinesses. These professionals are intimately familiar with farm operations and provide seasoned guidance on several financial reporting, accounting, and tax matters. Through years of practical experience serving industry companies, they have developed expertise in accounting software selection, capital acquisition, loan structuring, and government assistance programs.