Top 5 Bookkeeping Mistakes Farmers Should Avoid for Better Financial Management – By Wade McLaughlin

For farmers, keeping accurate and timely financial records is essential for the smooth operation and growth of your business.

Proper bookkeeping ensures that you can make informed decisions, maintain a healthy cash flow, and stay on top of your farm’s financial health. However, many farmers make common bookkeeping mistakes that can lead to confusion and missed opportunities. Here’s a look at the top 5 bookkeeping mistakes to avoid and how to stay ahead of them.

1. Not Having a System Set Up

The foundation of good bookkeeping lies in having a system that works for your farm. Without a clear structure in place, it’s easy to let things slip through the cracks, leading to costly errors.

• Not using accounting software: Managing finances manually can quickly become overwhelming. Using accounting software, like Farmcaster, QuickBooks or AgExpert, helps you automate and streamline your bookkeeping process. This makes tracking expenses, managing cash flow, and generating reports much easier, allowing you more time to focus on farming.
• Not knowing what to track: It’s essential to determine what you need to track for your farm’s operations. From fuel and seed expenses to labor costs and machinery maintenance, keeping accurate records of these costs helps you monitor profitability and make data-driven decisions.
• Not reviewing the chart of accounts: Your chart of accounts is a vital tool for organizing and categorizing your financial transactions. Regularly reviewing it ensures your financial reporting stays organized and accurate, giving you a clearer picture of where your money is going.
• Not understanding what goes into each account: Consistency is key. For example, you need to know exactly what qualifies as “farm supplies” or “maintenance costs” to avoid miscategorizing expenses, which could lead to incorrect financial reporting.

2. Not Doing Bookkeeping Regularly

Financial records are only valuable if they are up-to-date. Farmers often make the mistake of neglecting regular bookkeeping, which can result in lost opportunities and financial headaches later.

• Not entering information consistently: To stay on top of your finances, aim to update your books weekly or bi-weekly. This ensures that all transactions are accurately recorded, making it easier to track expenses and analyze profits.
• Neglecting bank and credit card reconciliation: Reconciling your accounts, whether it’s on a weekly or monthly basis, is essential to make sure your financial records align with your actual balances. This helps you stay in control of your cash flow and identify discrepancies before they become bigger issues.

3. Not Keeping Personal and Business Finances Separate

Mixing personal and business finances is a common mistake that can lead to confusion, difficulty in tracking expenses, and potential tax issues.

• Not having separate personal accounts: By keeping your personal and business finances separate, you’ll have a clear understanding of your business’s financial situation. Use separate bank accounts and credit cards for personal and business expenses to keep things simple.
• Paying for personal items from business accounts: Personal purchases, such as groceries or home expenses, should never be paid using business funds. Doing so can make your financials difficult to manage and may lead to incorrect tax filings.
• Not putting yourself on payroll: As a business owner, it’s important to pay yourself a regular salary or set a draw from the business. This keeps your personal income distinct from business revenue and ensures your bookkeeping remains organized.

4. Only Doing Bookkeeping for Tax Purposes

Many farmers make the mistake of only focusing on bookkeeping at tax time. While it’s essential for tax preparation, bookkeeping should be a year-round activity to give you a comprehensive understanding of your farm’s financial health.

• Only doing bookkeeping at year-end: Waiting until the end of the year to update your books creates unnecessary stress. Regular updates throughout the year ensure that your financials are accurate and you’re not scrambling during tax season.
• Not reviewing financial statements regularly: Simply sending your financial records to an accountant without reviewing them yourself means missing out on valuable insights. By regularly reviewing your profit and loss statements, you can stay informed about your farm’s performance and make smarter operational decisions.
• Ignoring cash flow management: Managing cash flow is critical, especially during planting or harvest season when expenses often exceed income. Regularly tracking cash flow allows you to forecast potential shortfalls and adjust your spending accordingly.
• Neglecting inventory tracking: Keeping an accurate inventory is essential for understanding costs and maintaining efficiency. By tracking inventory regularly, you can optimize your operations and reduce unnecessary expenses.
• Not tracking different farm enterprises separately: If your farm is involved in multiple areas of production—such as both crop farming and livestock—it’s important to keep financial records separate for each enterprise. This helps you see which part of your operation is most profitable and where improvements can be made.

5. Not Knowing When to Hire Professional Help

While doing your own bookkeeping can be cost-effective, there are times when it’s essential to hire a professional to ensure accuracy and efficiency.

• Not getting help with system setup or review: A professional accountant or bookkeeper can help you set up a customized system for your farm or review your current system to ensure it’s working effectively.
• Not investing in training: If you’re not familiar with accounting software or bookkeeping best practices, professional training can help you avoid mistakes. Sometimes, a consultation with an expert can clarify simple questions and help streamline your process.
• Relying on family members: While family members may be willing to help with bookkeeping, they might not have the expertise needed to ensure accuracy. Hiring a professional ensures that your books are handled correctly and efficiently.
• Not hiring help to prepare financial statements: Putting together financial statements, such as budgets versus actuals, can be complex. A professional can help you compile these statements and provide valuable insights for making informed business decisions.
• Not seeking help with financial analysis: A professional can analyze your financial statements, offering advice on how to improve profitability and make better decisions for the future of your farm.

Avoiding these common bookkeeping mistakes can make a huge difference in the financial health of your farm. By staying organized, consistent, and knowing when to seek professional help, you can ensure your farm’s financials are in top shape.

For more insights into bookkeeping mistakes and how to avoid them, check out this informative video by Wade McLaughlin on The Impact Farming Show: Bookkeeper Reveals 5 Most Costly Mistakes.

At Backswath, we understand that managing your farm’s finances can be overwhelming, which is why we’re committed to providing the tools and support you need to succeed. If you’re looking for guidance or assistance with your bookkeeping, don’t hesitate to reach out to us—we’re here to help you grow and thrive!