FACT SHEET: Part 3—Recording and tracking your costs

Start Simple!

By Michelle Frain, Marketing Coordinator for the Rodale Institute and Christine Ziegler, Editor

Posted June 23, 2005

Let’s be honest. Many people, including farmers, don’t keep financial records. And even those who do keep records do it reluctantly. Why? Probably because we assume that good record keeping takes more time and organizational skills than we think we have.

Record detailed information on every sale and purchase.

However, as a farmer, the truth is that you may already be saving and organizing a lot of the information you need to keep good records and develop useful cost information:

• Do you keep a bank account for your farm?
• Do you keep your farm bank account separate from your family account?
• Do you keep your receipts from your purchases and store them in one place?
• Do you write receipts from your sales and keep them on one place?
• Do you enter your sales and purchase receipts into a ledger (either on paper or on a computer)?
• Have you made a written inventory of your equipment and supplies within the last two years?
• Have you made a written inventory of your products and/or livestock in the last year?

If you answer “yes” to one or more of those questions, then you already have the foundation of a simple, functional record keeping system, one that can help you calculate your costs.

It’s true! If you have completed any of those tasks, then you have the skills (and most of the time) you need to do one or two other tasks on that list. And those three or four pieces of financial information, added together, can help you figure out a large portion of your product costs. After all, you have probably experienced the way that how focused, organized training can create success on the track, field, or other sports arena. Certainly your business and livelihood deserve the same kind of focused, organized effort!

The goal of this fact sheet is to help you tap the full value of your existing records (even if they’re very simple) to determine product costs. Along the way, you will also find a few realistic tips to improve your records and organizational systems, which can help make your cost calculations and business planning more manageable and effective. You may even learn to appreciate and enjoy record keeping more than you do now! However, let’s be realistic; if you’re able to make the most of the records you already have, that’s good enough.

Let’s also be realistic about the amount of information and guidance we can provide in a short fact sheet. Entire text books, college courses, and software packages have been devoted to farm record keeping, and it’s unnecessary to reinvent those wheels here. Instead, we will: 1) give you some basic, practical record keeping advice that you can use right away; 2) show you how those basic records can help you calculate product costs; and 3) provide a resource listing that you can tap for more in-depth information and guidance if you choose.

COMPUTER OR PAPER? THAT IS THE QUESTION.

Do you want to keep your records on paper or on a computer? This is your first and most important decision.

This is your first and most important decision. Do you want to keep your records entirely on paper, or do you want to keep them on a computer (which will probably still involve a little paper)? There is no right or wrong answer to this question. The right answer is the one that works best for you.

Know yourself, and be honest. If you own a computer and use it regularly, use it occasionally, or have used a computer once or twice and find it more interesting than overwhelming, then the computer is probably your logical choice for record keeping.

However, if you don’t like computers, or have tried to use them but still aren’t comfortable with them, then don’t use them! Keep your records on paper for now, and don’t spend any time and money on computer hardware, software, or training; if you don’t like it, it won’t help you in the end.

Whichever you choose, this decision is important because it will help you focus your record keeping efforts most quickly and effectively. Paper records work just as well as computer records (especially if you’re good with a calculator), so pick the format you like best. And while it’s important to stick with your choice right now, it is reversible later on. When you learn to keep good paper records, they’re easy to enter into a computer if you learn to like computers better in the future. So don’t agonize over this decision. Just choose the format that you like best at the moment, and go with it consistently!

BASIC TIPS TO IMPROVE ANY RECORD SYSTEM

The following points, listed in order of importance, are universally helpful to both paper and computer record keeping systems. (If you’re already doing all these things, great! You can move on to the next section.)

1. Run your farm business through a bank. Hopefully you’re already doing this, but if not, start now! Banking offers a logical, easy way to keep basic financial records. Deposits and check writing records can help you track a large portion of the money flowing to and from your business.
   
2. Keep your farm bank account separate from your family bank account. Again, you’re probably already doing this, but if not, start right away! A clear definition between your business and family finances will help you make better financial decisions on both fronts. This practice can also provide financial protection (depending on how you incorporate your farm business) and a clear mechanism through which to pay yourself for your work.
   
3. Record detailed information on every sale and purchase. Every time you sell anything (crops, value added products, equipment) or buy anything (inputs, office supplies, equipment), always record the following data:
   • name of buyer or seller,
   • date,
   • quantities,
   • weights (when appropriate),
   • unit prices, and
   • total price.

   Record all this information in the same place on every receipt, and also include it as you transfer each transaction into your accounting records.

4. Pay by check or charge, rather than cash, when possible. Checks and charges are much easier to record and track than cash payments. Set up charge accounts with the business(es) you buy from the most, and pay your account(s) regularly. This practice provides another way to itemize and record your expenses, and (in the case of charges) it can also bolster your credit rating.
   
5. If you pay cash, get a receipt! You probably already do this, but if you don’t, here’s a reminder. Receipts are the most fool-proof way to remember and record cash transactions. Without a receipt, it’s easy to forget how much cash you spent, where it went, or why.
   

6. Keep all your receipts in one place, and put them there daily.

   Keep all your new receipts in one place, and put them there daily. Whenever you get new receipts, put them in the same place in your wallet or vehicle so you can always find them easily. Then, when you get back home, use some kind of “catch-all” (a box, basket, or file) to store your new receipts until you have a chance to record them in your account books (vehicles or wallets aren’t very good receipt storage places). And put that catch-all in a place that’s easy for you to use daily! Make receipt-filing a natural part of your daily habits; it should only take a minute, literally. For example, put receipts in a file on your desk as you head in for your evening meal, or stash them in a basket on your bureau as you remove your wallet from your pants at bedtime. Whatever works for you, as long as you do it daily!
   
7. Use a pencil (not a pen) to keep your paper records. Pens are appropriate for receipts, but use pencils to balance your check book or to log entries in your account book. Pencils allow you to easily and neatly correct mistakes.

USING RECEIPTS AND BANK RECORDS TO GATHER COST INFORMATION

The best way to approach record keeping and cost information gathering (and any formidable task) is to break the work down into manageable steps. Here are some basics to get you started:

Step 1: Make a list of ALL the products your farm produces. This seems like a simple question, but can you really name all your farm’s products? Get a piece of paper and write a list of every item your farm produces (for sale or on-farm use), and don’t leave anything out! Do you sell a few dozen eggs from your flock, or a few bunches of cut flowers from you home garden each week? Do you produce hay, silage, or compost for on-farm use? Do you sell tomatoes, pumpkins, sweet corn, and feed corn and wheat? Do you trade your manure with your neighbor farmer for hay? Do you process and sell jams and pickles? Include it ALL, listing each product individually. The length of your list may surprise you! (Be sure to write this list on paper; physical writing is an important part of the process!)

Step 2: Group your products into categories. You might include your field corn, wheat (and possibly the hay and silage) in a: “Field Crops” category. Consider grouping the tomatoes, pumpkins, and sweet corn under “Production Vegetables”, labeling the jams and pickles as “Value Added”, and putting the compost (and possibly the hay and silage) in a “Farm-Use Products” category. And the eggs and flowers could be captured under “Miscellaneous Small Stuff”. However, these category titles are just suggestions. There are no right or wrong categories. Choose ones that make the most sense to you for your business, and make sure that each of your products ends up in a category. (Try not to list a product in more than one category, but if you can’t decide which category is best right now, use two, and then make a note to narrow it to a single category later.)

Step 3: Create General Operating and Overhead expense categories, too. Some expenses will obviously fit in one of your product categories, such as corn seed and canning jar purchase receipts, or wheat and tomato sales slips. However, receipts for tractor repairs, mortgage and tax payments, or sale of your old combine usually do not fit in any one product category. Therefore, you’ll need to create categories such as “Equipment/Depreciable Assets”, “Office Supplies”, and “Building/Property Maintenance” in order to capture these more general expenses and income. Again, choose categories that work best for you and keep them as simple and straight-forward as possible.

Use a pencil to label folders to give you flexibility as you plan and improve your new filing system. After you've used the system for a while and refined it, you can then relabel your folders in pen.

Step 5: Also create paper folders labeled “Recorded Expense Receipts” and “Recorded Sales Receipts” (even if you’re working on computer). You will need these files to store your paper receipts once you’ve recorded their information in your accounting system. These two folders will be used, along with your bank account book, to clarify your whole-farm financial picture.

Now that you’ve set up this simple system, it’s time to start plugging in the numbers:

Step 6: Enter data from your new receipts (both sales and expenses) into your banking account book (on paper or computer) regularly. Do this as often as you can, and make it a basic part of your routine! Once a day is ideal (if you have that many receipts), but once a week is fine and more realistic for most farmers. If you can’t manage once a week, then enter receipts once every two weeks, or once a month at the bare minimum. The goal is to keep the pile of in-coming receipts small, because, as we all know, big piles of paper can put a screaming halt to progress.

Step 7: Once you’ve completed the bank entry, enter the information again on the product spread sheet(s) in the category folder. Enter the same information you included in your banking account book (listed in Tip 3). If you’re working on paper and have a photocopier, you can also make a photocopy of each receipt to include in the category folder, too, if you want. (If you do this, be sure to write “copy” on the copy, and note the location of the original.) But if you don’t have a photocopier, don’t worry about it; the copies aren’t a necessity. If you enter receipt information on more than one product sheet or category folder, be certain to make a note next to each entry to cross-reference it, to avoid double counting.

Step 8: After recording, collect the original receipts in your “Recorded Expense Receipts” or “Recorded Sales Receipts” folders.

There! You’ve done it! You’ve just collected a lot of your important cost information in one place!

After you set up your initial folders and account sheets (1 to 4 hours of initial work), the cost information collection process should take only 10-30 extra minutes a week, if you do it as part of your weekly chores. To calculate a product price using this system, you can easily plug the data from that product’s spread sheet into an enterprise budget (see Pricing Fact Sheets 4 and 5). This system may not capture every penny of your costs, but it will put you a long way toward a good calculation.

The key to success with this or any record keeping system is simple: USE IT REGULARLY! If you enter your receipt information into your accounting system routinely (either daily, weekly, or monthly) you head-off the problem of “paper pile-up”, the downfall of any good record keeping system.

If you’ve already got an overwhelming pile of paper on your desk, just gather up the pile, put it in a box or file labeled “Before (today’s date) “, and set it in a corner of your office for now.

Today is a clean slate and it’s time to move forward. Start using your new record-keeping system with this week’s receipts, and be vigilant about keeping up with your current receipts until your new system is a normal, natural part of your daily or weekly routine (Three months? Six months? You’ll know when.). Once your system becomes second nature, you can then tackle the box or file of old papers and add them to your system, if you want to. Just make sure you keep rolling forward with today’s and tomorrow’s receipts, even as you integrate the older stuff. However, don’t worry if you find you never look back; those older papers are safe in their file, and you know right where to find them when you really need them, like at tax time.