Three key financial statements and how they can guide your regenerative ranch into a bright New Year
If you’ve been waiting for a sign it’s time to deal with the shoebox of receipts piled in the corner of your office or shop or on the kitchen table … this is it.
Dan Childs and Jason Bradley, two agriculture economic consultants at the Noble Research Institute, say that to end your financial year well, most of the work should already be done.
“Don’t wait until the end the year to cram it all in,” Bradley says.
To make the most of your end-of-year tax consultation meeting, be prepared with updated income/expense records, then use this final month of the year to reflect, recalibrate and look toward a more regenerative future on your farm or ranch.
These three financial statements are the building blocks for successful financial strategies.
KEEP AFTER IT, LITTLE BY LITTLE
If your tendency is to let receipts and statements stack up until the end of the year, make 2023 the year you ask for help to start a new habit.
Set a goal to update your income and expense report at least on a monthly basis; aim to review operational goals quarterly or every six months. Write down your marketing plan each year, but be prepared to adjust as reality unfolds. If tracking and recording all this feels daunting, consider asking your accountant, banker or trusted adviser to set short, intermittent meetings throughout the year for check-ins.
“Having that meeting set where you know you need to have all your information ready, even just for the first few months, might be enough to get your feet under you and get you in the habit of tracking the data,” Bradley says. “It gets easier if you just keep at it.”
He likens it to simple household chores.
“We all know that if we load the dishwasher after every meal, or wash a few dishes every day, it’s way easier than waiting until the end of the week and facing that big mountain in a full sink. That’s when it feels overwhelming, and you just want to walk away,” Bradley says.
Find ways to make record-keeping a small habit so it doesn’t become a big burden at the end of the year. Many accounting systems now come with apps or cloud-based sharing software, so your records are accessible on your smart phone.
If that’s the case, use small pockets of time – waiting for the feed truck to warm up, sitting in a drive-through line or in a medical waiting room, for instance – when you might otherwise scroll through social media or respond to texts. Instead, use it as a small window to categorize expenses on your mobile Quicken or QuickBooks app.
When you’re in the office, start small and set a specific time – say, five minutes before you eat lunch. Or set a goal to enter three to five data points while the first pot of coffee brews each morning. These little bits of time add up if you keep at them consistently, and the small bits of data will add up to paint a powerful picture of your ranch’s financial fitness.
1. REVIEW YOUR PROFIT AND LOSS STATEMENT; MANAGE FOR TAXABLE INCOME
Take stock of your income and expense reports in December and prepare to have a thoughtful conversation with your accountant concerning any additional expenses or income you anticipate in the financial year. Evaluate your taxable income so far, and make a plan to adjust accordingly.
Your profit/loss statement, also known as an income statement or statement of earnings, tracks basic revenue and expenses over a specific time period, typically a fiscal year.
If you’re a new producer or are in the process of transitioning your operation toward a more regenerative model, make an honest evaluation of what kinds of tax implications those changes might have.
Are you shifting a calving season to sync more closely with resource needs? Moving from a year-round herd to custom grazing? Need to purchase a no-till drill? Now is the time to identify those production goals and changes and decide how they will impact your income and cash flow. Do you need to stock up on cover crop seed now? Sell old drills to release capital for reallocation to new equipment?
Only a tax professional can offer the kind of legal guidance you might need in these decisions. Remember, tax codes may change from year to year, so be sure your decisions are in line with the most current requirements.
2. REVIEW NET WORTH STATEMENTS; SET OPERATIONAL GOALS FOR THE FUTURE
Tracking profit and loss is the baseline for managing a business, but if you want to move to a more regenerative model that intentionally balances people, profit and planet, it’s time to take those goals into consideration with your accounting.
“Your basic financial accounting asks, ‘Are we doing things right?’” Childs says. “What we want to think about next is more managerial accounting. It asks, ‘Are we doing the right things?’”
A net worth statement, also referred to as a balance sheet, considers the bigger picture of your ranch’s financial health. It incorporates assets, liabilities and any shareholder equity.
“Assessing a net worth statement is really the gold standard way of asking, ‘How are we progressing financially?’” Childs says.
He prefers to review this statement at the start of a new year and use it as a vantage point from which to set goals for the year ahead.
Make an honest evaluation of this statement with your CPA, banker, or financial adviser, Childs suggests, “then use that to help forecast a realistic financial goal of X amount of profit for 2023.”
It’s simple, but powerful, the economists note, for business owners to not only set profitability goals, but to write those goals down and keep them in a place where you can regularly review them.
Forbes magazine notes that fewer than 20% of people consistently write their goals down, even though “people who very vividly describe or picture their goals are anywhere from 1.2 to 1.4 times more likely to successfully accomplish their goals than people who don’t.”
3. REVIEW CASH FLOW STATEMENT; USE ENTERPRISE ACCOUNTING AS BUILDING BLOCKS
Your cash flow statement, in simplest terms, illuminates where money comes into the business and where money is spent. This measures the business’s ability to generate cash to pay debts, fund operating expenses and more. While your cash flow statement is going to evaluate the ranch’s financial footing as a whole, it can also be used as a starting point for more detailed enterprise accounting.
Your ability to focus on each individual cash-generating opportunity offers a clear picture of which enterprises on the ranch are most profitable.
“This is where you can start looking at your big goals and then ask, ‘Which enterprises on the ranch are going to contribute to hitting that goal?’” Bradley says.
Enterprise accounting allows a manager to ask powerful questions, such as: Can we shave a little off the overheads on this enterprise or can be get better margins on that enterprise? If we got better return here, could we reinvest that to improve over there?
“If you’re really concerned about addressing profitability, this is where you need to go,” Childs says. “Your knowledge of your enterprise profitability is very powerful in building an accurate operational plan.”
The bottom line, Bradley says, is that the best way to achieve success is to plan for it.
“So plan early, and plan often.”
Story by Laura Nelson, Noble Research Institute.
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