Does A Farm Have To Show A Profit?
- 1 …a question which might be on your lips as you consider setting up a small farm operation
- 2 Small farming for business
- 3 #1 Receipts, invoices & transactional source documents
- 4 #2 Accounting software
- 5 #3 Day book ledgers
- 6 #4 Income statement (Profit/Loss)
- 7 #5 Balance sheet
- 8 #6 Separating out the home expenses
- 9 The round-up…
…a question which might be on your lips as you consider setting up a small farm operation
As is so often our motto in such matters, “…honesty is the
best only policy.”
The underlying motive for owning a small farm or smallholding will vary from person to person.
Whether selling farm produce as a hobby, or business – when documenting the productivity of your operation, you’ll want to declare the truth.
There simply is no other option, a lie just isn’t true. Deception, no matter how tempting, will disadvantage always in the long run.
A better question might actually be:-
“How do you know if your farm has made a profit?
…and what are the different definitions of profit?”
For a detailed, granular view of farm profit take a look at our article: “Farm Income Statement Guide”
…but for the purposes of this breeze through, we’ll just be highlighting what constitutes profit, how it is generated and finally, how to document it.
Small farming for business
If you are intending to run a small farm for business purposes – whether or not you qualify for tax declaration – you’ll want to keep accurate records.
Governmental and regulatory obligations are one are which needs due care and attention…
…but keeping a finger on the pulse of your household’s productivity gives practical oversight and assists in investment decisions.
You’ll want to know even at a relative nursery growth level how fruitful your endeavours are.
Even if you have no intention of deriving a liveable wage from your farming efforts.
If you are concerned enough to sell – you should tally your income and outgoings.
Productivity always has value
No resource nor produce is worthless.
It has value to somebody, to some lesser…to others greater.
You shouldn’t therefore underestimate what you have under your hand if you produce from your small farm.
No matter how meagre the yield in your opinion.
The produce could always be a benefit to others, even if not given away, but in a commercial trade arrangement.
No matter how humble.
For example, there are so many restaurants seeking to buy genuine local produce from small farmers.
Even a relatively small market garden can generate healthy profit from local sales this way.
Whilst you might not be wanting to generate a major income from your endeavour, don’t forsake what it might do if gradually nurtured for someone else in your community.
Take this article on rural poverty, for example…productivity is a powerful tool in our hands, no matter the scale.
So, if you are looking to take your small farm enterprise from hobby status, or even fledgling start-up, to becoming a mature vehicle for sustainable profit – albeit gradually – take note of the following:
#1 Receipts, invoices & transactional source documents
These documents are the input and output markers of your whole small farm enterprise.
This paperwork if retained and organised will suffice an audit trail of transactions between your business and upstream/downstream counterparts.
Strict record keeping regimen will ensure your physical proofs are always at hand to verify activity.
A competent filing system with complimentary scanned digital backups will grant a bedrock of commercial reference material.
Maintain the habit.
If it comes to positioning your enterprise more formally, you’ll appreciate having set a disciplined tone from the start.
Should the your operation grow beyond your DIY financial management and you take on a bookkeeper/accountant – keeping a traceable transaction history will be non-negotiable.
#2 Accounting software
Lodging your small farm’s financial performance with a cloud-based, small business accounting platform would be right on trend.
Many of your peers are doing this.
There are various software packages which are developed with ‘you‘ the user in mind – offering easy, user-friendly workflows for the layman.
Such softwares are multi-user enabled and therefore are useful conduits for communicating you finances directly with accounting personnel.
Professional formatting, automatic calculations and instant notifications make such repositories capable, multi-functional desktop assistants granting a host of benefits for staying organised on paper.
Incorporate the various time-saving features into your administrative routine by signing up to one of these services and plugging-in will add a leading edge to your financial management.
#3 Day book ledgers
Keeping a paper-based ledger is a useful discipline to keep in business.
They respectively record every purchase or sale performed by your business.
By keeping day book ledgers, it means you are constantly passing your financial dealings on reflection through your fingertips.
This practice grants greater budgeting diligence and provides a finer financial oversight.
Supporting more effective decision making.
Sensitivity to the most granular level of economic detail affords prudence for making better investments.
Knowing what to plough your proceeds and resources into for the most fruitful outcome is critical to sustainability.
Do you require a hand in learning more about keeping day book ledgers?
Browse the countless free download resources available online, including templates and frameworks.
Day books are simple enough ledgers or record books to keep.
Take a look at this simple guide for managing prime books of entry.
#4 Income statement (Profit/Loss)
This is the principal accounting instrument for declaring a profit or loss for your small farm.
Your entry data from day books will be aggregated and categorised within the features for this statement.
This statement should be written periodically to present a formal communication on the profit position of your business.
Some businesses prefer monthly presentation, others quarterly.
It depends on your executive decision making processes.
An annual round-up, either way, should be performed in additional to periodic review in order to suffice accounting submissions for tax purposes.
Do you have more than one distinct income stream tied into your total small farm income?
Prepare separate statements.
One for each enterprise.
For a thorough breakdown on how to prepare farm income statements – read our profit loss guide.
#5 Balance sheet
This is where your small farm business assets and liabilities are recorded.
In other words, those possessions that your business holds that are either serving your business by adding income (asset), or are being served by your business by costing income (liability).
The function of your balance sheet is to show an overall balance of one against another (assets vs. liabilities).
Whilst this statement has nothing to do with either costs/overheads or revenue resulting from or supporting trade, it does rather uncover other potential influences contributing to your overall profit position.
Take at look at eCommercefuel.com’s: “How To Read A Balance Sheet (The Non-Boring Version)”
#6 Separating out the home expenses
If the financial management of your small farm business is still very much intertwined with your family finances, it will benefit you separate them out.
Ring fencing your income and expenses (business vs. personal) enables more accurate accountability.
Justifying investment decisions of time, money and other resources on your business will be much more confident if you know it’s true contribution.
There are financial reporting templates which offer segregated statements – business vs. personal, for side-by-side comparison.
The more intuitive method though which is less data entry intensive, would be to use integrated statement which clearly delineate the income/outgoing streams of both business and personal activity.
Take a look at our example of this integrated approach to farm and family accounting.
So, formally declaring the profitability of your small farm in practice is very straight forward, if you know how.
One or other simple tools to assist will save time and money on either going about it the wrong way, or hiring professional help too early.
Get disciplined in your handling of financial reporting and it will put your business in good stead for sustainable organic growth into the long term.
Have you just begun keeping farm accounts for the first time?
Share your experience below.
Do you want some professional advice on making your smallholding more profitable?
Feel free to get in touch.
Categorised in: Farm Profits