We all make mistakes. Some are more easily corrected than others! Here are some common bookkeeping mistakes that you may be making, but can easily avoid...
It's NOT "Personal", It's "Business"
Separating your personal finances from your operation's can be somewhat tricky as your farm is your livelihood. But not only is it a best practice of bookkeeping, it's downright necessary.
This can become complicated when your electric bill pays for your home and your shop, but talk to your accountant or bookkeeper to decide on what percentage of the bill should be allocated where, and stick to that percentage. For example: 40% of that bill could be allocated as a personal expense and 60% as a farm utilities expense. Once you decide on a percentage, figure out how to split up your bills in your tax software and then pay those amounts separately. It may sound like a headache at the moment, but once a system is in place, it will be no big deal.
In order to keep personal and business finances separate, you should have different bank accounts for each. This leads us into the next mistake...
Owner's Draws are NOT Expenses
Mis-categorizing transactions is a very common bookkeeping mistake. When you have your personal and business expenses properly separated, you will find that in order for you to get your hands on the farm's money, you will need to make a "draw" from that account. Essentially, you are just paying yourself so that you can use that hard earned "farm money" on personal things. When you do so, it is not classified as an expense to your farm. It is an "owner's draw" which is an equity account, not an expense account.
Reconciling Accounts is a Must
Many farmers think that it is sufficient to simply input income and expenses and then categorize. However, bank account and credit card reconciliations are extremely important. While you may think that everything is accounted at the end of the month, reconciling your accounts ensures that the numbers on your bank statements are exactly the same as in your accounting software. Think of it as balancing your checkbook, because it is essentially.
Most accounting software makes it quite easy to reconcile accounts, but it is much easier to do it right away than try to catch up on a year of data....which leads us to the next common mistake...
Procrastination is NOT Your Friend
Most jobs in the farming/ranching world are time sensitive. Getting the steers fattened out as quickly as possible, getting seeds in the ground at the right time, getting cows bred in a specific time frame...the books of your operation are not very different. If you don't give them the necessary attention by the week or month, when year-end and tax season shows up...you will have a headache and not much hair left.
Setting time aside for your books is one of the best ways to help your farm thrive and grow. Neglected books usually point to a failing or soon to fail operation. So picking out an hour per week to dedicate to your operation's financial health is really worthwhile. It may take you more time than that, but if you have good systems and organization in place, it should be a small portion of your week!
Receipt Collection Matters
Keeping all of those flighty receipts really does matter, and making it a habit is not too hard. If you check out my blog post about Going Paperless, you will see all sorts of tips about how to keep your receipts for the required seven years, without filling up every filing cabinet in the house.
Keeping receipts is not only important for audit preparation, they are also vital for being able to go back and retrieve necessary information. It's not just the big receipts that need to be stored away, but the seemingly insignificant ones as well.
If you went through this post and saw mistakes that you are making, DON'T PANIC. This is the perfect time to realize those opportunities and fix them! Fixing what you can, before you see your accountant or tax-preparer will not only make it easier on both parties, but will help them to do the best job they can at saving you money!
If you went through this post and it gave you a headache and you really DON'T want to take care of your books, Contact Me!
Good Steward Farmkeeping