Introduction to Record Keeping (2 of 2)

Know Your Numbers, Know Your Options Author

06/18/2020 Added

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By Austin Duerfeldt

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[00:00:00.106](cool music)
[00:00:09.370]Using cash accounting, recording transactions
[00:00:13.100]is relatively simple.
[00:00:15.740]I record whatever the income or expense is,
[00:00:18.550]and add or subtract it from my cash balance.
[00:00:22.770]Normally I would also include the data payment or receipt,
[00:00:26.680]along with the vendor's name.
[00:00:29.680]This is all that is required of us,
[00:00:31.870]if we are keeping books for taxes.
[00:00:34.600]But we aren't doing that anymore, are we?
[00:00:37.700]We have elevated beyond that, and desire to keep books
[00:00:41.780]for more than just simply tax purposes.
[00:00:44.960]We want to make decisions at the margin,
[00:00:47.440]and know that we made the right call.
[00:00:49.890]For those types of records,
[00:00:52.370]we need to do a little bit of additional things.
[00:00:56.650]First, We may wanna split out costs
[00:00:59.490]based on the enterprise.
[00:01:01.870]Later on, we'll cover more information
[00:01:06.130]about some of the harder costs splitting concepts,
[00:01:08.790]like tractor repairs.
[00:01:10.800]But for now, just know that if I can directly attribute
[00:01:14.570]something to a certain enterprise,
[00:01:17.370]that would be a beneficial way,
[00:01:19.020]of recording that transaction for a manager.
[00:01:23.980]What else you might be asking?
[00:01:26.750]Here's a big one.
[00:01:28.760]What about recording a memo that details the transaction.
[00:01:33.410]Let's say I went out and I bought a fuel pump.
[00:01:37.410]Maybe I should put in the memo of that transaction,
[00:01:39.990]that it went on a John Deere 4020.
[00:01:43.880]Let's say that I went out
[00:01:45.020]and I purchased feed for the cattle.
[00:01:48.070]Maybe I should record the ration type
[00:01:50.040]and the quantity purchased.
[00:01:53.460]Let's say that I received $10,000 from the elevator today.
[00:01:58.450]Maybe I should record the bushels sold,
[00:02:01.220]and their price per bushel received.
[00:02:04.580]By having these things in the memo,
[00:02:06.790]it not only gives us a great reminder
[00:02:09.240]of what the transaction did later on,
[00:02:12.010]but it also allows us to start doing some analysis.
[00:02:16.360]Sorting through all the repair bill transactions,
[00:02:19.500]in a given year would be nearly impossible,
[00:02:22.090]if trying to decipher how much was spent on a combine.
[00:02:26.810]But if I put combine in the memo of the transactions
[00:02:30.710]that are associated with it,
[00:02:32.800]I can quickly scan through a list,
[00:02:35.180]and pull the transactions related
[00:02:36.970]to that piece of equipment.
[00:02:39.650]Having the costs associated with my combine
[00:02:41.900]figured it out,
[00:02:43.270]I can calculate what my actual costs are,
[00:02:46.180]for operating, custom hire, harvest work.
[00:02:51.600]Having these type of numbers gives me the ability,
[00:02:55.250]to discover competitive advantages
[00:02:57.490]and doing some custom work operation,
[00:03:00.440]or it might give me the information needed
[00:03:02.660]to make a decision, as to whether
[00:03:04.800]or not it's time to trade or upgrade
[00:03:06.970]equipment into something newer.
[00:03:09.980]One of the most costly mistakes, I see when someone is
[00:03:13.020]starting out with a record keeping,
[00:03:15.520]is believing that if they go out and purchase software,
[00:03:18.670]it's the answer to everything.
[00:03:21.270]If I purchase the newest version of QuickBooks or Quicken,
[00:03:24.760]I will be a better record keeper for it.
[00:03:28.000]My comment to them is, this is a fallacy.
[00:03:31.570]While computers make life easier,
[00:03:33.570]in some regards it falls back to the old adage,
[00:03:36.847]"Garbage in garbage out."
[00:03:39.550]Understanding why you're recording
[00:03:41.280]a transaction in a certain way,
[00:03:43.660]and being consistent is far more important,
[00:03:46.950]than what computer software
[00:03:48.360]or method of tracking you're using.
[00:03:51.470]For my days to preparing income taxes,
[00:03:54.130]I've seen my fair share of different types of methods.
[00:03:58.630]Some of the best records that came across my desk,
[00:04:01.820]or the farm and ranch business records
[00:04:03.690]for income tax analysis ledgers
[00:04:06.360]such as the UNL, FM 884.
[00:04:10.760]But I've also seen some individuals build,
[00:04:13.470]some amazing Excel and Google Sheet documents,
[00:04:16.350]that not only track their records,
[00:04:18.820]but they can also then build on decision-making calculators,
[00:04:23.930]for Up-to-date cost analysis.
[00:04:27.310]And then there are some generic
[00:04:30.010]accounting softwares out there that are commonly used,
[00:04:34.230]such as Quicken, QuickBooks and Sage among others,
[00:04:38.900]that while not specifically built
[00:04:40.660]for agricultural accounting,
[00:04:42.750]do a fantastic job when you put in the time and the effort.
[00:04:47.350]Finally, there are some accounting software
[00:04:50.020]options out there,
[00:04:51.480]that are built specifically for our industry.
[00:04:55.070]These programs such as PcMars, CenterPoint, Ultra Farm and
[00:04:59.290]Magnify are built and designed
[00:05:02.080]with farms and ranches in mind.
[00:05:05.870]All of these options are perfectly acceptable methods
[00:05:08.720]of tracking and analyzing transactions,
[00:05:11.630]and range from free to hundreds of dollars,
[00:05:14.180]in yearly subscriptions.
[00:05:16.990]It's up to you to decide which option
[00:05:19.950]fits your operation best.
[00:05:23.190]When I say the word reconciliation,
[00:05:25.970]75% of you probably understand
[00:05:28.830]that I'm talking about something similar,
[00:05:30.320]to a bank reconciliation.
[00:05:33.470]How many of you actually still complete those?
[00:05:37.900]There is a large group that will argue with me
[00:05:40.430]and say that I need to get with the times.
[00:05:42.660]This is the 21st century.
[00:05:45.010]Modern technology has advanced far beyond
[00:05:48.000]such trivial process.
[00:05:50.480]My argument back is, well, not really.
[00:05:55.400]I will admit that we are in a modern era.
[00:05:58.290]There are artificial intelligences out there
[00:06:00.600]that are capable of learning,
[00:06:02.580]such as the ones created by DeepMind.
[00:06:05.050]They've learned to play deep strategical games
[00:06:07.360]such as Gero and video game stashes such as StarCraft,
[00:06:11.000]and a multitude of Atari Games,
[00:06:13.630]and be better at them than humans.
[00:06:18.410]In the business world though,
[00:06:20.400]we still have human inputs that can cause us mishaps.
[00:06:24.890]Mistakes do happen.
[00:06:26.400]Checks get lost in the mail and online orders disappear.
[00:06:31.460]As a former County treasurer managing millions of dollars,
[00:06:34.870]I will tell you that issues do occur,
[00:06:37.970]with your bank accounts.
[00:06:40.150]And an expected bank fee that needs to be recorded,
[00:06:44.010]a wire transfer that did not get completed,
[00:06:47.010]checks that are outstanding,
[00:06:48.800]that need to be addressed,
[00:06:50.370]are just a few of the things that I came across.
[00:06:54.600]There are also inventories that need to be reconciled,
[00:06:57.660]such as grain produced and sold.
[00:07:00.490]One of my favorite reconciliation stories
[00:07:02.640]comes from Tina Barrett,
[00:07:04.220]director of Nebraska Farming Business Incorporated.
[00:07:07.740]While working with a client,
[00:07:08.780]she conducted a reconciliation of gone grain sales.
[00:07:12.930]Basically all it does is looking at
[00:07:16.780]what grain is in storage,
[00:07:18.710]what was harvested and what was sold,
[00:07:21.980]and then making sure that everything matches up.
[00:07:25.440]What she found was thousands of bushels
[00:07:28.110]of grain was unaccounted for.
[00:07:30.620]The farmer was absolutely shocked
[00:07:32.810]and did not believe her at first.
[00:07:35.270]After finally agreeing
[00:07:36.460]to contact the farmers local elevator,
[00:07:39.990]he discovered then indeed he was sitting on a pile of grain,
[00:07:43.470]that was racking up storage costs.
[00:07:46.070]How long might have that grain sat there
[00:07:47.950]before it being discovered?
[00:07:50.630]There are three main types of reconciliations I recommend.
[00:07:55.080]I recommend that you reconcile your bank accounts.
[00:07:58.810]I recommend that you reconcile your crane production.
[00:08:02.950]And most certainly you need to do a reconciliation
[00:08:05.410]of livestock production.
[00:08:09.240]We'll have examples of exercises of each of these type,
[00:08:14.110]so that you can get an idea
[00:08:16.060]of what a reconciliation does,
[00:08:18.500]and hopefully they can catch mistakes,
[00:08:21.800]that would have otherwise gone unseen.
[00:08:25.890]It is common for sole proprietors
[00:08:28.000]to maintain one set of books, to rule them all.
[00:08:32.090]By that, I mean business transactions
[00:08:35.010]and personal transactions, all on one set of financials.
[00:08:40.340]While it is acceptable, I don't recommend it.
[00:08:44.030]Let me set the stage for you.
[00:08:46.680]You're looking to purchase a used $95,000 tractor.
[00:08:51.180]You go and talk to your local banker
[00:08:53.480]and they request a balance sheet.
[00:08:56.940]What they will be looking for is financial flexibility.
[00:09:01.210]A term you used with balance sheets,
[00:09:03.190]that looks at the ability to handle the purchase,
[00:09:06.620]and subsequent payments on loans.
[00:09:10.450]The banker wants to ensure that they get their value lent,
[00:09:13.500]plus interest back at the end of the transaction.
[00:09:17.070]This can be a matter of cash
[00:09:19.710]or have other assets as collateral.
[00:09:23.160]If you have all your personal information,
[00:09:26.100]interwoven in with the business,
[00:09:29.160]what could happen as personal cars and homes,
[00:09:32.970]could be going towards collateral for business assets.
[00:09:37.550]Another issue is with the distortion of income.
[00:09:41.970]If my bank account handles both the farm income,
[00:09:46.500]and my least significant other off-farm wages,
[00:09:50.110]it distorts the assets from farm operations.
[00:09:54.570]What could be an endeavor there is losing money
[00:09:57.050]year after year,
[00:09:58.700]becomes hidden due to the fact
[00:10:00.480]that supplemental income from an off-farm source,
[00:10:04.580]is supplementing the farm.
[00:10:08.310]While many will argue that having
[00:10:10.040]one set of books is easier,
[00:10:12.130]I have yet to hear how it simplifies things.
[00:10:16.640]By far the closest thing to simplification,
[00:10:20.520]I have heard is not having to sort out receipts,
[00:10:23.700]into personal versus business.
[00:10:26.200]The actual record keeping of transactions
[00:10:28.710]is the same amount of time and effort,
[00:10:31.030]on one set of books as it is for two.
[00:10:34.150]The only difference is the journal entry
[00:10:36.610]going in farm book versus home book.
[00:10:40.860]You probably remember during a previous video,
[00:10:43.880]that I mentioned that there was some industry practices,
[00:10:46.670]that should be followed.
[00:10:49.040]The Farm Financial Standard Council is good to source,
[00:10:52.330]for these accounting differences.
[00:10:54.800]There are two main guidelines published by the FF and C.
[00:11:00.720]The Financial Guidelines for Agricultural Production,
[00:11:04.430]and the Management Accounting Guidelines
[00:11:06.210]for Agricultural Production.
[00:11:08.680]These documents provide resources,
[00:11:10.870]and to recommended standards and financial measures.
[00:11:14.610]They also provide a methodology
[00:11:16.460]to keep record keeping consistent, reliable, and accurate,
[00:11:20.530]to support day to day management decision-making.
[00:11:25.640]I would not say that these documents are necessary,
[00:11:29.670]for the person just starting out with recordkeeping.
[00:11:34.120]For those of you maybe considering
[00:11:36.380]going a little bit deeper with enterprise analysis,
[00:11:40.890]and allocation of costs,
[00:11:42.840]I would definitely consider going to the website
[00:11:46.960]and possibly purchasing these two books,
[00:11:49.353]they have on hand ensuring you're doing
[00:11:51.282]your day-to-day record keeping.
[00:11:54.640]We'll provide a link to the website,
[00:11:56.630]and our supplemental information below,
[00:11:59.290]in case you're interested in going
[00:12:01.010]and considering purchasing these two documents.
[00:12:03.860]From this point forward,
[00:12:05.510]we will begin discussing the financial statements,
[00:12:09.270]and the ratios that go along with those.
[00:12:12.260]We'll talk about the cash flow statement,
[00:12:14.490]the balance sheet and the income statement.
[00:12:17.710]And how each of those ratios with their pros and cons
[00:12:21.020]can help you create a better operation,
[00:12:24.620]and be more profitable.
[00:12:26.730]Thank you, and hopefully
[00:12:28.180]you will enjoy the next courses.
[00:12:30.335](gentle music)

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Introduction to Record Keeping (2 of 2)

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