Accounting in farming
Whether you love or hate Jeremy Clarkson, the Clarkson’s Farm series on Amazon conveys many of the challenges faced by farmers. In the last ten minutes of the final episode of Season 1, the financial challenges are highlighted. As I watched this part of the show, I guessed a figure of £10,000 profit. The actual profit shown was £144 on arable farming in what was a weather affected year ( yields were down 40%). This would be increased by subsidies, but one has to question the viability, or more importantly the sustainability of farming if such low incomes are generated. Of course, as many farmers know, today profits are less from growing or rearing, and more in things like direct sales through farm shops or other items like tourism.
This made me think about what we teach (or do not) about accounting for farming. One might think it is something which should be covered in an accounting syllabus at university, but it in my experience it is not. I have never been taught or have I taught IAS 41 Agriculture. As an accounting standard, it is not very complex, so teaching it is not much effort. Perhaps what is more useful to teach is how to actually prepare accounts of farms. The Irish leaving certificate (an exam for entry to university) includes some more practical items, such as an “enterprise analysis account” – an account which shows revenues, costs and profits of each part of the farm/farm activity. Such an account is useful as it can be the basis for decision making in the same way that departmental accounts can be in other business sectors.
My previous post was on a new definition of accounting. Linking it to this post, I am wondering how farm accounting fits with the “enable the flourishing of organisations, people and nature” element of the definition. It is, or will be, difficult for people and nature to flourish (by being fed, having good farming practices) if the financial return on farming is poor or subject more risks from climate change. I could go on, but some food for thought here I hope.
Managing and accounting on farms
As I come from a rural background in Ireland, agriculture has to an extent always been part of my life. I have worked on farms as a young lad, and all things agriculture interest me still.
As a management accountant, I’d have a wild guess and say that most farmers do little formal accounting – particularly small farmers. Some farms have quite the turnover nowadays in Ireland and many are incorporated and even fit the medium-sized company criteria. The smaller farm, like many small businesses, probably does very little accounting – maybe just the annual trip to the accountant’s practice to work out taxes due.
As I have written in previous posts, cloud-based accounting software is a key tool in my view in bringing accounting to small business. And farming is no exception to that. Having done a relatively brief Google search, I could not readily find any cloud-based accounting apps which might be suitable for farmer. Farm accounting is a little difference than other business sectors in that 1) inventories are live crops and animals and 2) costs and revenues needs to be captured by sector e.g. tillage, dairy, crops. I have found several farm management apps, such as FarmFlo or see here for an international view. There are some software packages specifically designed for larger farms (see here for example), but it seems there is a gap there in terms of the smaller farmer. If I were to design an app, to be honest I would focus more on cash-based accounting than accruals accounting. I think farmers focus more on the cash in the bank than on profit.