• tax records
• financial reporting
• government programs

Farm operations with up-to-date and accurate financial records are seen as lower-risk clients to lenders. This directly affects risk ratings and loan interest rates. Tax compliance is important because the government has the power to garnish and freeze your bank accounts in extreme situations. And any farm operation that has experienced drought or extreme weather knows how important record-keeping is for access to government programs.

So, if you already know bookkeeping is important, why is it aways delayed?

You’re busy and allergic to office work

You’re the decision maker for most things on the farm including machinery, employees and marketing. Because you wear many hats, bookkeeping doesn’t feel urgent until it’s needed. For example, maybe you’re looking for more financing, or you need to make a decision about a capital purchase. You avoid farm bookkeeping because you’re busy and there’s no one else to manage it.

Farmers and ranchers enjoy working outside with machinery, crops and livestock. Many farmers don’t enjoy bookkeeping or office work and tend to gravitate towards doing the tasks they enjoy. In his book The 6 Types of Working Genius, author Patrick Lencioni describes the work that drains us versus the jobs that energize us. You might pick any task, such as sweeping the shop floor, over dealing with the books.

You avoid farm bookkeeping because it’s not your favourite thing to do.

You didn’t major in accounting

Accounting is an undergraduate degree for a reason. Fortunately, you don’t need an undergrad in accounting to be a good farm bookkeeper or accountant. However, like most things, it requires a time investment and practical experience.

Many producers get stuck on accrual versus cash accounting. Bankers and accountants prefer accrual accounting, while cash accounting is permitted — and often beneficial — for tax reporting. Accrual accounting includes receivables, payables and inventory, while cash accounting records only what has been paid or received.

Bookkeeping and accounting are confusing, so you avoid them.

Bookkeeping software keeps changing

Bookkeepers today (including me) have used everything from pencil-and-paper ledgers to desktop software and now AI-enabled cloud accounting platforms.

Most people don’t enjoy learning new systems. There’s always a learning curve and often some bugs. However, most desktop software is being phased out, which means cloud-based systems are becoming the only viable option.

Change is uncomfortable, so you avoid it.

You’re only using bookkeeping for tax reporting

If you’re only using your books for tax reporting, you’re probably not in a hurry to receive your tax bill.

The problem with this approach is you’re making business decisions based on only gut feel and the balance in your bank account. Up-to-date accrual bookkeeping helps you track profitability.

One of the underrated benefits of accrual accounting is tracking your grain inventory adjustments.

Unlike counting widgets in a warehouse, farm inventory often involves thousands of tonnes of perishable product. Some commodities, such as canola, can even self-combust under the right conditions.

Inventory values are estimates, not exact counts, and that adds complexity. Farm inventory is the biggest risk on the balance sheet, and its valuation can rise or fall overnight. Accurately tracking inventory in your books and records will provide better data to make stronger management decisions in the future.

Your record-keeping is messy

Why are receipts always missing? It’s a combination of your habits and processes. Having digital and paper receipts in several locations isn’t helpful for records management.

James Clear writes in his book Atomic Habits: “You do not rise to the level of your goals. You fall to the level of your systems.”

A new system could be adopting a digital receipt bank like Dext while your new habit could be immediately taking a picture on your phone of any physical receipts you receive.

Is regular bookkeeping and bill payment time scheduled? If not, it’s likely to remain sporadic and chaotic.

Maybe your email inbox is overflowing with payables and becomes unmanageable. That’s a sign accounts payable administration could be delegated to someone else.

In many farm families, money moves back and forth between personal and farm accounts. It’s practical, but it complicates bookkeeping and financial clarity. Untangling those transactions takes intentional planning and discipline.

Without receipts, bookkeeping turns into guesswork — and stress.

A quote attributed to Winston Churchill (and others) says, “Perfection is the enemy of progress.” Start somewhere with your farm bookkeeping. It could be switching to cloud software, investing in training, delegating to someone else on your team or hiring it out.

To paraphrase Clear, you need to standardize before you optimize. You can’t improve bookkeeping processes that don’t already exist.

The post Five reasons why you avoid farm bookkeeping appeared first on Country Guide.

No one does really, but farmers seem to have a particular disdain for sending money to Ottawa.

I think there are a few reasons for this.

One is cash basis income tax treatment which means farmers can often defer paying income tax. Farmers can benefit from deferring income tax, although I would argue it’s more of a necessity than a benefit.

The only alternative would be taxing the farmer on his or her production inventory before it’s sold, estimating production and a selling price.

Other business owners and professionals are taxed on their receivables, but for farmers, the inventory is often not yet contracted or sold.

There are two main strategies to defer income taxes. One is to pre-buy next year’s input expenses; the other is to defer grain ticket settlements to the next fiscal year. In the 2017 budget the Liberal government considered changes to the Canadian grain ticket income tax deferral rules. I responded to the government consultation that grain ticket deferral doesn’t cost government anything directly and I argued taking it away would only further increase farm support payments.

Fortunately, the rules remained unchanged.

There are two ways to record income taxes on accrual financial statements. One is the taxes payable method which is just as it sounds: simply report income taxes owing as a payable.

The other method is the future income taxes method. This method recognizes the future taxes owing on your unsold inventory and, in some cases, the difference between accounting net book value and tax net book value of assets such as farm machinery.

I prefer the income taxes payable method for its simplicity. I find the future income taxes method only relevant if operations were to wind down next year — which almost never happens.

Another reason farmers don’t like paying taxes is perceived government waste. Farmers work hard for their profits and like everyone, want to see good return for their tax dollars.

Most of my working career I’ve been a T4 income earning employee. Taxes withheld since my first pay cheque never hit my bank account. If you never see the money, it’s harder to envision it as your own.

Then I started my fractional CFO firm where I source and execute the work, pay the bills and have to send a chunk of profit away in taxes. It’s a different mindset when the money physically hits your bank account and then you have to send a large portion away each quarter.

The same is true for farm business owners who must acquire land and livestock, purchase supplies and inputs and then execute on a farm business plan. Hopefully, weather cooperates and they’re able to squeak out a profit. And then, hopefully, politicians put their taxes paid to good use.

One advantage Canada has over the U.S. is the absence of personal property taxes on farm machinery. (Although significant exemptions exist.) Some states, such as Montana, levy a tax for the value of farm machinery on hand at the end of every year.

Canadian farmers also benefit from a tax-free rollover of farms to the next generation and may it always remain this way. Any introduction of a wealth or estate transfer tax would be as popular as last year’s attempted capital gains tax increase.

So, between start-up years, money-losing years and deferring tax, farmers aren’t used to paying taxes. Many farm accountants tell their clients they should want to pay income taxes, because it means that the farm has been profitable long enough to exhaust the usual tax deferral strategies.

Just remember that farmers will never like it.

Craig Macfie, CPA, PAg, provides fractional CFO services to growing farms and agribusinesses. Find out more at springcfo.com

The post Why do farmers hate paying taxes? appeared first on Country Guide.

How can you tell your parents that the accountant they’ve had for years might not currently be the best option for the farm?

An email from Worried We’re Missing Something asked our resident awkward conversation pro, Patti Durand from Brightrack Consulting, for advice about what they should say to mom and dad to ensure that the right people are on board to plan for the farm’s future — and not rock the boat too much in the process.

This is the last Awkward Ag episode in our Summer Series, but if you missed previous episodes you can watch them all here: https://www.youtube.com/@agCanadadotcom/shorts

Click on the links below to watch more videos in the Awkward Ag series:

Sharing your final wishes with family

Responding to advice, whether you wanted it or not

Managing ‘not-so-good’ vibrations

Trying to find work-life balance on the farm

How to ask for a raise on the farm

Taking awkwardness out of farm family discussions

The post VIDEO: Is your parents’ accountant the best fit for the farm? appeared first on Country Guide.

But it’s a subject that’s creating a bottleneck, preventing some farm operations from reaching their growth potential and transition goals.

In short, decisions are being made with incomplete or slow information.

With another year-end comes the opportunity to evaluate your farm record-keeping system. If you don’t have a system, or you’re not sure what your system is, keep reading.

The case for digital

“Shoebox” farm accounting still exists in dark corners of some accounting offices. However, this record-keeping system is increasingly unmanageable given the dollars and financing at play on today’s farms.

Many shoebox record-keepers are exiting the industry. In contrast, some of the most successful farm operations I’ve witnessed had owners/managers who kept a close hand on ensuring accounting records were up to date.

To fully digitize farm bookkeeping involves accounting software coupled with a digital receipts and record-keeping system.

Many farm owners or managers get stuck somewhere between a half paper-half digital system. For example, in the same day they may find themselves printing digital receipts and scanning paper ones. The problem with this approach is finding the information you need, when you need it.

Suppliers and customers are increasingly going paperless as well. For example, FCC recently announced they’re switching to paperless and grain companies are adopting online portals and direct deposit.

And events like the paperless years of the COVID-19 pandemic and the recent postal strike leave many to believe that we are quickly headed for paperless systems.

Good labour is hard to find, especially in remote work settings such as on farms. Technology and artificial intelligence won’t make the bookkeeper role disappear anytime soon, but finding good, local, in-person administration and bookkeeping help will be harder, not easier in the future.

Instead of piles of paper, records are now hiding in email inboxes and online portals, meaning many farm business records will still be chaotic. Cloud bookkeepers are the solution.

Bookkeeping software providers are investing resources in cloud solutions rather than legacy desktop programs. Cloud bookkeeping software is a better match for digital receipts because it allows you to hire a bookkeeper from anywhere. And once you’ve adopted cloud bookkeeping software, you can access your information from anywhere.

Ultimately, going digital could take farm administration work off your desk.

The case for paper

Some farm managers still prefer a paper filing system. This means, however, that the accountant can’t consult farm records until those files physically arrive at their office.

Some farm business owners distrust cloud storage systems. But safety measures such as backups of electronic information and authorization to access information using passwords and secondary authentication make these information storage systems secure.

Yes, learning new software and systems will require a time investment. If you do your own books, or if you have good in-person help, a paper filing system may be adequate for now, but the trend is towards more of our work life going digital. Farm owners are increasingly living in a half paper-half paperless/digital world. The goal isn’t just to digitize your farm records, but to have access to up-to-date information that can help you make your next decision.

Now is the time to go digital with your farm records.

– Craig Macfie, CPA, PAg provides fractional CFO services to growing farms and agribusinesses. Find out more at www.springcfo.com.

The post Moving your farm’s books to the cloud appeared first on Country Guide.

That’s not all there is to watch for, however. Given that many farms have post-harvest year-end dates, a significant amount of inventory on 2023 farm balance sheets is likely overstated.

As a result of that overstated inventory and the grain inventory adjustment, many producers’ 2023 profitability could be inflated and 2024 worsened, with potential impacts on your cash flow and financing.

What is a grain inventory adjustment?

Unlike most businesses, farms grow their own inventory. A typical manufacturing business will have raw-goods inventory, work-in-progress inventory and finished-goods inventory. An inventory adjustment for this business should only result from theft, damage or a counting error.

Still, inventory shrinkage is a write-down and to be avoided. For these businesses, when inventory is sold, it is expensed as cost of goods sold. Revenue less cost-of-goods-sold equals the gross margin.

Since farms grow their own inventory, the inventory adjustment acts in a way similar to the cost-of-goods-sold expense and it can increase or decrease your gross margin. Since inventory is always a best estimate, producers will always see a grain inventory adjustment on their financial statements. Sometimes it will be to the good, and sometimes negative, depending on the quantity and quality of inventory and market prices.

An effective way to explain the grain inventory adjustment is to consider a farm’s first year in operation. If our fictional farm didn’t sell any inventory in its first year in operation, there would be no grain inventory adjustment. Balance sheet inventory would equal and offset the accrual grain revenue.

If the farm does sell inventory prior to year-end, however, the grain inventory adjustment will be the difference between the value of production and the inventory on hand.

This holds true for every year that follows with one additional adjustment. The inventory on the prior year’s balance sheet will also have an inventory adjustment since its final selling price will likely be different than the estimated year-end value.

Therefore, accrual grain revenue equals the value of current year production plus or minus the prior year’s inventory adjustment.

Accounting treatment

Most accountants will correctly value farm inventory at the balance sheet cut-off date using net realizable value. Net realizable value is essentially fair market value less selling costs. The balance sheet is prepared as of a point in time. This is true even under a financial statement review engagement or audit. Producers also have the option to record their agricultural inventories at cost, but most won’t find this method practical.

Financing and cash-flow implications for 2024

The main financing implication if 2023 inventory is overstated is for profitability and debt servicing. Keeping up-to-date inventory records with your bookkeeping will help you monitor your grain inventory adjustment. This will also help you get out in front of any issues with 2024 bank ratios and covenant testing.

Consider a grain farm with $1 million of inventory on hand at 2023 year-end. A 20 per cent drop in inventory value equals a $200,000 grain inventory adjustment expense for 2024, which is a direct hit to the 2024 debt-service ratio.(Fortunately, most lenders will test the debt-service ratio on a longer term average such as the past three years.)

When saleable inventory drops in value, confront the brutal truth and update your working capital and cash-flow forecast. Less money could be available for working capital, acquisitions or owner draws.

A grain inventory adjustment expense in 2024 will affect your profitability and debt service ratio before you even spin a tire in the field this spring. Producers cash-flow and operating credit will be weakened and pressured with the drop in commodity prices.

Of course, markets can always turn around but producers and their trusted advisors will be wise to be aware of potential grain inventory adjustments coming in 2024.

– Craig Macfie, CPA, CA, PAg provides fractional CFO services to farms and agribusinesses. He can be reached at craig.macfie@springcfo.com. This article was originally published in the April 2024 issue of Country Guide.

The post Summer Series: Watch your grain inventory adjustment appeared first on Country Guide.

Logistics, opportunity costs and strategy

Logistics also come into play. The ideal agronomic plan won’t be executed if cash flow, labour, machinery and technology aren’t available. Execution needs to happen in a tight window. Precision agronomy and farm expansion sometimes clash for this reason.

Is your farm’s strategy to increase economies of scale or to increase margins on existing acres?

And, is bigger better? Chick-fil-A founder Truett Cathy and his board were wrestling with new competition that had big expansion plans. In response, he is quoted as saying, “if we get better, our customers will demand that we get bigger.” Similarly, in farming if you get better, your balance sheet and stakeholders would demand that you get bigger.

Opportunity costs are part of the planning phase of building crop budgets. A cropping option will prevent you planting something else. Another may be eliminated due to constraints such as acres and rotation, or people and machinery. Gross margin analysis is the best way to evaluate different cropping options.

Gross margin analysis

The costs that can be accurately and efficiently assigned to specific cost centres (crops) should be included in the gross margin analysis. Typically, this means seed, fertilizer, chemical and crop insurance. Other variable costs exist on the farm but aren’t usually included. Variable costs are costs that change with acres farmed. Machinery and labour costs are examples. The problem is they’re not easily assignable to a specific crop. For labour, time sheets would need to be used; for equipment, engine hours, yet many crops see similar amounts of machinery and labour used. Few farmers see enough value for the time it takes to assign other costs such as machinery and labour to cost centres. Budget-to-actuals are helpful for all farm expenses, but farms should start with a budget-to-actual at the gross margin level.

Budget-to-actual

Producers should be preparing a budget-to-actual on inputs but in many cases, it’s a challenge just to get the bookkeeping and financial statements done. During your budget-to-actual review, billing or application mistakes could be found. Other benefits include improving the budgeting process for next year. Predicting insecticide and fungicide for the upcoming year is a challenge but a good opportunity to practice your forecasting skills.

A budget-to-actual requires assigning actual input costs to specific crops. Some bookkeeping software allows you to tag expenses to certain crops. This is more practical with a farm owner who knows what inputs were used on what crops, while many farms use third-party bookkeepers with limited agronomy knowledge.

Bin-run seed is a common issue. If it isn’t recorded, it will be buried in the grain inventory adjustment and hide your accurate seed expense.

Cash flow

More collaboration between farmers and agronomists on price points and budgets would be helpful, as most don’t have unlimited budgets for crop inputs. Credit lines should be in place early and be able to absorb contingencies like fungicide and insecticides.

Some farms pay all their expenses in cash while others finance their crop 100 per cent. A good benchmark for working capital-to-expenses for your farm is 50 per cent, i.e. you have cash to pay for half of next year’s expenses and need operating credit to finance the remaining. It’s advantageous if the agronomist is up to date on input prices. With deferred payments and zero per cent financing you can put cash to work elsewhere including land, technology and people investments.

Fertilizer is a commodity that should be managed like grain marketing. Sometimes it’s purchased early for tax planning reasons. If nine years out of 10 it’s cheapest in the fall, maybe there’s no issue. However, recently it became the top line item on farm income statements, surpassing machinery expense. It deserves more agronomist and financial management attention.

Crop shares / joint ventures

Crop shares and joint ventures can complicate crop budgets if some inputs are reimbursed in the budget while others are not. Agreements should be in writing to reduce issues. Open-ended agreements may cause issues later with audits requiring accuracy.

Craig Macfie, CPA, CA, PAg is a chartered professional accountant who specializes in providing fractional CFO services to growing farms. He can be reached at craig.macfie@springcfo.com

– This article was originally published in the February 27, 2024 issue of Country Guide.

The post Summer Series: Build a better crop budget appeared first on Country Guide.

Unfortunately, some accountants can get backed up like grain terminals in winter. Farm files trickle in until eventually the accountant’s throughput reaches capacity. This bottleneck of bookkeeping and accounting is both cyclical and predictable. It also results in delays in getting financial information to lenders and advisors and it can slow down new financing and opportunities.

The problem starts with farm bookkeeping — but really it starts with opening the mail. It seems farmers receive more mail, online logins and email than anyone.

Setting up a separate email address for accounts payable can help. So can mapping out office workflows and processes.

Keeping the bookkeeping up to date is one of the most important processes, but first the bills need to be paid. Maintaining a rolling cash-flow forecast can give you piece of mind over your cash position. As well, payables or pay runs can be scheduled at regular intervals to keep the chaos organized. Consider cloud accounting software so stakeholders and advisors can access the books from anywhere.

Bookkeeping usually ranks among the least favourite jobs on the farm, which makes sense. With credit financing in place, and with crops and animals that need attention, the bookkeeping often gets pushed to the winter months.

This might be all right for stable farm operations — tax returns get filed every year, and getting additional financing is never an issue. However, operations that are growing or are in transition or financial distress can benefit by addressing the bookkeeping backlog and reviewing the farm financial horsepower in a few key areas.

Financial Reporting: Traditionally financial reporting has been annual and it hasn’t been timely. Some producers will already be seeding their next crop before their financial statements arrive. This will be a problem with bigger farm balance sheets and more exposure to financial risk each year. Preparing and reviewing bookkeeping throughout the year provides the opportunity for more timely financial reporting. Accounting firms are a great place for bookkeeping training. Or consider hiring a bookkeeper to help keep your financial reporting up to date. Utilizing a spring or summer year-end date will catch your accountant at a less busy time of year. Or consider hiring a fractional contract CFO to help manage your financial reporting.

Financial Planning and Analysis: Most producers prepare income and expense budgets. These are usually on the cash basis and are often adjusted to the $/acre level. However, both cash and accrual accounting should be considered. Accountants prepare accrual accounting net income, but lenders are primarily interested in the cash generated to service debt. The solution or bridge is the statement of cash flow. Preparing this statement requires extra time, so it’s not typically done with most farm’s financial statements. Producers should speak with their accountants about preparing a statement of cash flow. Better business discussions will result.

Taxation: Tax planning and compliance filing, traditionally done by farm accountants, is only increasing in complexity. Now, farmland values and high commodity prices have made tax planning even more important. CPA firms are preferred for compliance filing for their combination of resources and professional standards.

Mergers and Acquisitions: Mergers could include new formal or informal partnerships or joint ventures. There are many areas producers can work together to lower their cost of production. Machinery, land, agronomy, accounting and marketing are some examples. In most cases, this will add time and cost to financial reporting. However, if the same accountant is used, efficiencies can be gained.

Farm and farmland sales are increasing in dollar value. It’s not hard to imagine $10- and $20-million farm sales being normal in a few years. Once you’ve digested that thought, it’ll help to consider the financial horsepower you have in place to evaluate these future opportunities.

Risk Management: Due to inflation, it’s more expensive to farm the same acre every year. Financial and production risk management is more consequential due to the rising cost of production. Grain farmers in Western Canada have the benefit of both government and private sector crop insurance options but cost-benefit must be analyzed.

Winter is a good time to review your farm financial horsepower, especially for operations that are growing, in transition or in financial distress. Administration, bookkeeping and CFO-level support should all be considered.

Craig Macfie, CPA, CA, PAg is a chartered professional accountant providing farm accounting and fractional CFO services through his company Spring CFO. He can be reached at craig.macfie@springcfo.com.

– This article was originally published in the January 2024 issue of Country Guide.

The post Summer Series: Assessing your farm’s financial horsepower appeared first on Country Guide.

Blair Sanderson sees it time and again. “The difference between a good producer and a great one,” says the CPA and partner on MNP’s private enterprise team in Lethbridge, “is their attention to detail and their constant pursuit of raising the bar.”

Across the country, farmers have dramatically upped their financial skills in the past decade. If you’re already on that track, what more can you do for even more benefits?

When it comes to farm accounting, Sanderson says, it’s increasingly about the details, and it’s the farmers who notice them who come out on top.

It’s like in the field, he says, “It’s a combination of improving many little things that add up over the years to separate the good producers from the great ones. Good is never good enough.”

In the boardroom, top performers go through their books with a fine–toothed comb, looking for places where their reports don’t align with their business plans. “These farmers could tell you their bottom line within five per cent without needing to look it up,” Sanderson says.

They have detailed business plans for the fiscal year that tie into their crop and/or cattle plans, he adds. “These plans don’t just collect dust on their desks, they are reviewed on a regular basis and any variances from the original plan are either documented or looked into and evaluated to see where improvements can be made.”

These are farmers who don’t need advice on the basics. They have a high level of financial literacy, they work collaboratively with professional advisors, and they know that even high performers occasionally need a nudge in the right direction, especially when the goal is continuous improvement.

Here are more tips too — free of charge:

1. Learn to take advice

Financially astute farmers know when to rely on experts for advice, says Riley Honess, CPA and partner with Thomson Group in Lethbridge. “They continue to learn, evolve, ask questions and adjust.”

These farmers spend serious time on business issues, they focus on strategic planning, and they leverage employees and experts to grow the farm.

Sanderson agrees that being receptive to expert advice is critical, and also recommends looking into whether assembling or joining a peer group could be good for the farm. Peer groups can also guide farmers who are looking for advisors they can trust, he points out.

“Have a good team of advisors, not just one, and make sure they work well together,” Sanderson says. It’s a solid recipe for growth, he says, and will help the farm make timely decisions with the best information possible.

2. Get going on succession

Too few farmers have succession plans, even among high performers, says Honess. “There are many operations that avoid this difficult topic for years.”

Does it matter? Honess says the answer is a definite yes. Postponing succession planning creates a kind of energy drain, he says. “At the end of the day, I think everyone wants certainty around what the plan is … This is huge for the success of the family-owned farm.”

It’s never going to be a one-size-fits-all solution, and the sooner producers can define it, and define roles for individual family members, the better.

“The best time to start succession planning was yesterday,” Sanderson agrees. “The next best time is today.”

3. Adapt your tax strategy

Outsource your tax strategies to the experts, Honess suggests, but be prepared for a lot of conversation.

Recognize that your tax strategy will be better if you have a solid plan for major expenditures and transactions, and this once again ties in with succession planning. The clearer you can be with your goals, the better the result.

It’s also wise to be prepared for the conversation with your accountant to explore areas and create decision points that you may not have anticipated.

“There are a variety of options that farming families can consider when transitioning their operations — for example, the potential utilisation of the Bill C-208 legislation introduced in 2021,” Honess says. “These rules can allow parents to sell shares in their farm company to the next generation and utilise their lifetime capital gains exemptions to fund their retirement. This allows for huge tax savings on the transition, but the legislation was recently amended and these rules are becoming more specific/restrictive in 2024.”

Further, Honess adds, farmers should always ensure they are able to utilize the intergenerational farm rollover rules and understand the tax effects of non-farm investments to their estate. It is vital, too, to review the corporate structure on an ongoing basis to avoid any unforeseen tax consequences.

Sanderson says MNP’s tax specialists work to maximize after-tax cash available to either grow the farming operations or plan to move cash/investments out of the farming operations for living and estate planning for non-farming children. “There are a few tools available to help make this more feasible,” he says.

He also recommends that farmers seek out farm management consultants to help them compare their results against their projections. “You can map out your cash flow, determine what amount of debt your farm can support, factor in stress tests to see what impact changing interest rates can have, and monitor your results to measure your success.”

4. Plan for the BEST, and the worst

Sanderson and Honess also say more farmers should also create a plan for more eventualities, so there are triggers when the best — or the worst — happens.

Depending on your farm goals, those triggers may seem counter-intuitive, like the way one of Sanderson’s clients spent the difficult 1990s focused mainly on land acquisition. The client saw it as an historic opportunity to grow, even if it meant other expenses might be deferred.

Becasuse of their plan, Sanderson’s clients weren’t shy of taking on debt, but locked in interest rates so they could predict payments within a five-to ten-year period. “In their business plan, they know they have excess cash flow and they’ve been aggressive about paying down their debt early so they have borrowing power when the next deal comes up,” he says. “They had a clear vision.”

“The more you plan up front, the more prepared you’ll be when opportunities arise,” Sanderson says. “Your operation will be prepared when headwinds prevail.”

– This article was originally published in the October 2023 issue of Country Guide.

The post Summer Series: Do sweat the details appeared first on Country Guide.

Maybe it started with a progression from Mom’s hard-copy ledger to a series of Excel spreadsheets. Or was it a transition from spreadsheet hell to a desktop software that the accountant recommended?

Today, many farmers have moved to web-based platforms that do more than record debits and credits. There are a number of comprehensive packages on the market that run payroll, track inventory, automate tax filing and generate customized reports for in-depth financial analysis. 

But before you ask if you’re using the right software for your operation, farm advisor Denise Filipchuck suggests a different question. Do you have the right person doing your books in the first place?

In-house or outsource it?

In some farm businesses there is a member of the family or the management team who doesn’t mind office work and has the expertise to maintain accurate and up-to-date books. 

But Filipchuck, a farm management consultant and certified financial planner based in Swan River, Man., finds it’s often a job that gets put off because nobody enjoys doing it. 

“Sitting down at a desk and doing the bookkeeping gets left until the last minute on many farms because there are so many other jobs producers would rather do outside,” she says. 

In these situations, Filipchuck recommends looking outside of the business for help. 

When she talks about her own bookkeeping service, farmers are often surprised at how minimal the cost is. They quickly realize they could spend their time doing what they are good at — operating the farm — and hire someone who specializes in bookkeeping. 

“Outsourcing the books takes a load off their shoulders right away and it ends up being faster and cheaper than doing it on the farm,” Filipchuck says.

In her business, Filipchuck Management Inc., bookkeeping clients adopt a monthly routine of using a scanner app to submit statements and invoices. Since the books are updated every month, it’s easy to access reports and see a current snapshot of the farm’s financial health at any given time. 

The hourly fee for this service replaces the need to choose a software, learn it, dedicate time to data entry and troubleshoot when needed. Outsourcing this non-core function of the business to a professional bookkeeper ends up being a net benefit for most farmers. 

Accountants and other farm advisors can usually recommend a list of bookkeepers who have a solid reputation and are familiar with agriculture. 

Peak efficiency

For those who decide to keep the book work on the farm, it’s a question of how to make the process as efficient as possible. Much of the answer stems from choosing the software with the best fit. 

Coralee Foster, BDO Canada partner in Mitchell, Ont., advises farmers to talk to their accountant before making any financial software decisions. Some have a preference for what their clients use. Some firms are also able to offer training and support on certain platforms.

When comparing the available options or revisiting your purchase decision, Filipchuck recommends beginning with the end in mind. 

“Think about the value that you ultimately want to get out of the accounting software, including report generation and level of detail, and then look at the features of each available product,” she says. 

Filipchuck has seen farm clients gain efficiency by moving from spreadsheets to accounting software, and from basic software to a more comprehensive package. 

Country Guide recently asked farmers and farm advisors across the country about their experience with accounting platforms. While every farm’s management needs are unique, it’s clear that three software companies currently serve the majority of Canadian farmers — Farm Credit Canada (FCC), QuickBooks and Sage. 

Desktop versus web-based

In the past, these companies primarily sold desktop products like AgExpert Analyst, QuickBooks Pro, QuickBooks Premier or Sage50 (previously known as Simply Accounting). 

While these options are still being used by some businesses, the focus of the industry has largely shifted to web-based applications. 

Why are software companies recommending the migration? In short, it improves the customer experience.

Web-based software, or cloud accounting, allows users to access their data at any time on any internet-connected device. In addition to the convenience of being able to update your records from anywhere, it also makes it easy to share your data with your management and advisory teams.

Other benefits include automated data backup, built-in security precautions and frequent updates.

Traditional desktop software is typically expensive because it involves a significant upfront cost, an additional fee for upgrades and in some cases, another annual charge for accessing customer support. Web-based products tend to have a less costly, inclusive monthly or yearly subscription fee that is often based on customized features and services. 

So, if cloud accounting is the way of the future, how do the online products from the leading companies in Canadian agriculture stack up? These reviews encapsulate what we have learned. 

The bottom line

Foster sees a variety of bookkeeping practices among her clients and is familiar with the evolution of FCC, QuickBooks and Sage products.

“These softwares are all fairly user-friendly and all of the family farms I work with could easily run on any of them,” she says. “They all have a basic format or can be expanded upon significantly if you want to use all of the modules.” 

Since there are so many similarities, much of the software decision comes down to the preference of the farm bookkeeper and their farm advisors. It’s key to talk to your accountant first, Foster reminds.

Sage

Sage (sage.com), a global market leader in business technology, recommends small business owners use Sage Accounting.

Accounting Start allows one user to create and send unlimited invoices, integrate payments, automate bank reconciliations and calculate GST/HST returns. The most popular choice, Accounting Standard, gives an unlimited number of users the added ability to send quotes and estimates, run more advanced reports, forecast cash flow, and manage purchase invoices. Upgrading to Accounting Plus enables multiple currency banking and invoicing capabilities as well as inventory management. 

All three Sage Accounting packages include a bilingual English-French interface. 

Sage also offers a range of add-on products to meet human resources and other business management needs. Sage Payroll and Sage HR, for example, integrate into Sage Accounting. 

Pricing: Sage Accounting Start, Standard and Plus packages cost $15, $35 and $55, respectively, per month. Sage Payroll starts at $20 plus $3 per employee per month. 

Sage offers 30-day free trials on accounting and finance products. The company often runs sales and other promotions (such as getting any version of Sage Accounting free for three months).

Support and training: Sage users can access a library of online resources and the Sage City community forum anytime. The company also offers the option to connect with a company representative by phone or online chat during specified hours. 

Sage University offers online training courses available in many different languages. Both self-paced modules and live webinars are available, depending on the product. 

What farmers and farm advisors are saying: Sage Accounting seems to have fewer farm users than our other two reviewed products but is still common among businesses of all sizes. It is not industry-specific but is known to be fairly user-friendly and can be customized for agriculture. The tiered pricing model makes the software affordable for those who need fewer features but the many add-on product options may be valuable to larger operations. Sage is used by over 16,000 Canadian accountants and bookkeepers, making user support widely available.

AgExpert Accounting

FCC offers the only accounting software designed specifically for Canadian farmers. Their product, AgExpert (agexpert.ca), is used by 16,600 clients nationwide. 

The standard features of AgExpert Accounting include transaction recording, bank reconciliation and reporting. The software allows users to generate reports such as a general ledger, balance sheet, income and expense statement, trial balance, net worth statement and accounts payable and receivable. 

Users can upgrade to a premium version which includes features such as GST/HST Netfile, payroll, AgriStability worksheets, invoices and statements, inventory management, transaction templates and attachments, and additional report generation of a cash-flow statement and budget. This version can be used for up to five sets of books. For those who were previously using AgExpert Analyst, the premium version of AgExpert Accounting also includes a data migration service. 

Pricing: The basic version of AgExpert Accounting with standard accounting features is available at no cost. The premium version is $399 annually. 

FCC also offers AgExpert Field, a web-based platform for planning, tracking and analyzing the activities involved in growing a crop. The premium versions of both AgExpert Accounting and AgExpert Field are available in a bundle for $499 per year. This bundle fee is waived for one year for FCC clients who take out a Young Farmers Loan.

Support and training: All AgExpert Accounting users have access to an online support forum, blog articles and introductory webinars. Those who have upgraded to the premium version can also access unlimited technical support directly from FCC by phone or remote computer access. 

In addition, there is a network of AgExpert certified advisors in each province who offer one-on-one consultations and training. One-day online training is $899 and two-day training is $1,399.

What farmers and farm advisors are saying: AgExpert Accounting is a popular choice, especially for larger operations. Since it is made specifically for farm businesses, the software includes industry-specific charts of accounts and other data entry prompts by commodity or government program.

Some farmers start off with a simpler software and move to AgExpert Accounting when their business has grown and they need the advanced capability of detailed inventory management.

It is known by farm advisors as a powerful program and is used by many agriculture-specific bookkeepers.

QuickBooks

Intuit’s QuickBooks (quickbooks.intuit.com) is one of the most popular entry-level accounting products on the market.

QuickBooks Online Self-Employed allows users to track income, expenses, sales and mileage. In additon, it can capture and organize receipts, run reports, invoice and accept payments and sort business and personal transactions. 

The EasyStart version adds the capability to send estimates and progress invoices and organize income and expenses by tax category. By upgrading to the QuickBooks Online Essentials, users can also track time, manage bills and payments, and record transactions and make invoices in multiple currencies. The Plus version offers enhanced tracking of project profitability and inventory. 

QuickBooks Payroll is available as an add-on product. 

Pricing: QuickBooks Online Self-Employed costs $15 per month. The EasyStart, Essentials and Plus versions cost $22, $44 and $66 per month, respectively. QuickBooks Payroll is $20 plus $4 per employee per month. 

QuickBooks offers 30-day free trials and often runs sales (such as save 50 per cent for the first three months) on web-based products. 

Support and training: QuickBooks Online users can access articles, video tutorials, recorded webinars and a community discussion forum 24/7. They can also connect with a company representative by phone or online chat during specified hours.

There is a network of Quickbooks ProAdvisors who can provide additional customer support. The database of these accounting professionals can be searched by city and province.

What farmers and farm advisors are saying: QuickBooks is a popular option for farm operations of all sizes. It is not industry-specific but is known to be one of the most user-friendly products on the market and can easily be customized for agriculture. The tiered pricing model makes the software affordable for young or smaller businesses who need fewer bells and whistles. Since there are millions of QuickBooks users worldwide, there is a significant network of expert guidance available.

The post A path to better bookkeeping appeared first on Country Guide.

Darren and Carmen Sterling at Weyburn, Sask., hadn’t thought much about their retirement. In fact, they hadn’t once looked at the goals they had committed to paper 20 years ago, back when they were in the process of creating a joint venture with Darren’s brother’s company as a means of taking over from their parents. At that time Darren wrote down his hope to retire from farming at age 55 while Carmen set her separate goals, and then the pages were promptly boxed up and put on a shelf.

When Darren’s brother retired, the Sterlings rented his land for a number of years before rolling his company into their own in 2018. At harvest of 2019, Shady Lane Farms Inc. was taking off about 8,000 acres of canola, wheat, lentils, soybeans and corn, with 3,200 of that owned, the rest rented. The farm had two long-term full-time employees and the Sterling’s daughters, Brooke and Shastidy, helped out when at home in the summer but were otherwise pursuing careers in health care.

The decision

If hindsight were 20/20, the Sterlings might have done things a little differently. “We really had no idea that two years later we’d be selling,” Carmen says. But when they sat down to review their operations, they both started thinking beyond the theoretical to the reality of their potential retirement. Carmen admits it took a while for them to speak openly about it, each afraid of unduly influencing the other’s decision.

“Are you ready to do this another seven to 10 years?” Carmen asked Darren as a means of opening the discussion. Their equipment was largely paid for and still had good value, but needed upgrades if the Sterlings were to keep farming. “Because if we purchase now that’s how long it will take to get back to our current position.”

These are difficult conversations for anyone. “The number one most difficult thing to decide is when is the last harvest,” says Dean Klippenstine. “It’s finding the balance between doing a good job of farming, operating at peak production, and deciding the point at which it’s time to start the next chapter.” A long-time partner and business advisor with the MNP Ag Team in Regina, Klippenstine says this kind of self-assessment can be emotional because in some cases partners can differ in their readiness.

It’s also about the kids. At Shady Lane Farms, the Sterlings consulted with their daughters who love the farm but want their careers. Darren had been farming since his teens. Looking at the options, he made his call. “I’m ready,” he told Carmen. They made their decision in the fall of 2019 and sold in spring 2020.

“We called the accountant and it was a shock to him,” Carmen says. “But I think the only way Darren could follow through and retire was to make the decision and have it happen quickly.”

There’s a point to be made that despite what can feel like haranguing from advisors to plan, plan, plan — we have to acknowledge that personalities and circumstances are going to play a role. With her long career in agriculture and business lending with RBC, Carmen knew many if not all the implications of the decision they were making, and agreed with her husband because it mattered to both of them.

“It’s been a win for me that Darren never wavered,” she says. “From the time we made the decision he was good with it.”

This doesn’t mean Darren is unaware they might have benefited from more planning, especially with regard to rolling Darren’s brother’s corporation shares into their own only two years prior. “We might have used the tax tools more effectively,” Carmen says. “We could have started five years before, even if we weren’t anticipating retirement, moving toward something that is inevitable for everyone.”

Business timelines

After the emotional decision about the last harvest (or milking, or cow sale), Dean Klippenstine says, “the number one business debate, especially with increasing land prices as we’ve seen in the Prairie provinces, is whether to liquidate operating assets and land, or to rent the land out and hold it as an investment. There’s no right or wrong way — it’s a personal decision — but each does have tax and other consequences.”

At Shady Lane Farms, the Sterlings chose the second option. Wanting to keep a land base should one of their daughters return to farm, and with neighbours ready to rent the land, the Sterlings sold everything else out of the corporation so that what remains is basically a land-holding investment company.

But things get a little more complicated if you want to sell it all. Specific to corporate farm sales, there are a few things to consider.

Lise Deleurme is owner at Lise Deleurme Chartered Professional Accountants in Notre-Dame-de-Lourdes, southwest of Winnipeg. She recommends making a plan and beginning its execution as much as five years ahead of the final sale, particularly where a producer has everything in the corporation.

To begin, Deleurme suggests grouping assets held in the corporation and spinning them off into separate entities in order to expand the base of potential buyers and ensure maximum value. Trying to sell any farm in its entirety could limit buyers who might want only one part or do not have the required equity base to purchase the whole.

All of this has to begin early so the new structure is in place at least three years prior to sale to avoid a CRA charge of tax avoidance.

Next Deleurme suggests examining the tax consequences of the sale of each asset group.

For our purposes let’s look at land only as the tax implications of its sale can be complicated and nuanced depending on how the sale is executed. Of course, the biggest of these considerations is the $1 million lifetime capital gains exemption available to every individual.

Tax tools

Unlike the sale of privately held farm land, the sale of corporate land holdings does not qualify for the capital gains exemption, meaning its liquidation will occasion a punitive tax if sold outside the corporation. Only the shares in a farm corporation qualify (See ‘Tax tools and definitions‘ further down).

“More and more the shares of the corporation are being sold with the land inside of it,” says MNP’s Dean Klippenstine. “It is an experience unique to agriculture.”

Example: Six quarters are owned in the corporation. An interested buyer meets the rules and criteria for a qualified farm company. The purchaser buys all the land in the corporation through the purchase of shares, and the seller uses any capital gain deduction he or she has remaining. The administrative burden put on the purchaser to amalgamate the two companies and for legal and accounting is minimal compared to the relative gain for the seller.

“You don’t have to sell from within the corporation, but most farms are not buying land at an after-tax corporate rate. Ninety-five per cent are now buying with corporate dollars,” Klippenstine says. “I would even be so bold as to say that if you are negotiating to sell land through corporation (shares) and they say no, you should find someone who will.”

In jurisdictions where competition for land is less intense, a slight discount might entice purchasers to go through, and pay for, this process. If a non-corporate entity wants to buy the land, it is basically the same process except the purchaser will have to set up a corporation to roll the purchased shares into.

Okay, so you might be exhausted by now. Carmen Sterling admits that having their land in the corporation created the biggest dilemma for them. “If we had understood the ramifications at the end of our farming career, we still would have incorporated but perhaps would have held the land personally… the financial management to do all of this and administer the land company has actually been harder than through our entire farming career.”

The accounting

Believe her. Remember that they had inventory creating an income stream well past the sale, plus there were deadlines around programs like AgriInvest, and they also had to monitor a variety of land ownership dates in relation to their sale and what that means to eligibility as a “qualified farmer”. Whew, shall we just say the whole thing is complex?

Dean Klippenstine admits it’s complicated even for the best accountants. “Our industry doesn’t have as good an understanding as we should simply because we never had a significant multi-generational transfer of (farm) wealth before, especially in the Prairie provinces. The last generation had a $1 million farm; now they are often worth several million.”

“Clients tell me they just want it to be simple again,” he says. “I tell them the only way to have it simple again is to be poor.”

“I want to emphasize one thing,” he adds more seriously. “Don’t assume the second you quit farming, you’ll wind up the farm corporation. You may cease operating a day-to-day farm, but most corporations continue to exist into the next generation as children use them as income and inheritance tools and use their capital gains exemption through them… It won’t be wound up, but you will live off the income generated by the assets.”

The alternative isn’t pretty. Let’s say you have a $3 million corporation, he says. If you sell the land and claim it as personal income, you maybe pay $1 to $1.2 million in taxes. If you leave the land in the corporation you will pay tax only on the annual income it generates. “Most of my clients would choose the latter.”

Both accountants believe most farmers underestimate their wealth.

Older farmers have built up a lot of equity so they need to plan how to get the most out of their sale while at the same time working on a financial retirement plan, says Lise Deleurme. She puts it this way: Are you ready?

“Are you ready if someone comes to your door with a good offer? Can you accept it without a huge tax hit? Are you ready to back away completely? What will the plan leave in your pocket, and will that make you financially ready for retirement depending on your age, how long you might live, and what you want to do in the future.”

Klippenstine agrees farmers don’t know their wealth and are consequently shocked at the post-sale tax hit. “Nobody seems to have a good handle on their taxable income,” he says. “On a grain farm you have your entire crop inventory and deferred income with no input costs, rent coming in, proceeds from the equipment auction; it’s a tidal wave of taxable income. And that’s just current taxable income, let alone the rest. So you have to think of the next generation and what will happen, look at the intergenerational, farm specific rules. You’ll need help with all of this because the consequences are huge to yourself and the future generation.”

Back at Shady Lane Farms, Carmen and Darren Sterling were ready. Their process was quicker than most, but they knew what they were getting into both emotionally and financially. They had to come to terms with letting go two long-time employees who were also friends. They are still waiting for the tax bill but are prepared for that too. And they have their head around upcoming deadlines related to landholdings and meeting criteria for qualified farming.

A few months after their auction, the Sterlings dug out the box they’d tucked away 20 years earlier and looked at the goals they’d forgotten they’d ever written. Darren had just turned 55.

Tax tools and definitions

Qualified farm property

• A share of the capital stock of, or interest in, a family farm that you or your spouse or common-law partner own.
• Real property, such as land and buildings.
• Property such as milk and egg quotas.

This seems fairly straightforward but BDO Canada warns it’s easy to run afoul of these definitions. “All or substantially all” of the value of assets in a corporation must be principally used in a farming business that a family member was actively engaged in. So be careful not to build up non-farming assets in the corp that won’t qualify for capital gains.

MNP’s Dean Klippenstine also cautions producers to be aware of the date land came into the corporation if they plan to maintain the land in an income-generating land company as the Sterling family did. The rules say your land has to be farmed more years than it’s rented out in order to “qualify,” so the purchase of land within two to five years of retiring might put you offside of the rules.

At Shady Lane Farms, Carmen Sterling says this has required them to monitor both the dates and how the land came into the farm as there are different rules regarding intergenerational, sibling or non-family acquisitions.

Intergenerational (tax free) rollover

• The transfer of qualifying farm interest to next-generation family members on a tax-deferred basis during their lifetime.

Prior to the transfer, the property must have been used principally (more than 50 per cent) in a farming business in which you, your spouse or any of your children were actively engaged on a regular and continuous basis in order to qualify for the rollover provisions. This “use” stipulation applies separately to each parcel of land.

Klippenstine says agriculture is “the only industry that has this option whether it is a passive asset or not.”

But be careful: the next generation must own the transferred property for at least three years in order to ensure the taxable gain doesn’t attribute back to the parent under charges of tax avoidance.

Alternative minimum tax

• The alternative minimum tax is a separate tax calculation determined in parallel with an individual’s regular income tax calculations. It is designed to ensure high income-earners pay a minimum despite deductions/programs available to them.

In the case of a farm sale this is triggered in the year in which the capital gain is triggered and is refundable over time.

“Older farmers have built up a lot of equity,” says Lise Deleurme from Lise Deleurme Accounting in Manitoba. “Sometimes their biggest mistake is waiting too long to sell the land. If you’re 80 or 90 you don’t have time to recoup the AMT you’ll pay and suddenly find yourself figuring out how to gift or distribute money to the grandkids because you’ve skipped a generation of succession and tax planning.”

Closing accounts

When it’s all said and done, be sure to make a checklist of federal and provincial deadlines and requirements for dissolution of a company, filing of final tax returns, and closing of all accounts such as payroll and GST/HST.

And another thing

Old Age Security, and programs such as the seniors drug plan and home care costs are all calculated based on income. While they might seem like small amounts compared to the income from a sale, they add up over the years so be aware and work with your advisor to manage these programs within your financial plan.

The post Selling the corporate farm appeared first on Country Guide.