When we first started our farm we took care of the farm expenses out of our personal checking account. We didn’t have any farm income yet, so any farm expenses were funded out of our personal finances anyway. I used Microsoft Money for our personal budgeting and checkbook program, so I set up a “Farm” category there to keep track of what we spent.
One of the first action items to come out of taking the Grow Your Small Market Farm™ class was to set up a separate checking account for the farm.
Sure, for a while we were just transferring money over from our personal account to cover the checks we wrote. But having a separate checking account, among other things, puts you in the mindset of treating your farm as a business.
It also puts others in the mindset of treating your farm as a business – your bank, other businesses from whom you purchase goods or services, and your customers. Having an account with our farm name on it means our customers can make checks out to “Sugar Creek Farm” instead of to us personally. Hopefully this helps them take you seriously as a business and prompt with their payments!
The checking account, and the deposits and withdrawals in and out of it, become the skeleton for budgeting and accounting. After the first year you can use your checkbook entries to see how much you spent in what areas, giving you a base to build your budget for the coming year. You can also see when you had spending or income in each area, giving you a base to build your cash flow for the coming year.
It also makes tax time easier. Each entry, whether income or expense, will go directly into one or more categories on your Schedule F.
To take it a step further, I highly recommend using QuickBooks or some similar accounting program. This was another action item from the GYSMF™ class. By simply entering your checking account transactions into QuickBooks, and putting each transaction into a category, you suddenly have some extremely valuable reports at your fingertips.
More on QuickBooks later, but suffice it to say getting ready for our tax appointment now is a piece of cake. Matt spends about an hour figuring how much mileage we put on the truck last year for farm use. Other than that we simply print out Profit & Loss and Balance Sheet reports for our accountant. Our entire tax appointment tonight was a quick 45 minutes from start to finish (and included both personal & farm taxes and a lot of chattiness!)