Bookkeeping for Flower Farmers
You know that feeling you get when you take that freshly opened box of seed packets and dump it out on your bed and spend the night dreaming about all those gorgeous flowers that you are going to grow in the coming season? It’s almost like a scene from a bank robbery movie after the thieves are back at their hideout and dump out the duffle bag of cash on the bed and stare at it with the look of giddy smeared over their faces…
I mean, I don’t know this feeling, but I have witnessed it many times sitting next to my wife at the kitchen table while she eagerly shows me everything new that we are going to be growing next season.
Well, this topic isn’t going to invoke those feelings.
In fact, I would say, all we are going to try and accomplish here is the prevention of the opposite feelings. Specifically: dread, anxiety and hatred for being forced to do a task that is a byproduct of something you love but only takes away your time for that. If you have already guessed what topic I’m getting at by these adjectives, you probably have personally experienced these feelings in attempt to handle it, or you just read the title of this blog… Anyhow, you are here to figure out how to handle the task of bookkeeping more efficiently and cleanly, and in a manner that lets you get as much information out of the time and effort that you put into it with the limited time you have.
This blog is going to go over the basics of bookkeeping, specifically for flower farmers, and some basic tricks to make the process easier to juggle in your complex farm life. Bookkeeping is essentially keeping your finger on the pulse of your flower farming business. It will tell you the health of your business that will allow you to make better business decisions and to keep growing more beautiful blooms.
My background
Before we jump into the nitty gritty of bookkeeping, it’s probably best to give you a little bit of my background in relation to this topic so that you know that I’m not just making stuff up. As it happens, I am writing this blog as I am sitting in the conference room of my firm’s office taking an extraordinarily boring and irrelevant update class before the 2020 tax preparation year begins. This coming tax season will be the twelfth year that I have been working as an accountant, and the seventh year that I have been moonlighting as a farmer for my wife.
Now, let me be real for a second. Bookkeeping for a flower farmer, at a base level, is almost no different than bookkeeping for any other small business. The recommendation and the actions to be taken are almost exactly the same, but I do have a few items that will help make this relevant to flower farmers and hopefully make the process more clear.
For the purpose of keeping this simple and making it so this post doesn’t turn into a textbook, I’m going to only focus on the entity type that I know most new and semi-established flower farmers will be: a Sol-Proprietor. As always, be sure to discuss business set ups with your CPA if you are unsure.
What the heck is a Sol-Proprietor?
A Sol-Proprietor (Sol-Prop.) is basic, it’s the default status that a single business owner finds themself in unless they set up a different entity for their business, namely an LLC, an S-Corp or a C-corp. Typically, first year flower farmer’s will not be looking at setting up an LLC or S-Corp or C-Corp, in fact it may take a few years to get to the point where that is needed. Once again, this is something to discuss with your CPA.
A Sol-Prop. also reports their annual activity on a Schedule-C, or in the case of a farmer a Schedule-F, which is included with their Federally filed individual income tax return (Form 1040). While this is the entity that everyone, except businesses with more than one proprietor (Partnerships), will find themselves in as a default, this is the entity that I recommend new flower farmers stick with in the beginning for various reasons, mainly the way losses from a Sol-Prop. are handled on their individual income tax return (overall gives you more of a benefit in the beginning). To keep this from getting too confusing, we won’t tackle any of that in this blog. The best thing you can do is to talk to your CPA, they will help you navigate through setting up your business.
Get a Dedicated Business Bank Account
This isn’t as much about the direct topic of bookkeeping but it has one of the greatest effects on the act of bookkeeping of almost anything. I can’t recommend this strongly enough: you need to get a dedicated business checking account. There are a myriad of reasons why this is a must but the most important is that the foundation of accounting is built upon having a dedicated bank account. It keeps the paper trail of finances clean and simple. It is simple to do, get a fictitious name (your business name) and you can easily set up a business account to be under your name as well as your business name. Think of the debit card with your business name as just an extra step of being legit! I will touch on how the dedicated bank account further on down and how you can use this bank account as a kind of backup bookkeeping system, but for now let’s get into it
Importance of Bookkeeping Software: embrace the modern ledgers
First things first, USE BOOKKEEPING SOFTWARE! Don’t try to make a spreadsheet for it, don’t try and do it by hand with Thirteen Column and definitely do not use a shoebox to accumulate receipts! Sure, you watched your grandfather keep the books from his kitchen table with Thirteen Column and it looked like it worked for him. Trust me though, with the time he would have saved if he had access to a modern ledger program (aka bookkeeping software), he would have jumped at it.
While there are bunch of good ledger programs out there, I personally only recommend one application and that is QuickBooks by Intuit. It is not so much that this is the best ledger program or the cheapest or the easiest to use. While it is moderately good in relation to all those factors, the reason I recommend it is QuickBooks is more widely accepted as the go-to software for small businesses. You can easily find support for it and with almost 100% certainty, I can say that if you take a backup to any CPA firm in the US that they will have the ability to access that backup without much hassle.
Which Version?
So, QuickBooks… simple as that, right? Wrong! There is one other choice beyond the application itself that needs to be made.
Desktop or Online.
To make this next decision easier below is a pro/con list below.
With all that in mind, the version of QuickBooks that I like the best, as a preparer, is desktop. However, the version that I recommend to clients is online. As a preparer, the desktop version gives us tools and functionality that makes our job easier and more efficient. While I appreciate this when I am doing year end cleanup and tax preparation, I can’t deny that the utility that is given to clients for general day to day bookkeeping with online far outweighs the benefit from the Client’s perspective. Bottom line, unless you are in need of the more advanced functionality of the desktop version, go with online.
Now, you have your preferred version of QuickBooks available and ready to use, where to start?
Chart of Accounts
One of the most time-consuming tasks that I do as a preparer, specifically business tax preparation, is what we call “Cleaning up the Chart of Accounts”.
For the most part, 80% of the accounts in the Chart of Accounts are the same across all types of small businesses. The other 20% is where industry specific portions that differentiates or makes keeping books for flower farmers, or any type of business, different from all other books.
For flower farmers these are accounts like: Plants, Seeds, Soil & Amendments and so on. This is where most people, not knowing how to structure the accounts, add a lot of bloat and make multiple overlapping or sub-accounts that just aren’t needed. The argument the client makes in defense of this practice is that they wanted more detail. They want to know how much was spent in purchasing not just seed but each variety of seeds or how much was brought in at each different outlet or each wedding. While I am a huge fan of using your books as more than just a tool to accumulate your activity so you can slap it on your tax return at the end of the year, there are better methods inside of QuickBooks to help facilitate this rather than muddying up your Chart of Accounts. By avoiding the pitfall of overdoing it on too many sub-accounts, you will actually be able to see relevant information more more clearly.
With all this said, I’m going to give you a basic Chart of Accounts to give you a starting point to launch into flower farming bookkeeping without making your accountant facepalm. This is just a starting point and as time goes on and as you work with you tax preparer you will start to customize your accounts to what your business needs. Remember, don’t start adding accounts just because you think you need a new one, take a second and consider all that you already have and make sure you don’t have one already that would work for whatever transaction you are trying to categorize.
Choosing your Bookkeeping Method
At this point you have a dedicated bank account, a copy of QuickBooks and a starting set of accounts, sounds like it’s time to jump into it.
Now, there’s two ways you can go about this: “After the Fact” or “As it Happens”
“After the Fact” style of bookkeeping is where you run all your transactions through one to a few sources that you receive monthly statements from such banks accounts, credit cards, etc. You then use those statements to build your books off of.
The other way, which I’m sure you have guessed, is a “As it Happens” style. This is where you enter disbursements either from receipts or such shortly after incurring the expense, or paying bills directly from QuickBooks along with invoicing and entering deposits in the software as well. The idea here is to always be building your books as it happens or within a short amount of time from it happening.
The advantage of using “As it Happens” over “After the Fact” is that your information in your books is up to date and can be used to help make relevant financial decisions pretty much immediately compared to the “After the Fact” which is mostly good to prepare tax returns off of and see how you did for the year after the year is done.
While it might seem the obvious choice is to take the “As it Happens" bookkeeping approach you have to consider how much time it will take consistently to keep up on bookkeeping. As farmers, we know once that growing season hits, it’s hard enough to squeeze in a hot shower and meals.
Our solution is to take a hybrid approach. When we’re not in our busy seasons (growing season and tax season) we try and practice "As it Happens” but in those busy months we put most of the bookkeeping aside and pick it up later when things slow down, this is when we do “After the Fact.”
However you choose to approach your bookkeeping, the input of transactions is about the same. Side note: this isn’t addressing using the billing and invoicing features of QuickBooks, that’s a different story. The easiest way to tackle this is to look at the input of transactions as if you are using a modified check register, the type that you find in the back of a checkbook. The only difference from that and what you will find in QuickBooks is that you will have to designate every transaction with an account, the same set of accounts that we already provided you with above. There is nothing more to it than that and if you choose to use the desktop version of QuickBooks you can pretty much do all your input from one screen (their “Check Register” screen).
There is not much more to bookkeeping than this, it’s almost as easy as it sounds. The biggest hurdle will be learning and memorizing how to classify transactions. This isn’t complex and everything can be fixed or changed easily but it will take getting familiar with how to classify those $1,000 dahlia tubers that you just ordered.
Avoid these boo-boos while inputting
There are however a few things to watch out for as you go about the process of inputting.
Make sure you are in the register that relates to the bank account or credit card that the transactions were processed through.
Classify large Item purchases under the correct Fixed Asset account and not a P&L (Profit & Loss) account.
Vehicles
Furniture & Fixtures
Machinery & Equipment
Set up Liability accounts for any loans that you may have and run all payments against principle through here, do not expense payments on P&L
DON’T TOUCH EQUITY ACCOUNTS!
These are the areas that can quickly derail your books and require your attention to keep things straightened out or paying someone the big bucks to do that for you.
Understanding the P&L and Balance Sheet
You now have your books all set up and running and you have your first bit of transactions in, but where does all that information go and how to you access and read it?
Hold on, that’s a whole other topic in itself! For the moment though, I will tell you briefly about that two most used reports, the ones that you really care about.
First is the Profit & Loss, or P&L for short. This will have on it all the activity for a specified period of time, normally one calendar year. This is going to be broken down into three main sections (technically there are more but for now three is all you need): Income, Cost of Goods Sold and Expenses (General & Administrative expenses). This is the report that you will go to throughout the year and at the end of the year to see how you “did”.
Second, we have the Balance Sheet, which I lovingly call “BS.” This report is for doing as it sounds like it does, it holds “Balances.” On this report you will find accounts like your: Checking, Fixed Assets, credit card balances, equity and more. This is all as of a specific point in time. Normally you will look at a P&L with a corresponding Balance Sheet as of the last day of your P&L report. So if you are looking at last year’s data your P&L would be from 1/1/20XX to 12/31/20XX and your Balance Sheet would be as of 12/31/20XX, just showing the balances on the last day of the year.
Both of these reports without the other are only showing you half of the story. Just because you have a Net Income of 100K on the P&L could be completely overshadowed by the million dollars of debt you are in that is showing on the Balance Sheet. Yes, operations for that period might have been good but it doesn’t mean the business is completely healthy. Looking at the two reports together will tell you the overall health of your business and will begin to tell you if you made good business decisions, poor business decisions and will help you to either tighten your business finances or if it is time to grow.
I hope you have found even a small part of this helpful. I am continually reminded by Jessica that I am rough at teaching others, so this is my first dive into uneasy and uncharted waters. I am also sure that while this hopefully answered some of your questions it probably opened just as many more up for you, this is why it is essential to work with your CPA. Your CPA will give you great advice and as your business grows, the two of you will revisit and re-strategize as needed.
We hope to release more blogs and videos tackling these valid business subjects when it comes to flower farming in the near future, ya know with the hybrid approach much like our bookkeeping- on our down time!
We are looking forward to helping you hand blooms soon!
Graham & Jessica
SHAMELESS PLUG!
FLOWER FARMING BUSINESS
Flower farming is a journey. For all the dreamers and fellow flower farmers, let’s get down into the business side of flower farming!