Part III of Financial Management on Black Sheep Farm
If you have ever been frustrated by a flurry of last year’s receipts at tax time, you should read this post. Brenda of Black Sheep Farm in Grey County puts us straight on how and why to track expenses. See Brenda’s introduction post for details on why she’s so passionate about spreadsheets.
Tracking expenses is probably the least favourite record keeping task of pretty much everyone I know. I happen to love doing it as it involves data entry into my spreadsheets and filing away my receipts, which cleans up my office and keeps me sane. Ideally, I like to do it once a week so I can remember and record any purchases I may have made that don’t have receipts. The general rule though is that you should get a receipt for everything or it didn’t happen. And you need to be ready to keep everything for seven years before shredding/burning anything.
First of all, ask for and keep all your receipts! Put them into a box, envelope, or file folder as soon as you get home. An accordion folder marked with the months is handy as you can just throw your receipt into the corresponding fold and deal with it later. Receipts need to have the date, the vendor, and a description of what you bought, with the cost and applicable HST. Each of these pieces of information will be recorded and having a running HST total will make calculating your Input Tax Credits (ITCs) easy at year end. This is provided you have an HST number, otherwise, there’s no need to keep track of your HST paid. But if you are running a farm business, it is in your best interest to have an HST number, even if your gross sales are under $30,000 a year. As a farm, most of your products are ‘zero-rated goods and services’ (HST = 0%), which means that you can claim all the HST you paid on expenses as ITCs, and don’t have to charge any HST on your produce that you then have to collect for the government. Even for a small farm operation like mine, this comes to around $1,000 that I claim back each year, minus any HST I owe to the government (such as on cedar wreaths, or other HST taxable craft goods I might sell). You can see which of your products are ‘zero-rated goods and services’ here. If you don’t file for HST, then you don’t get back the HST you paid on items.
The key to tracking your expenses is to label them correctly. Each label can be a more detailed section within an account. You can do this whether you’re using a bookkeeping program like QuickBooks, or using your own custom spreadsheets. And if you want to make tax time a whole lot easier, you should consider using the same labels as the Canada Revenue Agency (CRA) uses on tax forms. That said, when I first filed my farm taxes years ago, I was shocked at how simplistic the expense lines were on the Statement of Farming Activities, T2042 form, and felt like my kind of farming wasn’t recognized by the government (but that’s a whole political rant for another time). In the end, I’ve settled on having a set of my own labels that correspond with my budget, and I add up my various labels to correspond to tax form lines.
Having a ledger (for tracking expenses by hand), QuickBooks, or your own spreadsheet is still useless if you don’t enter your information regularly. For discipline and to not get too far behind, I recommend entering all your expenses at least once a month. It’s worth hiring someone else to do this for you if you really can’t bring yourself to do it. The better kept your records are, the less time it will take you to do your own taxes at year end, or the less it should cost you at your accountant’s. This way, you can also catch yourself if you’re starting to spend out of budget on a regular item and adjust accordingly, or see if you’re saving enough money on certain items that merits spending those savings on something else.
For every expense item, I have columns for the following:
- Total Amount
- Net Amount (formula ‘=Total Amount cell – HST cell’)
- Payment method (cash/cheque/debit/credit/in kind)
- Budget/Balance Sheet label (These labels correspond to the lines in your Budget/Balance Sheet)
- Note (this is where I make any notes to myself about the item, such as if it’s an IOU for later, needs to be broken out further, something needs to be returned, etc.)
I keep track of all my expenses, whether business related, or personal. If you’re tracking ‘whole farm’ spending, you’ll need to record both. You can either keep two different spreadsheets/books, or you can keep all your expenses in one long list and add another column labelling that expense item as ‘Business’ or ‘Personal’. You can use different formulas to add up one versus the other for you. I prefer to keep my business and personal expenses spreadsheets as separate files, as HST paid on personal expenses will not qualify as ITCs, so it’s not even recorded at a personal level. And having separate files makes it easier to pass your numbers on to an accountant at tax time.
This is where things can get confusing, especially in farming where the work is so intertwined with your personal life. For tax purposes, you need to separate out business expenses, but for whole farm planning/running, you need to keep track of the entire picture. When it comes to how much of your property costs can be claimed as business expenses, or what large one-time expenses need to be classified as capital investments (anything that counts as depreciable property) and dealt with under Capital Cost Allowance instead of as a straight expense, you really need to read the various tax guides and/or consult with an accountant. Once you have that sorted out (for example, claiming 10% of all home expenses as business because you’ve determined 10% of your home is used for the business), you likely won’t have to rethink it for future years.
The main reason why I have such detailed labels for my expense items, is so I can then keep a running total of each of these expense types by using a simple ‘sumif’ formula. Any time I want to see how much I’ve spent so far on chicken feed, I can just look at that total (see ‘Balance Sheet totals’ columns in sample expenses spreadsheet). If the proper time is spent setting up your labels at the beginning, you save a lot of time later. I prefer more subdivisions, because I can always add similar totals together (for example, all animal feed), but splitting it out to each underlying type because I just labelled them together, would take more time. My year end budget/balance sheet updates will now be a simple task!