We had a record crowd at the Farm Futures Ag Finance Boot Camp held in St. Louis late last month. Nearly 150 people came to learn about financial statements, balance sheets, liquidity and all the other functions you need to run a farm business. We talked about cash basis accounting and how it’s not a true reflection of how much money the farm made last year. With that in mind I thought I’d share with you this ‘top ten’ list on why you and your farm may need accrual accounting.
10. You think working capital has something to do with politicians in Washington DC.
9. You think Quickbooks is a story about NASCAR.
8. You think current ratio is something to do with electricity.
7. You think ROA is a rock band from the 1970s.
6. You think finished goods is something that Aunt Martha made for Christmas.
5. You think long-term refers to putting Uncle Bob in the nursing home.
4. You think the turnover ratio is something to do with NBA basketball.
3. You think that flow-through might be some type of a laxative.
2. You think depreciation is something accountants suffer from.
And the number one reason why you might need accrual accounting on your farm?
1. You think a debit is a card you use at the ATM.
The list may be silly but hopefully it drives home a point: In these difficult times for agriculture, you need to know how your farm business is doing financially. Accrual accounting is a way to do just that. The goal of a tax return is to minimize taxable income, not measure operating performance. Cash income and expenses can be accrual-adjusted to arrive at financial statements that reflect true profitability.
If you have questions, get in touch with me at: [email protected]. Hope to see you at next year’s Ag Finance Boot Camp!
Neiffer is an Agribusiness CPA, business advisor and principal at CliftonLarsenAllen. He specializes in income taxation and accounting services related to farmers and processors. He helps farmers set up specialized computerized accounting systems for use in their operations and provides guidance on accrual accounting for management while maintaining the cash method of accounting for tax purposes.
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.