Farmers who want to be in business in the next 10 years must start using accrual farm accounting to have an accurate view of their profitability and other pertinent financial ratios, says Dick Wittman, farm financial consultant based in Culdesac, Idaho, who spoke this week at The Executive Program for Agricultural Producers (TEPAP) in Austin, Texas. Accrual statements provide a more accurate measure of a borrower’s historic or projected profitability, Wittman says.
On a cash basis, revenue and expenses are composed of the cash actually received or paid irrespective of when the goods are produced or expenses incurred. On an accrual basis, however, revenue represents the value of items produced during a given period and expenses represent the costs incurred by the business. Timing of the cash sales or cash expenses will not directly affect an accrual income statement.
“Most farm bankers are already taking your cash basis income tax returns or financial statements and converting them to an accrual basis,” Wittman says. “If you have been with the same banker for many years, the banker will generally have these statements for each year and they will readily give this information to you. This could save you many hours of research and give you a good start on setting up your accrual statements.”