As farmers enter into a new accounting year, it may be time to adjust accounting methods on your farm or ranch. Paul Neiffer, AgWeb’s Farm CPA, says when it comes to accounting, a switch from cash to accrual may be beneficial.
“I think it’s very important for farmers to understand that cash accounting, which is probably what they’re used to - cash in, cash out - that’s what they put on their income tax return -- that does not do a very good job of explaining to you what your farm really made,” says Neiffer of Cliftonlarsonallen (CLA). “It doesn’t help you plan going forward. It just simply shows you a snapshot for that year: here’s how much cash I’ve received in, here’s how much cash that went out the door.”
Neiffer says since cash accounting doesn’t give farmers an accurate snapshot at any given time, accrual is a more accurate measure of the financial health of your farm operation.
“Under accrual accounting, you’re going to start booking inventories, you’re going to start looking receivables and payables,” he says. “The key is when you start using those inventories, receivables and payables, as you get better and better at that, it’s really going to give you a much better picture of what you really made, or what you didn’t make. And it’s going to be a lot more real time.”
Neiffer adds cash accounting can become out of date extremely quickly, but accrual can be a better tool to allow farmers to plan better for the future.
“With accrual accounting, you’re able to start using that to more effectively manage your farm operation,” he says. “It allows you to understand here’s my breakeven point, and here’s a great point for me to start marketing grain. It also allows you to maybe start doing some effective 35 year projections where you’re using those balance sheets and those income statements to really project not only where are you at, but where are you going?”
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