Now is a good time to gather information to convert cash statements to accrual income and expenses statements. Dean Dyck, farm business management specialist at the Alberta Ag-Info Centre, looks at how to check for farm profitability.
“The majority of farms still report their incomes and expenses on a cash basis via their annual income tax returns with the goal of avoiding or postponing income tax,” explains Dyck. “Very few actually have an accurate accrual statement prepared to give them a true picture of profitability, and if their farm made a profit.”
Dyck adds that the goal, after all, is to make a profit. “Accruing your income and expense statement also gives you the information so that you can drill down and really know your cost of production. It allows you to reflect on those decisions you made during the last cropping season, and to see if they generated a profit.”
“With the right information you can convert those cash statements to accrual,” he says. “This will give you a true picture of income and expense for your farm and if you made a profit. This information is invaluable in developing your projected income statements and marketing plan for 2019. It will allow you to make better decisions into the future and fully understand your cost of production.”
“You will have a better understanding of what your breakeven points are and when you can take a profit. This knowledge will direct your marketing plans, and your adoption of risk management tools to protect that profit. If you are currently operating as a corporation, the financial statements generated will include an accrued income statement.”
Items that will affect the calculations are year-end numbers for inventories of livestock, crops for sale, feed on hand, purchased supplies, accounts receivable, accounts payable and accrued interest.
Dyck says that now is the time to collect those numbers. “Most farmers will have these numbers available either from the year-end statement that they provide to their banker or accountant or from their annual AgriStability returns.”
The only number that may not be readily available is the accrued interest at year-end, so he says that number can be requested or calculated at this time. “Producers need to have the required numbers for the beginning of the year and end of the year for the accrual adjustments to be calculated properly for any given year. 2018 year-end numbers become 2019 beginning year numbers. Ask your accountant or business advisor to assist you in accruing your cash statement.”
Depreciation is the tricky one, says Dyck. “Income tax returns may have capital cost allowance (CCA) numbers, but those can be quite different from the actual depreciation numbers that should be charged as a business expense. For the historical accrued net farm income numbers to be meaningful, depreciation amounts must reflect true depreciation of the assets used to generate an income. This may be close to 16 per cent for your equipment line and two to four per cent for your grain and machinery storage. If you are in an intensified livestock operation, depreciation on building and equipment could be higher.”
“The primary goal of any business is to generate a positive net income and to make a profit. Profit is not a dirty word. Once you make a profit, the issue is how to invest it and protect it from being taxed,” he adds.
To learn how to accrue income and expense statements go to The Income and Expense Statement. For more information, visit the Farm Manager Homepage or call the Albert Ag-Info Centre at 310-FARM (3276).
Source: Alberta Agriculture and Forestry