Financial or Managerial Accounting: What’s Right for Your Farm?

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agrisolutions 15 things to know about farm finances ebook

Considering the Purpose of Your Accounting Records

Accounting provides essential information farmers need to make good economic decisions. There are two types of accounting reports that are essential to your operation’s “financial health” - management and financial.

The Difference

Financial accounting reports are used to communicate financial information to a third party, such as for stockholders, tax professionals and lenders. These reports must abide by “rules” known as generally accepted accounting principles (GAAP), and they show concrete numbers that reflect past mistakes and achievements. Standard financial accounting reports are balance sheets, income statements and cash flow statements that provide a look at the entity as a whole and are used when auditing the operation. Consolidated financial reports are beneficial to the owner and lender when multiple entities' financials need to be consolidated to reflect the complete "big picture" of the entities involved. These documents are objective, factual and avoid projections.  For example, GAAP requires a piece of land be assessed at its cost in the past (its historical cost), while if a company is thinking about purchasing a plot of land, management will want to see the current value of the land, along with projections for future value. Financial accounting provides the scorecard by which your farm’s past performance is judged.

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Financial Accounting

  • Past-Oriented
  • Standard Financial Statements
    • Balance Sheets
    • Income Statements
    • Cash Flow
  • Used Externally to Evaluate Financial “Health”
    • Investors/Shareholders
    • Creditors/Regulators
    • Government
  • Has a Set of Rules Knows as GAAP
  • Whole Picture Look (Consolidation)
  • Used for Audits

Managerial accounting is used to run operations and help farm owners and managers make important financial decisions. In farming, we buy inputs in year one, plant a crop the following year, and we may not sell all our commodities until the year after our harvest. Managerial reports show us how we are positioned in real time and break down numbers and projections related to commodity, farm and field, equipment activity, quantities in bushels, gallons or units, per-head, etc.   

Managerial accounting produces information that is used within the operation by farm owners and managers, to plan, assess progress, set goals and evaluate results.

Managerial Accounting

  • Present & Future-Oriented
  • Internal Use for Savvy Decision-Making
    • Should I buy or lease that ground or equipment?
    • Would it be better to hire an employee or outsource?
  • Data Specific to Your Farm for Setting Targets and Building Plans
  • Not Subject to GAAP
  • Not Audited
  • Includes Detailed Information
  • Reports on Farm’s Various Segments (Commodity, Farm or Field)

Critical Business Considerations

  • What information and insights do you need to help you run your farm?
  • Do your current financial/management systems provide this information?
  • Do you have the right expectations of your accounting system?
  • What are the steps you need to move beyond capturing only financial accounting information?

Management accounting and financial accounting both serve important roles for your operation. They are significant in different ways, but equal in importance. To farm owners and managers, managerial accounting is crucial in planning ahead financially and thinking of ways to grow based on estimates of what will happen. Financial accounting is important for informing investors, tax professionals and creditors of an operation’s performance over a period of time, shedding valuable light on the past. These reports are used for tax preparation, so they must be accurate.

agrisolutions 15 things to know about farm finances ebook

Want to Learn More?

If you’re at the end of your financial and accounting rope, don’t give up hope.  Instead, learn how the AgriSolutions Philosophy can provide you the clarity needed to make the most of your financial reporting.  We’ll listen to what’s going on with you and your business, and then offer customized solutions just for you.

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Written By

Chris Whited

Chris Whited

North American New Business Consultant | cwhited@agrisolutions.com | 618-372-4048

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