Understanding and Using Ag Financial Reports
One of the key purposes of financial reporting is to manage profit.
Often, the challenge is to know what measurement of profitability is best to use and how profitability can be “captured” and reported by the financial reporting system being used. For a lot of agricultural operations, the use of cash-basis accounting and the filing of the Schedule F, Profit or Loss from Farming, may be the main source of reporting financial profitability.
This is great for meeting compliance requirements for tax purposes, but doesn’t provide management or owners a measurement of the true profitability of the business as a whole (entity level) or the true profitability of the business’s key products such as grains, forages, and livestock (managerial level).
The answer to this is to add accrual-adjusted financials to your existing financial reporting method. Accrual-adjusted reporting more accurately matches the revenue with the expenses incurred to produce the revenue, so it reflects true profitability.
In order to get a full financial picture, the following information should also be included in accrual-adjusted financial reporting:
- Inventory changes (grain, forages, livestock)
- Account payables, Account receivables
- Prepaid expenses
- Growing crop investments
Managerial level reporting
Managerial level reporting is based upon production cycles appropriate for the product without regard to the calendar year. It provides information that is more comprehensive and specific, allowing for more informed decisions:
- Monitoring, measuring and controlling commodity and location costs
- Monitoring costs of various production support activities
- The analysis of incremental or marginal costs
- The analysis of breakeven points
- Monitoring staff performance
Many lenders now request or require accrual-adjusted reports for specific profit centers (e.g. grain, forages, livestock), in order to determine credit lines and/or capital loan terms for those segments of the business.
Implementing Accrual-Adjusted Financial Reporting
More importantly, implementing accrual-adjusted financial reporting will help you drive improvement of your bottom line results, and provide you the peace of mind that comes with knowing you have used all information at your disposal to make an informed decision.
If you aren’t sure your current accounting system supports accrual-adjusted reporting, call and ask your representative. If the answer is no, you may want to consider making an investment in a system that will provide this functionality.
While some production agricultural business managers and owners may be satisfied with reporting their profitability on cash basis only, maintaining the status quo is rarely the best management practice.
Take the responsibility to find and utilize tools that make you a more effective business manager.
If you have questions or are in need of guidance on next steps, feel free to contact us anytime.