FARMER'S CAN'T MANAGE WHAT THEY DON'T MEASURE
Originally published on February 1, 2001
Farmers are becoming much more sophisticated in tracking and recording business transactions.
In our office, I can not think of one corporate farmer who is not using a computerized computer program. Farming is a business.
As the Canadian Farm Business Management Council noted in Accounting for Successful Farm Management:
"To remain competitive and meet the pressing demands of today's global agricultural industry, Canadian producers need high quality management information."
Most farmers use the cash basis to record their transactions to the end of the year. This cash basis data is than converted to the accrual basis by making adjustments at the farmer's fiscal year end.
Accrual reporting provides farmers with the most accurate picture of overall farm profitability. Let's look at the example in Table 1. Assuming no other transactions occurred, Farmer Al would report net income on a cash basis of $10,000.
Accrual basis accounting ignores the amount of cash received and instead looks at the value of Farmer Al's 2000 lentil crop. In this case, the accrual based net income is $25,000.
For those of you who have made it this far, there are two points to emphasize.
■ The conversion from cash to accrual is not rocket science. It is merely cash sales plus the change in your opening and closing inventory values. Intuitively, farmers understand this type of accrual reporting in different ways. In my example, $5,000 worth of lentils can be attributed to revenue earned in 1999. For this reason it is not of any accrued significance in 2000.
There are many books on the subject. Your accountant can help you understand your farm's accrual adjustments.
■ Accuracy of accrual reporting depends upon the accuracy of the beginning and ending farm data.
Table 2 shows a sample inventory worksheet that is our office's control procedure to ensure that our client's production, sales and inventory records make sense.
By ensuring yield, production sales and inventory reconcile with each other, we can ensure bins have been properly measured and inventory has not gone astray.
Anyone growing specialty crops knows that cash settlements on these commodities are not as timely as they used to be.
In mid-January, while reconciling sales and production, a client and I discovered about 90 tonnes of lentils that were shipped but not yet paid for.
The client shipped them in October and assumed that his account was settled in full. With 90 tonnes of lentils worth a little less than $30,000, it was worth our time to determine the account receivable was outstanding.
For those of you who say you would recognize the shortfall immediately from within your operating funds, it has been our experience that settlement discrepancies are usually caught from Table 2 and not from a stressed bank balance.
On another note, we have been told that the new Canadian Farm Income Program forms will be available in March. The program will be using something similar to Table 2 to check, verify and process applications. Anyone preparing a 2000 CFIP form will want to have their inventory reconciled in advance.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.