Financial statements are beneficial tools for farm managers, accountants, and lenders to analyze a farming operation. Yet, not all managers bother to prepare financial statements. Often, the cost of preparation is viewed as expensive so farm managers choose the less costly route of cash based tax preparation alone. This may not be the best choice when long term management decisions are considered.
Kari Burnett
Cash based accounting is mostly used for farm tax preparation as opposed to the accrual based accounting which forms the basis for financial statement preparation. Cash based accounting can show wild swings in the operation depending on when/if sales and purchases happened in the year being analyzed. Obviously, wild swings in performance make analysis of any kind of financial report difficult and almost impossible to compare year over year for success or failure. Cash based accounting measures cash, not profitability. Farm lenders often stress the need for accrual prepared financial statements for this reason.
Without accrual based financial statements an operation is also unable to compare its results against those of similar operations in the same enterprise. Tools such as benchmarking are useless if the industry values are not evaluated on an “apples to apples” basis using the same form of measurement.
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In the majority of cases today, a farm is a multimillion-dollar business. Any other business operating at these levels would view their financial statement as a necessary tool to assess the health and condition of their business. The financial statement is used by managers in all forms of business as a measurement of success or to diagnose any potential problems in the management of that business. Farm managers should be no different in this regard and should value the information provided within a financial statement.
The expense associated with the preparation of their financial statement should be considered as no different from the cost of purchasing a GPS or auto steer unit for field work. These tools are an investment in the operation to improve efficiency of field work and therefore overall profitability. A financial statement is an investment also designed to improve efficiency and profitability by allowing a farm manager to evaluate the success or failure of management decisions. If you make a decision to borrow funds for the purchase of new and improved equipment, how will you know if that decision improves your profitability if you do not also invest in the tools to measure it?
Financial statement preparation is a necessity in order to invest in the management of your farm operation. Seeing value in the information provided by financial statements shows a strong level of management ability even if you are not fully using all the information the financial statement provides. However, learning how to fully use a financial statement and leveraging all of the information available shows an advanced level of management ability that will be recognized and valued by any farm lender.
Once you understand the value of your financial statement you will soon view it as a management tool you cannot live without.
For more information, stop by or call the Swift Current regional office at (306) 778-8285 or contact the Agriculture Knowledge Centre at 1-866-457-2377.
Kari Burnett, PA. is a Regional Farm Business Management Specialist with the Sask. Ministry of Agriculture, Swift Current.
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