TEPAP – Day 2
Day two of the TEPAP conference was primarily focused on management accrual accounting for farmers. The presentation was done by Dick Wittman of Wittman Consulting. As a CPA, Dick was speaking to the choir (so to speak).
Some of the ideas that resonated with me were:
- It is very important to implement full accrual accounting for your farm operation. This means that all COSTS of production should be posted to the balance sheet as cost of growing crop (an asset) once the crop is harvested, then these costs are moved to crop inventory. As these crops are sold, the total costs for the bushels sold are deducted against crop revenues. By simply implementing this method of accounting, you will significantly remove the dramatic swings in monthly income and expense by using the cash method of accounting. This also allows you to benchmark against YOU – not twenty different farmers using twenty different methods of accounting.
- Another item that is even more critical today is your repayment capacity. This is calculated by taking your net farm income adding non-farm income plus depreciation and interest expense on long-term debt and capital leases. From this total, we subtract long-term debt and capital lease payments, net cash incurred for equipment purchases required annually and family living expenses. What is important about this calculation is this tells you how liquid you are for this year and the upcoming year. If this ratio is less than 1, you will have liquidity problems. It should be greater than 1.5 to 1 to be comfortable and above 2 will give the liquidity to expand, etc.
- The trend analysis done by Dick Wittman for the last ten years indicate that farmers have had the best overall profitability over the last three years and 2011 appears to be just as good.
- By simply getting a good handle on your cost of production will enable you to make marketing decisions tied to profit margin objectives instead of seat of pants guesses.
That is a summary of day two of TEPAP. I will keep you posted on tomorrow.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
I think that most of blame lies with the banks (I’m a banker) for not requiring accrual accounting and letting cash accounting and income taxes suffice for analysis. My company is getting more and more stringent on what type in information we get, and are requiring more borrowers to get CPA statements. Farmers all have different standards of putting together balance sheets, and really do not do a good job with cost accounting and looking at profitability on an enterprise or unit structure. Would love to see this change, because it would make the decisions for banks faster and easier. Keep up the postings.