Standard Accounting Practices: Your Competitive Edge

How to have a clearer view of your business’s profitability

Imagine the inefficiencies for your farm or agribusiness if every time you purchased feed or sold your harvest you had to convert to a different currency or measurement system. You’d spend precious hours calculating and re-measuring rather than tending to your business.

Yet that’s precisely what thousands of small farmers do each year by adhering to older accounting techniques that add layers of difficulty to dealing with lenders, suppliers, customers and tax officials. In fact, the Farm Financial Standards Council suggests that adopting generally accepted accounting principles (GAAP) can be one of the best ways for farmers and agribusinessowners to position themselves for greater
growth and prosperity.[1]

For generations, many farmers have practiced cash-based accounting. In the simplest terms, this method means that you record expenses and sales at the time you actually pay or receive money. While it may at first seem like the most logical method, cash-based accounting presents some serious drawbacks.

For example, cash accounting makes it harder to determine whether your farm is truly profitable. Say you sold a bumper crop near the end of the year, but don’t expect payment until well into the next. When you calculate sales and expenses for the outgoing year, you might come away with an unrealistically negative view of your profits. By the same token, failing to record a major equipment purchase that you won’t actually make payments on until the following year could make you look more profitable than you are. That’s one reason GAAP guidelines call for businesses to use accrual accounting, which means you record sales and expenses as they happen, regardless of whether money actually changes hands right now or a few weeks or months down the road. By forcing you to compare sales and costs within a more accurate time frame, accrual accounting gives you (and your lenders, suppliers and others) a much better view of your profitability.

While many farm and agribusiness traditions are worth preserving, sticking with cash accounting because that’s how it’s always been done is becoming harder to justify. Switching to GAAP won’t just help give you a better understanding of your ownfinancial situation; it can also help you build credibility with lenders, suppliers and investors. At a time when farms and agribusinesses are increasingly complex operations, bringing your accounting methods up to speed could help give you the competitive advantage you need.

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Important Legal Disclosures and Information

  1. http://www.ffsc.org/wp-content/uploads/2013/12/2014-Financial-Guidelines-for-Agriculture.pdf

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