Know the real bottom line before heading out to seed

Finance expert says knowing your actual cost of production allows for 
better decisions on marketing and risk management

Another seeding season is within view, but do you know how you fared last year?

“Unfortunately, farmers really don’t know if their farm was profitable in 2014,” said Rick Dehod, farm financial specialist with Alberta Agriculture and Rural Development.

“The majority of farms still reports their incomes and expenses on a cash basis via their annual income tax returns with the goal of avoiding or postponing income tax. Very few actually have an accurate accrual statement prepared to give them a true picture of profitability.”

Converting cash statements into accrual ones is key, he said.

“This will give you a true picture of income and expense for your farm and whether you made a profit,” said Dehod. “It will allow you to make better decisions into the future and fully understand your cost of production. You will have a better understanding of what your break-even points are and when you can take a profit.”

This knowledge is also critical in deciding what risk management tools are appropriate for a farm, he added.

Financial statements for incorporated farms will include an accrued income statement.

“Items that will affect the calculations are year-end numbers for inventories of livestock, crops for sale, feed on hand, purchased supplies, accounts receivable, accounts payable and accrued interest.”

These numbers are usually available from the year-end statement provided to a lender or accountant or from the farm’s annual AgriStability returns.

“The only number that may not be readily available is the accrued interest at year-end, so that number may have to be estimated,” said Dehod. “Producers need to have the required numbers for the beginning of the year and end of the year for the accrual adjustments to be calculated properly for any given year. They can also ask their accountant or business adviser for assistance in accruing their cash statement.”

Depreciation is “the tricky one,” he added.

“Income tax returns may have capital cost allowance (CCA) numbers, but those can be quite different from the actual depreciation numbers that should be charged as a business expense,” said Dehod. “For the historical accrued net farm income numbers to be meaningful, depreciation amounts must reflect true depreciation of the assets used to generate an income. This may be close to 16 per cent for your equipment line and two to four per cent for your grain and machinery storage. If you are in an intensified livestock operation, depreciation on building and equipment could be higher.”

To learn how to accrue income and expense statements, go to agriculture.alberta.ca.

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