Was your farm profitable in 2017?
Now is the time to find out by converting cash statements to accrual income and expenses statements, says a provincial farm financial specialist.
“The majority of farms still report their incomes and expenses on a cash basis via their annual income tax returns with the goal of avoiding or postponing income tax,” said Rick Dehod. “Very few actually have an accurate accrual statement prepared to give them a true picture of profitability, and if their farm made a profit. The goal, after all, is to make a profit.”
Accrual income and expense statements allow producers to know their cost of production and see whether decisions made during last year’s growing season increased or reduced the farm’s profitability.
While incorporated operations will have an accrued income statement included in its financial statements, those that operate on a cash basis need to do some financial calculations.
Those include year-end numbers for inventories of livestock, crops for sale, feed on hand, purchased supplies, accounts receivable, accounts payable, and accrued interest.
“Now is the time to collect those numbers,” said Dehod. “Most farmers will have these numbers available either from the year-end statement that they provide to their banker or accountant, or from their annual AgriStability returns.
“The only number that may not be readily available is the accrued interest at year-end, so that number can be requested or calculated at this time. 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 — 2017 year-end numbers become 2018 beginning-year numbers. Ask your accountant or business adviser to assist you in accruing your cash statement.”
Depreciation is the tricky one, said Dehod.
“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. 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 the Alberta Agriculture website.