Over the past two articles we've contrasted the ways farmers produce financial statements and the conflicting goals of maintaining simultaneous farm financial records by cash and accrual.
The conflict is created by these realities:
• Because the IRS allows it, most farmers file cash-basis tax returns.
• As a result, the cash-basis 1040 Schedule F intentionally distorts true farm earnings.
• Few farmers have the training or incentive to prepare accrual financial statements.
Therefore an "adjusted accrual" system (Coordinated Financial Statements) was developed by Tom Frey and Danny Klinefelter at the University of Illinois in the late 70s. Further refined and re-dubbed "Agricultural Financial Reporting and Analysis" (AFRA), this methodology is the heart of the process adopted by the Farm Financial Standards Council.
This adjusted accrual model relies on a cash-basis accounting system throughout the year, then converts those records to a modified accrual basis for year-end analysis through comparing changes in inventories and "reconstructing" payables and receivables.
Over its 25 year history, the adjusted accrual system has played a critical role in advancing the financial capabilities of farmers (and lenders) as well as helping them survive and thrive. However, many FBS users are outgrowing its limited scope and flexibility. You may have reached this point if you find yourself in one or more of these situations:
• You're trying to track perpetual raw material (seed, chemicals, fertilizer, feed) inventories that turn over several times a year.
• You need to produce accrual financial statements more than once a year.
• You're working with an accounting firm to produce those financial statements.
• Your operation includes multiple accounting entities.
• You need to cost account products and departments within your operation.
• You're already running transactions through accounts payable and/or accounts receivable.
These factors indicate that you're ready for a major paradigm shift in your business operations. Instead of trying to manage by cash and report by accrual, you need to manage by accrual and report by cash. Here are the benefits:
• Your inventories will always be in sync with your accounting transactions.
• You'll be able to produce accrual financial statements with very little manual manipulations.
• Cost accounting will not only reconcile with financial statements, but will actually produce them for you.
• Your accountant will understand the process and audit trail.
• Through an automatic process of "backing out" accounts payable/receivable entries and segregating accruals from cash entries, you'll be able to produce cash/tax reports at the press of a button.
Most of you, though, will need help and encouragement in making this transition. We will continue to present more about that topic in up coming articles. FBS can help. Get a Free Demo today from one of our experienced professional and find out how FBS can help you make this transition.