Accounting Games on the Farm: Are We Cooking the Books?
Many farm businesses cash flow, even with the new Farm Bill, but are not profitable. How can that be? The following is an example to prove the point.
Take a farm and ranch business that generates $300,000 in farm taxable income and $270,000 in farm taxable expenses. They have $30,000 in income tax profits and $30,000 in the checking account balance at the end of the year. The farm demonstrates a tax profit and cash flows. Is it profitable?
Further examination finds the feed and fertilizer account increased over the period from $20,000 to $60,000. Grain inventory decreased from $100,000 to $70,000 over the period.
After adjusting the expenses on an accrual basis by $40,000 for the feed and fertilizer account, the expenses are now $310,000. Cash revenue needs to be reduced $30,000 for the inventory decline, or to $270,000.
Thus, total revenue, $270,000, minus total expenses, $310,000, finds a tax and cash income of $30,000, but a $40,000 true profit loss when inventory and expense adjustments for the period are accounted for.
As one of the readers of this column indicated in e-mail, the new Farm Bill plugs the cash flow drain, but does very little for the long-run sustainability of agriculture. Failure to take a true look at profits can result in a slow demise of financial conditions, or the "silent killer."
A speaker at the Colorado School of Banking indicated that we had 11,000 community banks 50 years ago. In another few years, this could be down to under 2,500.
Technology, demographics and competitiveness are driving that industry as well!
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Editors' note: Dave Kohl, Soybean Digest Trends Editor, is an ag economist at Virginia Tech. He recently completed a sabbatical working with the Royal Bank of Canada. He is now back at Virginia Tech with his academic appointment, which is teaching, extension, and applied research.
To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.
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