How Agricultural Accounting Helps Farmers with Finances

Agriculture and farm operations receive special tax treatment from the Canada Revenue Agency (CRA) due to their unique challenges. Unlike other businesses, farming involves seasonal cycles, living animal inventory, fluctuating crop prices, and unpredictable weather. Each of these challenges has significant financial implications, so the CRA allows farm businesses to report income and expenses using cash accounting.

Agricultural accounting addresses the unique business challenges farmers face when preparing financial statements and helps owners manage finances. Agriculture includes various types of businesses, such as crop farming, livestock production, dairy farming, agrotourism, and leasing land for farming or solar energy. Each type of business has specific accounting needs.

Why do Farms Need Agricultural Accounting

Crop farming has a six-month production cycle from planting the seed to the harvest and sale in the market. If weather conditions are bad and the crop is destroyed or the yield is poor, or you grow a low-margin crop, the six-month wait may not yield the desired income. And if you took out a working capital loan to buy seeds and fertilizers, there would be an added expense.

This business requires specialized accounting for revenue forecasting, cash flow management, and risk mitigation (futures contracts). The accountant may use cash accounting for tax purposes and accrual accounting for financial reporting. For perennial crops like vineyards, which take years to yield, the accountant may capitalize establishment costs and realize them over multiple years. The specifics of these adjustments vary by business.

Livestock farming has a biological inventory. You may raise cattle, sheep, and chickens to produce milk, wool, and eggs. They will generate regular cash flow but will incur fixed overheads, such as feed costs, veterinary expenses, and facility maintenance. This requires strong cashflow management. Another aspect is breeding, where livestock such as horses and bulls are reproduced and sold. This requires the accountant to value the inventory based on its quality, age, health, and other factors.

Multiple Businesses

It is common for a farmer to participate in multiple businesses. Once the crop is sown, there is a six-month wait period, during which the farmer may raise cattle, work on other fields, run a bed and breakfast at the farm, or sell jams and jellies from the farm produce. Each business has a different tax treatment and accounting. The accountant tracks each business’s profitability to help farmers understand which business is burning cash.

How Agricultural Accounting Helps Farmers with Finances

Now that you know the difference between accounting and agricultural accounting, it is time to understand how the latter helps your farm business. The accountant’s core job is to report revenue, manage costs, and track profits to help the business owner make informed decisions. Here’s how agricultural accounting helps:

Reporting and Forecasting Revenue

The accountant will create a separate chart for every business – crop sales, livestock sales, milk production, government payments, and other businesses. Even with crop sales, the accountant may report crop-wise charts to understand which crop is yielding higher profits.

When crop- and business-wise revenue is available, the accountant will forecast revenue based on past performance, weather patterns, and market trends. A more accurate forecast can help farmers plan for good and bad seasons, make investment decisions, and allocate resources accordingly. For instance, a farmer will know which crops will grow well in which soil and season. But an accountant can help them determine which of those crops will yield a better profit and use an efficient product mix.

The forecast is always in the upper and lower range. If revenue is unable to cover expenses, the accountant can suggest allocating resources to other businesses to boost revenue or maintaining a higher cash reserve to meet working capital needs.

Tracking Expenses and Optimizing Costs

The accountant will also track expenses, bifurcating them into fixed (rent, utilities, insurance, property tax, equipment maintenance) and variable (seeds, labour, and fertilizers). He will also allocate expenses by business type, crop, and fields to determine which businesses and crops are profitable. Knowing the fixed cost will help you determine each business’s breakeven point and the need for working capital.

If your revenue forecast covers fixed costs, you can consider increasing crop production, as it will only add variable costs. If you had a good season and sufficient cash reserves to secure a loan, you could consider allocating capital to buy irrigation systems, new barns, and solar panels that can help reduce costs and increase production in the long term.

Many of these expenses are tax-deductible. The accountant can capitalize some costs and use accelerated depreciation to reduce tax bills.

Inventory Management and Valuation

The accountant reports agricultural inventory in three ways –

• Crops that are growing in the field will become inventory in the future. They will become future revenue and can be used to forecast revenue. They may not be a part of the balance sheet, but they will be used to create sufficient warehouse space to manage that inventory.
• Harvested grain inventory can either be valued at market price or at production cost, depending on your accounting policies. If grains are stored for a longer period, the accountant will deduct storage and shrinkage costs based on the change in inventory.
• Feed supplies, such as seeds, fertilizers, fuel, and chemicals, will be valued separately at cost. They will become future expenses when used.

There are several inventory valuation methods. The accountant may value livestock at market price and crops at cost for tax purposes, but use a different inventory valuation approach when reporting inventory to management and lenders.

Seasonal Budgeting and Working Capital Management

With past records and forecasts for revenue and expenses, the accountant can help you prepare seasonal budgets for different crop cycles and different businesses. The accountant will create a tax budget for advance tax payments, an operational budget, and a capital budget, and determine whether external financing is needed. Knowing your cash needs and a detailed breakdown can help you secure working capital financing.

Contact KSSP Partners LLP in York Region to Help You with Your Agricultural Accounting Needs

An accountant specializing in agricultural accounting understands the nuances of the business, how money flows, and where the cash gets stuck. Reporting and tracking money can help ensure a smooth flow and improve your business finances. At KSSP Partners LLP, our accountants and bookkeepers can provide services such as preparing financial statements, filing taxes, budgeting, and forecasting. To learn more about how KSSP Partners LLP can provide you with the best accounting and bookkeeping expertise, contact us online or by telephone at 289-554-5997.