Know Your Tools
Financial tools have different goals when managing farm expenses.
“Each financial tool has specific goals and rules to reach those goals. You use each correctly by understanding the goals,” said Adam Trott. The financial analyst manager for Rabo AgriFinance spoke June 8 during the Young Producers Symposium in conjunction with the 2020 Beef Improvement Federation conference hosted virtually.
Knowing the goals of different types of accounting helps determine the experts to seek.
He smilingly admitted that most cattlemen probably don’t enjoy accounting, but there are different types of accounting of which cattlemen should be aware — tax accounting, managerial accounting and financial accounting.
Tax accounting’s overall goal is to lower your tax liability, he explained. It helps to show lower taxable income and keeps capital to grow a business. It has specific rules to help achieve this goal by use of cash vs. accrual accounting. Certified public accountants (CPAs) are tax experts, and Trott recommended employing their help for succession planning and transferring assets; ever-changing tax laws; and 1031 exchange, prepaid inputs and bonus depreciation.
Managerial accounting’s goal is to help you run your business and maximize your profits, he said. This is the type of accounting cattlemen are most familiar with since it has more to do with actually running the business. It includes cost accounting by tracking variable and fixed costs, and revenue sources and production. It also includes key performance indicators (KPIs) like food conversion ratios, cost per hundredweight (cwt.) of weaned calf, revenue per breeding female, and pounds weaned per exposed female. The struggle most have with managerial accounting, he says, is being able to take these metrics and turn them into usable changes in production.
managerial accounting =
and financial accounting =
make capital available to you.
Financial accounting’s goal is to provide the information that is needed for sound economic decision-making. This provides information about an operation’s performance to external entities like investors and creditors. It helps understand the effects of capital purchases, and performs ratio analysis like liquidity, solvency and debt-service coverage. Accrual accounting will tell you if you make money every year, while cash accounting does not. This type of accounting is important in this regulatory environment, he noted, to ensure responsible lending. Trott recommended talking to your lender about risks they see.
These are three different tools that require three separate skill sets. Don’t expect to know this all yourself. That’s why there are experts who specialize in each type. All in all, he summarized, tax accounting = lower taxes; managerial accounting = increase profits; and financial accounting = make capital available to you.
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