TEPAP – Day 1

On Sunday, Dick Wittman did a presentation on basic farm financial skills. As a class, he had us take a set of financial numbers and report them on both a cash and accrual basis. I would say less than 10% of the class got the right answer.

Dick emphasized the need to be able to report your numbers on an accrual basis in order to understand if you are really making money or losing money.  Tax basis reports are of little value for managerial accounting.  If you don’t do this, chances are the banker does and can help you generate reports like this.

That was followed up with a discussion on deferred tax liabilities. Dick provided two examples in particular that really hit home on the danger of managing around taxes only. Using section 179 depreciation on machinery while financing that equipment with debt can leave an operation vulnerable to this current economic downturn. Many operations now have loan payments coming due, have to sell grain to pay for that equipment, but have tax due on the income because they have used up the deductions with accelerated depreciation.

The second example focused on how deferring taxes can make you a poor marketer. The example of holding grain when at a high price and waiting until prices are lower costs way more than selling and paying the high price. Marketing should be a separate decision from tax planning. If not, it often drives sales at low price or the wrong time of the year.

Finally, we talked about several key ratios. Debt Repayment Capacity is one of two we discussed that I think is critical to know. Basically when calculated, it simplifies things down to how much cash flow do I have vs. how much debt do I have to service every year. The last ratio that we discussed is the Sustainable Growth Rate Ratio. If your business is growing, this is the maximum rate your business can grow without depleting your assets.

I had a chance to catch up with Dick for a quick interview and you can hear his comments here.

You can find a lot of good free resources here on his website.  I use his workbook with many of my clients and have found it to be very useful.

http://www.wittmanconsulting.com/

 

 

Trial Balance – First Report Used By CPA’s

If you provide a Quickbooks or other electronic file for your tax preparer, chances are the first report they look at is the trial balance report. When opening a set of books from a client, especially if that entity is a corporation or partnership, the first thing the tax preparer wants to see is if the previous year’s account balances match what was used on the tax return.    The trial balance simply gives the debit or credit balance for all accounts on the day the report is run. The following picture is an example.

Trial Balance, Quickbooks

Trial Balance Example from Quickbooks

 


Often times, those balances do not match.  When that is the case, someone needs to make an adjustment to reconcile the differences.

Here are just a few things we have seen that can throw those balances off when working with clients over the past 10 years.

  1. A check that was written, but then voided in a new year because the payee did not cash it.
  2. Checks or deposits that are entered with the wrong date putting that income or deduction in a previous year.
  3. Unreconciled transactions that are later deleted because they were double entered or incorrectly entered.
  4. Going back to edit the details or splits on a deposit or check that changes the accounts that were used.

Trial Balance and Other Year End Action Items

At the end of the year, we recommend three things to archive the records. Continue reading