How can a farm go from losing $1 million to turning a $250,000 profit in a financial report on the same year?
The answer isn’t magic. It’s math. More specifically, it’s the difference between tax-based reporting and accrual-adjusted accounting.
The issue isn’t performance. It’s interpretation.
The farm in this case was using accrual accounting, which matches income and expenses to the period they’re earned or incurred. This provides a more accurate picture of true profitability.
The lender, however, was relying primarily on tax return data since this was the typical documentation their institution uses for compliance and loan renewals. When the couple asked why, the response was simple: “We don’t typically get accrual numbers from our customers. We use tax returns.”
The concern is tax returns rarely tell the whole story. Tax returns often include:
- prepaid expenses
- deferred income
- accelerated depreciation
- one-time transactions
Each of these can significantly distort performance in any given year. In this case, those distortions were large enough to make a profitable operation appear deeply unprofitable.
So, the farm leaders walked the lender and their processors through the numbers line by line. They corrected how transactions were categorized. They clarified what should — and shouldn’t — impact net income. They separated tax strategy from business performance.
When the dust settled, the result looked very different. Same farm. Same year. Two completely different conclusions.
5 reasons to use accrual accounting
This isn’t just about getting approved for a loan. Accrual-adjusted accounting is one of the most powerful tools a farm has for making better decisions. Without it, you’re often making high-stakes decisions based on incomplete or misleading information. With it, you can:
- Make better management decisions. Accrual accounting gives you a true picture of profitability, not just cash flow timing. That clarity improves decisions around expansion, cost control, capital investment and transition planning.
- Understand trends over time. Year-to-year comparisons only matter if they’re consistent. Accrual adjustments smooth out timing differences so you can actually see whether the business is improving — or not.
- Evaluate enterprise performance. Many farms operate multiple enterprises, such as corn, soybeans, livestock, custom work. Accrual-based analysis helps identify which are truly profitable and which may be quietly draining resources.
- Strengthen lender conversations. When you can clearly explain your numbers and reconcile them to your tax return, you build credibility. That can impact credit availability, terms and overall confidence in your operation.
- Separate tax strategy from business strategy. Tax management is important. But when tax decisions drive business decisions, it can lead to poor outcomes. Accrual accounting helps you keep those two objectives aligned but not confused.
Simply put: It’s difficult to make good decisions when relying on poor information.
Why this matters more than ever
As farms grow in size and complexity, the gap between tax-based reporting and management-based decision-making continues to widen. That gap can affect:
- lending decisions
- credit availability
- interest rates
- risk ratings
- growth opportunities
- transition planning
And in today’s environment, with higher interest rates and tighter margins, that gap matters more than ever.
Take ownership of your numbers
Farms that are proactive in lender conversations tend to do a few things differently:
- They understand both tax and accrual performance.
- They reconcile differences ahead of time.
- They bring their own analysis to the table.
- They communicate clearly and confidently.
They don’t assume the lender sees what they see. They make sure of it.
Final thought
At the end of the day, this isn’t just about accounting methods. It’s about control. Farms that understand their numbers, and clearly communicate them, put themselves in a stronger position with lenders, partners and stakeholders.
Before your next financial conversation, ask yourself:
- Are you equipped to walk your lender through accrual-adjusted performance?
- Are they using the same numbers you are to evaluate your credit?
Because when the numbers don’t align, the outcome might not either.