At many farms, the year-end occurs post-harvest when grain inventory levels are at their highest.
However, measuring grain inventory is more art than science. Even when ground or grain cart scales are used, inventory still needs to be validated with an inventory count.
Inventory counts are common across other industries and necessary for auditors. Yet, counting boxes of widgets in a factory is different than estimating inventory of grain bins holding thousands of tonnes of perishable commodities.
In a perfect world, harvested production is weighed and accurately recorded. Grain cart scales have made this economical and perhaps soon combine yield monitors can be relied upon.
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However, there is a saying that “no plan survives contact with the enemy.” In this case, the enemy or battle is harvest, complete with long days and nights and untrained employees on the grain cart.
Assuming the cart scales are calibrated correctly in the first place, grain scale information still needs to be vetted for operator error. Inventory counts are needed even if a producer has faith in their production information.
If necessary, accountants and auditors can roll back an inventory count from any date to the desired cut-off period. Inventory counts are only usually needed at your tax year-end or for risk management programs, but you can do an inventory count at any time. Your advisers will appreciate accurate and up-to-date information.
AgriStability participation is one of the best ways a farm can ensure their production and inventory information is reconciled and accurate. A lot of producers’ (and accountants’) frustration with AgriStability can be attributed to inventory records, or lack thereof. Reconciled and vetted AgriStability production information is the most accurate source of historical yields.
One benefit of keeping up-to-date accrual accounting records is it makes it easier to track the grain inventory adjustment. In a perfect world, the grain inventory adjustment will offset cash grain sales when the bins are emptied. However, because of volume estimates and price fluctuations, this will never work out perfectly. Keeping up-to-date accrual inventory records will help you track how accurate your inventory estimate was for the previous year and whether you have more or less cash than expected.
A common issue around inventory information is grain movement around the time of the count. Producers can mitigate this risk by dating their count sheet. Factories shut down operations for inventory counts for this reason. It’s hard to count inventory if trucks are coming and going.
Producers often ask what prices they should use for their inventory count. The answer should be the market price as of the cut-off date. The reason is the balance sheet is prepared as of that date. However, contracted prices signed as of the cut-off date should be used if available. If too high or low of a price is used for the inventory, it will flush out and be reflected in the grain inventory adjustment in the following period.
Top line revenue made up of a combination of inventory adjustments and grain sales produce the most variability in a farm’s financial results from year to year. Improving the art of the farm inventory count will provide producers and advisers better information with which to make decisions.
Craig Macfie is a chartered professional accountant who provides farm accounting and consulting services through his company Spring CFO. He can be reached at craig.macfie@springcfo.com.
