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How Much Does an Accountant Cost?

Is your accountant costing you money? Your accountant should not cost you anything. An accountant’s responsibility, in addition to keeping you in compliance with federal and state financial laws and regulations, is to make you money. Most accountants have a degree in Business. Accountants understand how business works. It is your accountant’s job to understand your business.

            Accounting is not considered a people business; however, I disagree.  Accounting is about business and business is about people.  We all know a business is only as good as it’s people.  Just like any team, some teams are better than others.  Your accountant should be part of your team.  Even though your accountant may not know the names of all your employees, he should strive to be part of your team.  

            As your business grows it will be necessary to hire an accounting firm.  Way before that happens you should already have your own accountant.  Accountants that work for you are called internal accountants.  Accountants that you hire to prepare annual financial statements and taxes are called public accountants.  Your internal accountant can do everything an outside accounting firm can do.  The difference is credibility.  Third party audits are more credible than internal audits.  Outside accounting firms are respected in the industry.  Outside accounting firms offer the knowledge of many accountants.  A large team is more effective than an army of one.

            That being said, Rome was not built in a day.  Start your business and begin generating revenue.  Consult with an accountant when you have recurring revenue.  As soon as possible bring on an internal accountant.  Let your business degreed accountant assist you in growing your business.  The business degree offers you valuable advice in accounting, marketing, finance, law, government, and most importantly, how to get along with others.  Business is business attitude without tact and tolerance is not good for your business.  People are not machines.  Real people have real issues.  Respect your employees, customers, vendors, and neighbors.  

            Accountants have a fiduciary duty of trust and privacy to their clients.  Don’t be afraid to share private information with your accountant.  All accountants are responsible to follow ethical duties.  Even though greed has caused some accountants to go rogue, not all accountants have the Arthur Andersen/Enron mentality.  A trustworthy accountant will not hide information from you.  Accountants understand, “Trust but verify”.  

In summary, in business you spend money to make money. Farmers don’t buy fertilizer because of the free meal the fertilizer company gives them. Farmers know fertilizer makes them money. Your accountant will also make you money, just in an indirect way.

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Accounting for Business v. Personal

Expenses are a fact of life.  Because we all have expenses, we all need income.  Hopefully our income is more than our expenses.  In accounting, both income and expenses are considered temporary accounts.  The reason being, both income and expenses are constantly fluid.  They change daily.  They come and go.  There are five major accounts in accounting: Assets; Liabilities; Equity; Revenue; and Expenses.  As mentioned above, revenue (income) and expenses are temporary accounts.  Assets, Liabilities, and Equity are permanent accounts. 

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Inventory, Supplies, & COGS

I am a member of the ranching community, so this article’s purpose is to empower ranchers on the business side of ranching.  Financial institutions require ranchers to submit financial statements.  There are two main important financial statements, the balance sheet and the income statement.

Inventory, supplies, and Cost of Goods Sold (COGS) are terms used in accounting.  Most everyone is familiar with the terms inventory and supplies.  COGS is somewhat vague.  All three of those terms refer to items used and paid for, in your business.  When you purchase a bale of hay, or a load of hay, which of these three terms should be used.  The correct answer is, with inventory and supplies, it depends.  COGS is always used with inventory.

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Actual Expenses vs Imaginary Expenses

In calculus class you learned that imaginary numbers are real.  They are used to find the square root of negative numbers.  Of course, those same mathematicians say it is infinity to any specific point on a line.  Well in the accounting world, imaginary numbers are used on the income statement to account for depreciation expense.  Those same imaginary numbers are then used on the balance sheet as accumulated depreciation.

Scenario one:  A business owner borrows his working capital from financial institutions.  Scenario two:  A business owner self-finances.  Before I go any farther, let me remind you, life is not fair.  Everyone has their own special advantages.  Your competitor will use his advantages to his benefit, you have to do the same.  Some people’s advantage is simply, they are willing to work harder.  Money is a big advantage in the business world.  People that are able to self-finance have an advantage over those who have to borrow.  

In scenario one, Larry Leverage, financed all of his hay equipment from John Deere Credit.  His annually note is $60,000.  In scenario two, Richie Wells, purchased all of his hay equipment outright.  Both men started their perspective hay businesses with all new equipment worth $400,000.

Larry leases a ranch with 100 acres of prime hay fields.  Richie owns 300 acres of prime hay fields. 

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True Cost of Baling Hay

Ranchers know baling hay is expensive, however some ranchers still sell their hay for remarkably low prices.  Throughout this article, I will refer to hay balers/sellers as ranchers.  To produce a bale of hay, there are variable cost and fixed cost.  Hay that is sold cheap only takes the variable cost in consideration.  Let me back up some.  Fuel, net, wire, labor, fertilizer, and herbicide are variable costs.  As we all know, not all hay is fertilized and sprayed, thus some cheap hay does not have that added variable costs.

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True Cost of Ranching

Ranchers know their choice of livelihood may not be an easy life filled with weekly paychecks, Christmas bonuses, unlimited labor and financial resources, but ranchers choose that live because that is the life for them.  Ranchers would be bored to death living in a subdivision.  Where would they park all of their trailers?  Ranchers know there are many benefits to ranching for a living, but the real beauty of ranching is freedom of choice. 

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Cash vs Accrual Accounting

My area of expertise is in the ranching industry. I suspect most ranchers use the cash method. For my ranch, I use the cash method for tax purposes. The cash method is considerably less costly than the accrual method.

The IRS graciously allows most of us to use the cash method. Small business taxpayers. Effective for tax years beginning after 2017, the Tax Cuts and Jobs Act (P.L. 115-97) expanded the eligibility of small business taxpayers to use the cash method of accounting.

With that being said, I do use the accrual method for my ranching operation’s books. Cash method for the IRS and accrual for cost control. Ranching is a very competitive market, thus the margins are small. Without through accounting it is impossible to determine what your true costs are.

No one would sell a 1500 pound round bale of hay for less than what they have in it. It is easy to determine your fertilizer and net-wrap cost per bale. Not so easy to determine all of the many other incidental cost to produce that round bale. With a good team working together to keep accurate records of daily transactions, the accrual method of accounting will allow accurate cost reports for greater decision making.

A big part of ranching is inventory control. That includes hay and feed, fuel, raised cattle, purchased cattle, and equipment use. Every revenue stream should have a corresponding cost stream. Gross Profit may then be calculated. Overhead costs is everything else. The more of your costs that you are able to put into a corresponding cost stream, the less your overhead will be. Overhead is paid for out of Gross Profit.

Cost control requires the use of spread sheets and pivot tables for analysis. This is what accountants are for.

Brett Bickham, May 24, 2020

Clifton, TX

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Income?

Tax time again for most of us. We all know you are taxed on your income past a certain amount. You may not realize you are not taxed on all of the money you received from the sale of a fixed asset. Only the gains on the sale of fixed assets are taxed! Most of the time the sale of a fixed asset results in a loss, which is deductible.

Remember, money put into the bank is not always income!