Beyond Cash Flow: Why Swine Producers Need Accrual-Based Financials for Long-Term Success

From the desk of an agricultural lender

After over two decades of working with livestock producers across the Midwest, I've seen my share of financial statements. While many swine producers excel at managing day-to-day operations—monitoring feed conversion ratios, optimizing breeding programs, and maintaining biosecurity—too many still rely solely on cash-based accounting to understand their financial position. This approach, while simpler, can create a dangerous blind spot that threatens both operational decisions and lending relationships.

The Hidden Costs of Cash-Only Thinking

Cash accounting tells you what money came in and went out, but it doesn't tell you the whole story. For swine producers, this limitation can be particularly problematic given the cyclical nature of hog production and the significant timing differences between expenses and revenues.

Consider this common scenario: A producer shows strong cash flow in December after marketing their fall pig crop, but their cash accounting doesn't reflect the feed costs, veterinary expenses, and facility depreciation that went into producing those hogs over the previous six months. When that same producer approaches us for an operating loan in February, their cash-based statements might show December profits, but they fail to reveal the true cost of production or the farm's actual profitability.

What Accrual Accounting Reveals

Accrual-based financial statements match revenues with the expenses incurred to generate those revenues, providing a clearer picture of actual profitability. For swine operations, this means:

True Production Costs: Accrual accounting captures feed costs, veterinary expenses, utilities, and labor costs in the period they contribute to production, not when bills are paid. This gives producers and lenders a realistic view of cost per hundredweight and profit margins per head.

Inventory Valuation: Growing pigs represent significant invested capital. Accrual statements properly value livestock inventory, showing the real asset base of the operation and helping identify trends in production efficiency.

Depreciation Reality: Buildings, equipment, and breeding stock depreciate over time. Accrual accounting spreads these costs over the useful life of assets, providing a more accurate picture of the true cost of production and the need for future capital replacement.

Accounts Receivable and Payable: These balances reveal cash flow timing issues and help identify potential collection problems or supplier relationship strain before they become critical.

Making Financial Information Work for Your Operation

As a lender, I don't just want to see accurate financials—I want to see producers using this information to make better management decisions. Here's how savvy swine producers leverage accrual-based information:

1. Monitor Key Performance Indicators

Accurate accrual statements enable producers to calculate and track critical metrics:

• Cost per hundredweight produced: Compare this across different groups, seasons, and production systems

• Feed conversion efficiency costs: Beyond biological performance, understand the true economic impact

• Facility utilization rates: Determine if buildings are generating adequate returns on investment

• Labor efficiency metrics: Track labor costs per pig produced or per sow

2. Identify Seasonal Patterns and Trends

Accrual statements reveal seasonal cost patterns that cash accounting might obscure. Understanding when costs typically peak relative to revenue helps in:

• Planning operating loan needs more accurately

• Negotiating better payment terms with suppliers

• Timing major expenditures to optimize cash flow

• Identifying the most profitable production periods

3. Benchmark Against Industry Standards

With accurate cost accounting, producers can meaningfully compare their operation against industry benchmarks. This enables identification of:

• Areas where costs are out of line with industry averages

• Opportunities for efficiency improvements

• Strengths that can be leveraged for competitive advantage

• Capital allocation priorities

4. Plan for Capital Replacement

Depreciation schedules in accrual statements help producers anticipate when major equipment or facility investments will be needed. This forward-looking approach allows for:

• Building replacement reserves gradually rather than scrambling for emergency financing

• Planning capital improvements during favorable financial periods

• Negotiating better terms on planned purchases versus emergency replacements

Improving Your Financial Management System

If your operation currently relies on cash-based accounting, transitioning to accrual-based statements doesn't have to be overwhelming. Start with these steps:

Work with a Qualified Accountant: Find an accountant experienced with livestock operations. They understand the unique aspects of agricultural accounting and can help establish systems that capture your operation's specific needs.

Implement Monthly Closings: Don't wait until year-end to understand your financial position. Monthly accrual statements allow for timely course corrections and better decision-making throughout the production cycle.

Integrate with Production Records: Your financial system should connect with production data. Feed costs should tie to feed conversion rates, veterinary expenses should relate to health protocols, and facility costs should correlate with capacity utilization.

Establish Inventory Procedures: Develop consistent methods for valuing livestock inventory at different stages of production. This might involve working with nutritionists and veterinarians to establish standard costs for different weight classes and production phases.

The Lending Perspective

From a lender's standpoint, producers with accurate accrual-based financials demonstrate several important qualities:

Management Sophistication: Understanding and using accrual accounting shows a commitment to professional farm management that extends beyond day-to-day operations.

Risk Awareness: Producers who track true profitability are more likely to identify and address problems before they become critical, reducing lending risk.

Planning Capability: Accurate financial information enables better business planning, which leads to more realistic loan requests and better repayment capacity.

Communication Quality: Producers with solid financial information can have more productive conversations about their operation's performance, challenges, and opportunities.

Common Implementation Challenges

While the benefits of accrual accounting are clear, implementation isn't without challenges:

Initial Cost and Complexity: Setting up accrual-based systems requires more upfront investment in accounting software and professional services. However, this cost is typically recovered quickly through better decision-making.

Time Investment: Accrual accounting requires more detailed record-keeping and regular attention. Producers need to build this into their management routine.

Learning Curve: Understanding accrual-based reports takes time, especially for producers accustomed to cash-based thinking. Investment in education pays dividends in improved financial management.

Moving Forward

The swine industry continues to evolve, with increasing emphasis on efficiency, sustainability, and risk management. Producers who make decisions based on accurate, timely financial information position themselves for success regardless of market conditions.

As your agricultural lender, I'm committed to working with producers who demonstrate professional management approaches. Accurate accrual-based financials aren't just a lending requirement—they're a management tool that can transform your operation's financial performance.

If your operation hasn't yet transitioned to accrual-based accounting, I encourage you to start the conversation with your accountant and your lender. The investment in better financial information systems will pay dividends in improved profitability, better access to credit, and more confident decision-making.

Your farm's financial health depends on understanding not just where the cash is today, but where your true profitability lies across the entire production cycle. Accrual-based financials provide that clarity, and smart producers use that information to build stronger, more profitable operations.

Written by Matt Hardecke senior agricultural lender with over 25 years of experience financing livestock operations across the Midwest.