Measure profitability in real time to benchmark financial progress
If you throw a rock into a pond, you create a ripple effect. The same action and reaction is true for farm financials—a single change to one cost category alters the bottom line for all other categories.
Now more than ever, producers need to shore up their management accounting practices to shed light on those complicated relationships. Doing so will let managers know, in real time, whether they’re gaining traction and making money.
“Everything is totally integrated,” explains David Bullerman, an Adrian, Minn., producer at Son-D-Farms. The business includes a 10,000-sow, farrow-to-finish hog operation and 4,500 acres of corn. “We can see what our true costs are throughout the year, from the time we put seed in the ground and all the way through the hogs until the hog goes to the packer.”
Why Internal Reporting Matters
Keeping track of operational profitability isn’t just important for farm owners and operators. In fact, best-in-class producers track finances meticulously to enable transparent reporting to a variety of stakeholders.
The farm has used a management accounting software called FBS Systems since 2009. The decision to track financials around the clock enables Bullerman to make critical business decisions as the company expands. For example, Bullerman continues to plant and harvest while leading a team of 100 people, and he hopes to delegate some of those responsibilities to a general manager.
Yet after reviewing comprehensive financials this summer, he and his team opted to wait to make the hire.
“We’d be adding a totally new position, which would not be a low-paying position,” Bullerman says. “Looking at the projections and where we’re sitting, we did not want to add that position right now.”
Learning Curve. Even on large farms, many leaders haven’t adopted management accounting at such a finite level because they haven’t seen the value, experts say. That mindset is changing as commodity prices remain low and managers are forced to reconcile revenues and expenses.
“Now that margins are thinner, I think it’s much more important to understand those costs that you have in your operation and find ways to be more efficient, whether that’s equipment costs, labor costs or direct costs of inputs,” says Tom Bayer, partner and CPA at Sikich LLP.
Most operations only understand profitability at a surface level. Entering 2016, producers have the opportunity to begin diving deeper.
“Most people can do a fairly high-level peanut butter spread of their machinery costs and labor costs across their acres, but that doesn’t actually match how they’re being used,” explains Norman Brown, owner of the FBS Systems farm management software that Bullerman uses. “If they’re growing more than one type of crop or they farm ground differently, that doesn’t really represent what’s happening.”
Because of the vast disparities in how producers do management accounting, it’s valuable to think through the steps needed to adopt the practice from start to finish.
Where To Start. Crop producers might need to spend three years gearing up for a truly robust management accounting system simply because of the offset scheduling of the production year, marketing year and input purchases, Brown says. Livestock producers can scale management accounting faster because inventory turnover is rapid.
“You need to evaluate what is possible versus what’s feasible in your business,” Brown says. He advises farmers pair software of some kind with the financial expertise of a chief financial officer (CFO) or controller. Many software platforms provide cloud-based access to data, enabling operations to tap the knowledge of an outside professional if in-house expertise is unavailable.
In southwestern Minnesota, four members of Bullerman’s team use the management accounting software to track different financial buckets. The first manages financials for the hog operation, including feed data and packer sales. The second handles accounts receivable and payable and oversees custom hog feeders. The third manages payroll and human resources. The fourth is an accountant who crunches numbers, reviews balance sheets, enters depreciation data and communicates with Bullerman to ensure accurate tax information. Together, they paint a complete financial picture.
Sector By Sector. Once a system is in place, start to evaluate costs by category, Bayer advises. For example, equipment has costs per hour, per unit and per acre. Capture all annual costs of major iron such as planters, tractors and combines, and then allocate them across your farms.
“What you want to understand on a global basis by commodity is, are you making money on each of the commodities?” he says. “On a per-farm basis, you want to look at what’s the cost to operate each of those individual plots based on the yields and all of your costs, including some absorption of indirect costs.”
Compiling accurate data for expense categories is essential because they roll into one another. For example, high equipment costs can reduce the profitability of individual farms, which then have tighter margins after commodity sales, which are finally reflected in the bottom line, Brown says. “The most useful benchmarking is internal,” he says. “Are we making improvements? What is it costing to do these activities, not just commodities and product costs?”
Little discrepancies add up. Research suggests there is a $200 per acre to $300 per acre difference in farm profitability depending on how closely labor and equipment costs are monitored, Brown says.
“That is a huge opportunity right now with tight margins to understand how to optimize your business,” he says.
Bridge The GAAP. Yet many producers fail to synchronize those internal financial records with external reports required by CPAs, bankers and lenders, Bayer says. In today’s regulatory environment, poor reporting spells trouble. He expects farmers will eventually be required to provide comprehensive reporting that meets Generally Accepted Accounting Principles (GAAP) or risk losing operating loans.
“The regulators of banks, because of the size of some of these loans, may want a GAAP report prepared by a CPA,” Bayer says. “A better solution may be simply hiring a CPA to verify information through a field examination where they go out and verify the existence of inventory. They may verify certain costs and certain equipment. It doesn’t give you a full financial statement but certainly gives you some further assurance of the accuracy of the information from the farmer.”
For Bullerman, that kind of detailed record-keeping is critical.
How Farm Financial Centers Cascade Into One Another
A flow chart such as this one can help your management team see how money moves in your operation. Use it to improve profits.
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