Buy the Numbers

January 16, 2009 03:27 PM
 




In the shadow of the Saddle Mountains in central Washington state, twin brothers Darin and Devon Michel have spent a lifetime building DM Ranches, an operation that now spans 12,000 acres of rugged range and fertile, irrigated farmland.

They have become devotees of management accounting (MA) principles, if for no better reason than to keep a tight rein on capital expenditures for their highly diversified business.

"There are a lot of things we can't control as producers, such as the weather and markets, but we can control our purchase decisions," Devon says. "MA helps us know whether an investment can make money."

Equipment. Nowhere is this more evident than with equipment decisions. Using Red Wing CenterPoint software, the brothers have learned how to track costs across their business's entities, including machinery costs per acre. If their analysis doesn't show it pays to own, they lease a machine or hire out the work.

The opposite is true as well: A few years ago, Darin figured out that buying a new baler and hiring a man to stack the hay would save more than $23,000/year over what they were paying a custom operator.

"The Michels now look at what it means to optimize instead of buying equipment because they can afford it," says Dick Wittman, a farm financial consultant in Culdesac, Idaho, who works with the brothers.

Center-pivot payoff. Farming was good to the Michels last year, allowing them to add more acres via a 1031 land exchange. But the land badly needed new irrigation systems. To make the decision on whether to purchase seven new center pivots, they used MA analysis and ran purchase scenarios along with capital investment analysis.

"We calculated our return on equity for the new land will be at least 12%," Devon says. The land was rill-irrigated before, which was labor-intensive, equipment-intensive and wasted water, he adds. The Michels estimated that putting pivots on the land would increase the land rent value by at least 65%.

The brothers provided their financer, Farm Credit Services in Moses Lake, Wash., with the scenarios and analysis. "The numbers showed how the new pivots would pay for themselves, which goes a long way with a banker," Devon says. "Management accounting has made us very good at doing capital investments and allocating resources to the investment that gives us the greatest return today rather than at the end of the year."

By having good MA accounting records, DM Ranches is making better and faster decisions and growing quickly. MA also helps to improve the Michels' asset-turnover ratios and debt-to-asset ratios and increases their return on equity.

"It makes it easier to stomach an investment knowing to 95% certainty you will make money, even before you stick your neck out there," Devon sums up.



To contact Jeanne Bernick, e-mail JBernick@farmjournal.com.

Top Producer, January 2009

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