Farm Accounting Application: Financial vs. Managerial

Farm Accounting

Building a financially healthy ag business is possible. You just need to find what works for you.

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If data isn't driving your behavior, then why are you doing it?

We all have big ambitions when taking over the family farm. We want to jump in and use our skills to build upon what the previous generations have handed down, leaving our own mark for future generations. What do you want to achieve?

Regardless of your specific goals, a financially healthy ag operation is built on a foundation that can withstand risk. Building on that solid foundation, you can achieve your vision at a measured, steady pace.

Our behavior is guided by the knowledge available to us. Customized data specific to your operation allows you to make informed decisions for your farm rather than base your choices on industry trends, which may or may not be valid for your business.

 

Application of Financial Accounting 

All financial activity in any business is classified into four areas. Operations (production) is only one of them. It is, however, the only part that can (and should) provide an ongoing and renewable source of money for the other three parts of the business, which usually require cash. If there is adequate profit, the business can meet its financial needs; if not, then one or more of the other three areas will be short of funds.

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The AgriSolutions Rule allows us to direct the money coming into the operation to the other three parts of the business. Understanding the relationship between how operating profit should be used to fund asset purchases, debt principal, interest, living, and taxes is key to managing the financial longevity of the operation.

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You can begin to control the outcome of your farm business by starting with the big picture and moving to customized managerial accounting to determine priority areas for improvements. Once determined, we can begin developing detailed plans of action that provide a roadmap for you and others to guide behavior. You must reconcile these action plans back to the big picture in projecting your farm’s financial performance to determine if you are taking the right course of action. If your action plans do not result in movement toward meeting or exceeding your big picture projection for financial performance, you must do one or both of following:

  • Go back and rethink or change the detailed action plan.
  • Review—and possibly revise—the goals and objectives of the big picture plan of action.

 

Application of Managerial Accounting

It is not unusual in the ag industry to have three to five years of ups and downs. A farm business can go downhill in a year if each of the 4 areas of the business isn’t properly managed. By segmenting the farm business into profit and cost centers, we can see the individual financial results from various crop enterprises and/or livestock enterprises. Our goal is to smooth out ups and downs close to the upside and remove that volatility.

Profit and cost centers can help us answer questions:

  • What activities do we need to scrap?
  • Where can we look to make improvements?
  • What options do we have to move in another direction?

Having detailed information shows us where profitability exists in the operation and points out areas for improvements. The more we recognize what is going on in our business, the more we can effect changes to our behavior that significantly impact the financial health of the operation, regardless of the markets.

When making decisions using managerial information, you should always base those decisions on financial information. This helps you understand the impact your decisions will have on the operation as you direct dollars to fund the four parts of the business. When making decisions, we must see if we have achieved the financial results from the change in behavior, and if we have, we are then able to recognize the results due to our application of both financial and managerial accounting. 

Past generations were on the farm day in and day out. They were home taught or were often pulled out of school to help on the farm. Time spent working on the farm allowed them to develop a “gut feeling.” They could tell you the story of each field every year they worked the ground. Today’s generation didn’t have the privilege of working in the fields every day of their youth like previous generations. Along with that, farms are growing beyond the ability to manage with just a gut feeling.

With the development of technology, we have grown into a generation whose decisions are guided more by accumulated knowledge and data. We can learn from the experience of past generations as well as the newest tools. These tools allow us to manage the business with quicker response as we implement behavioral changes that bring innovation and improvement. We have an immense amount of valuable information available to us— data that can guide our managerial decisions and directly affect the success of our business. The question is, How much of that information is being analyzed and used on a day-to-day basis to impact the financial future of the business? 

When it comes down to financial accounting vs. managerial accounting, the choice is clear. You need both simultaneously—to diagnose the operation’s financial health while gathering information that can guide you to effect needed change.

 

Behavior flows from desire, emotion and knowledge. ~Plato

 

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Written By

Chris Whited

Chris Whited

North American New Business Consultant cwhited@agrisolutions.com 618-372-4048