Financial vs. Managerial Farm Accounting Interpretation, Part 2

Farm Accounting

Cash and Wheat.jpgTake control of the outcome, or be overrun by unstable markets.

Your farm’s financial story shows you its potential.

In Financial or Managerial Accounting, we explored the essential information farmers need to make good economic decisions. Today, we are going to look at how the interpretation of managerial accounting reports can be essential to your planning, direction, and choices about where you should invest in the operation.

 

Managerial Interpretation—Segmenting Performance

The important thing about managerial accounting is that it accurately shows you how your farm is performing. In the past, we managed by line items, but this is limiting for any producer who wants to improve performance. Those who want to enhance their ability to manage key performance activities can utilize managerial information, which allows farm owners to define appropriate management activities, access information for better planning and budgeting, and monitor the operation’s performance. You put a lot of work into your operation, and managerial accounting lets you know whether your efforts are being rewarded and, if not, tells you what to do about it.

Our fathers and grandfathers had no choice but to manage expenses. There were limited revenue options, so financial performance was not considered a significant issue. Today, that is different due to many marketing alternatives: assets have replaced labor, and the costs of assets keep increasing. Today, we can guide our operations by focusing on expense areas that provide the best return. We can maximize these by analyzing the performance of major and minor cost centers and personnel, monitoring and measuring profitability, managing our asset purchases, and controlling our costs.

Production margins are the financial lifeblood of an operation. They must be high in major profit centers to pay production costs, satisfy sales demands, cover administration and general operating expenses, make debt payments, finance operations, cover owner withdrawals, and provide growth opportunities. This allows farm owners and their managers to give the farm a focused direction while reducing cost and increasing profit. Without managerial accounting that’s customized to your farm with appropriate profit centers (crops, pork, dairy, etc.) or cost centers (activities that support profit), you cannot appropriately focus on your farm business to seize strategic advantages.

  • Break-even reports break down your commodities and/or livestock income and expenses, telling you what prices are needed to make a profit.
  • You can observe your operation’s profitability trends: is the operation slowly trending up, down, or are you seeing inconsistent swings? We may not get too excited if we see an increase of 5 cents a bushel, but an fluctuation of $3.00 a bushel would show a $540 increase or decrease per acre. This gives us great insight into how we need to manage our budgets and plan.
  • You can determine which commodities are truly making money. You may want to focus your attention on those commodities rather than the ones that aren’t performing.
  • You can take a deep dive into crop, dairy, beef, or pork production segments and compare year to year. Savvy operators have used this type of information to determine where they need to invest in their operation.

Your operation has a story to tell you, a history that you and future generations can use as a solid foundation to build upon. Let it speak to you. 

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Written By

Chris Whited

Chris Whited

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