By the Numbers

Whys and Hows of Cost Accounting

Managerial accounting matches costs with precision farming data. (Photo courtesy of Purdue University)

For nearly 40 years, I've pushed the need to use accrual adjusted income rather than cash basis income to evaluate a business's true profitability and cost of production. Accrual often leads cash in recognizing both downturns and upturns by two to three years. One thing I've learned from watching more than 1,000 participants at The Executive Program for Agricultural Producers (TEPAP) since the early 1990s is that timing is the number-one thing that separates the best from the rest. That delay is way too long if you need to make some major changes.

Cash basis is great for tax purposes and is simplistic, but using accrual-adjusted books doesn't require you to file taxes on an accrual basis. Accrual adjusted net income is also a way to differentiate earned net worth from market value net worth. That separates out true earnings from inflation. Lenders, accountants and academics know it but too many farmers are decades behind the curve. Enough of that: The next thing that's lacking to run a farm as a professional business is the use of managerial/cost accounting.

Farmers need to be able to drill down into their data to know where they're making money and losing it. This is more than just enterprise accounting. It's knowing the difference between farms, between fields and between different enterprises on each. It's also important in analyzing and negotiating rents, as well as knowing the true cost of work in process inventory. Add in the real-time information and site-specific information available from Granular (a company where I serve on an advisory board), Conservis and similar managerial software providers is critical for analyzing chemical, fertilizer and seeding rates.

The results can make an exponential difference. We have much more site-specific technology today. This matches your agronomic firepower with your accounting. You'll know your real cost, in real time, not guesswork based on gut instincts.

WHERE TO START

Dick Wittman, a TEPAP instructor, consultant and farmer, offers a one-and-a-half day program on managerial/cost accounting that can be a real eye-opener for people who want to get started. You can check his website, www.wittmanconsulting.com, to see when and where any of these sessions are scheduled. He usually offers several programs a year.

As far as which accounting software to use, the ones I've seen most often are Redwing's Centerpoint and Farm Business Systems (FBS) TransAction Plus.

Once you do get started, the only thing I highly recommend is that whoever is responsible for the accounting functions on your farm joins or sets up a group of others using the same software. User groups share what they have tried or learned and the different approaches they've used. Others' experience can help ramp-up the learning curve and answer a lot of questions. Your software sales person can usually give you other user names as well as letting you know if the company offers any training programs.

In the past, some operators complained managerial accounting was too time-consuming. If it proves too much for your current accounting person or would be too costly to hire someone with the necessary skills, one approach I've seen work well is for several farmers to go together and share a joint accountant. That way they hire the right person and are able to split the costs. If the farmers are open enough, this is also an excellent way to benchmark numbers against each other because the numbers will actually be comparable.

I want to wish you the best if you decide to upgrade the depth and detail of information needed to make better decisions and become more of a professionally managed business. I'm guessing only 5% of today's farms use managerial accounting now, but they will be the ones best able to adapt to ag's changing economics.

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Editor's note: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. To read all of Klinefelter's recent DTN columns go to https://www.dtnpf.com/….

(MZT/AG)