Patience earns results

Agriculture.com Staff 09/27/2007 @ 11:00pm

Randy Gangwish looks for more than a hunch to make decisions. Sitting in the boardroom of Gangwish Seed Farms near Shelton, Nebraska, he points to a stack of printouts. They list the account numbers for 80 cost centers in the family's farming and seed production businesses.

In June of 2004, the Gangwishes switched from Microsoft Dynamics, a leading small business accounting program, to one written by FBS Systems, Inc., of Aledo, Illinois.

The ag-specific software is precise.

"When you run a report, you actually know which piece of equipment and which tractor was pulling it out in the field and the date it was put on," Gangwish explains.

The farm has already benefited from that. It has also been nearly buried in the data summarized by the list of accounts sitting on the boardroom table.

"You just run what you want to look at," Gangwish says. "You never look at the whole thing. It's really not what you're after."

The goal -- on Gangwish's farm and others trying managerial accounting -- is straightforward. It's using better information to pinpoint where a cost center can be more efficient.

Managerial accounting divides a farm into cost centers; they can be an individual crop, an individual hog-finishing barn, a cattle feedlot, a trucking business. It tracks the flow of costs, including overhead, as they affect each center. As crops or livestock are sold, financial activity shifts to marketing or profit centers.

Application is tougher than theory. Randy's wife, Sherry, runs the payroll for the farm's 15 full-time employees and up to 400 high school kids who pull tassels in seed corn each summer. Allocating health and workmen's compensation insurance for detasseling is straightforward. It's not for a full-time worker doing six tasks in a day.

"There would be a lot of people who would think it wouldn't be worth it -- including my staff," Gangwish jokes. By many measures the Gangwish farm is successful. Randy's father, Leland, is one of the founders of NC+ seed company.

So far, the Gangwishes have just 2005 and 2006 to compare under the new system, too soon perhaps for dramatic results. But it has offered a few eye-openers:

  • More accurate understanding of costs of field operations, including planting. "I didn't realize there is so much variation from one year to the next," Gangwish says.
  • Truer maintenance costs. "Guys have shops, and they don't allocate the shop expense. We started out with $40 an hour and that isn't enough," he says.
  • Affirming decisions made earlier, such as using self-propelled sprayers more than tractor-drawn if possible.

"One of the main positives of our use of managerial accounting has been knowing our complete costs and expenses by business segment," Gangwish says. "We've been able to use that information to negotiate substantial production contracts. Knowing our activity costs helps us negotiate with external suppliers when our internal costs are too high."

A few miles to the east at Dorchester, Nebraska, Burkey Farms has been using managerial accounting in its hog business since 2003. In the past year, it has finally seen cost savings that more than justify the shift to the more expensive managerial accounting system, which also happens to be from FBS.

"This is probably the first accounting system we've used that put the cost and the [pig] performance in the same system," says Steve Roth, supervisor of nurseries and finishing units for the 2,800-sow hog farm and 2,000-acre crop operation.

One motivation for making the change was switching from raising breeding stock. "The businesses of genetics and commercial production are not very similar," says farm veterinarian Andy Schweitzer.

A big change with the new system, Schweitzer says, is "being able to tie dollars to the facilities cost area." It led to a decision to gradually shift from three-stage farrow-to-finish production to just two stages, moving pigs into wean to finish barns at about 19 days of age. That has saved an average of $2 per hundredweight.

"Going from nursery-to-finish to wean-to-finish was a big change but the benefits were clearly confirmed through managerial accounting," agrees Sid Burkey, one of the family owners of the business.

A dramatic shift has come from analyzing sort loss, the penalties their packer (Farmland) charges for hogs that are either too light or too heavy.

"Being able to look at things more clearly with the accounting-based software kind of woke us up to the fact we were leaving money on the table," says Schweitzer.

The amount left on the table totaled $112,806 in the first three quarters of 2006. The losses per hundredweight were well over $1 last year (see graph above). The farm set a target of sort losses under 80¢/cwt. They focused more on getting the heaviest pigs loaded out sooner. "We didn't wait to leave pigs behind that would be too heavy a week later," Schweitzer explains.

They started in the last quarter of 2006, and by this year they have passed their target. The sort loss in the last quarter of 2006 and first two quarters of this year was $71,777, a savings of $41,029 in those three quarters. On an annual basis, Burkey Farms's Sid Burkey says, reducing sort loss has added more than $50,000 to the bottom line.

The accounting has also confirmed the benefits of another change: using only two large pens in finishing barns -- one for barrows and one for gilts. That allowed room for 30 to 50 more pigs in a barn. A 1,000-head-capacity barn produces about 22,000 pounds more pork per year.

Just as the Gangwish farm learned, the Burkeys also faced challenges.

"When we started, there was probably a six- to 10-month period where we were frustrated trying to understand it and get everything entered correctly," Schweitzer says. "There's a learning curve."

Early on, Sid Burkey and his brother, Tim, recognized that they should hire outside expertise. That help was Daryl Ellis, the chief financial officer for Jorgensen Land and Cattle Company near Winner, South Dakota. Ellis spoke at a user conference sponsored by FBS last summer, where he urged producers to get help if they needed it to set up the right cost center structure, beginning balances, and proper accounting procedures. "I just stress to get started right," Ellis says.

Tim agrees."None of us are accountants, and the statement that we're going to need some consulting is real," he says.

The cost for the first two years was about $22,000, Tim says. That includes $13,000 for the initial software and training in its use, $3,500 for consulting, $2,000 for an annual update in the second year, and $3,500 for a crop audit module bought later.

They say it's been worth the cost.

With three full years of data, "We now have a lot of confidence in the integrated feed milling, biological performance, and financial numbers," Sid says.

At this point, "it would be hard to imagine being without FBS when we need to make informed management choices," he adds.

Ellis consults for both the Burkeys and Gangwish. He has begun using another type of software, Tableau (www.tableausoftware.com.), to convert large amounts of accounting data to graphs and charts . Visual analysis allows the user to quickly view trends, he says.

Ellis says he's further along in using it at the Burkeys' hog farm. Graphs produced with Tableau helped pinpoint the problems with sort loss, for example.

At the Gangwish farm, Ellis helps compare performance of the seed division and the crop division. "Randy is very detailed on cost allocation," Ellis says. "Randy's a very deep thinker, an analytical thinker. He's pushed me hard, but he's been fun to work with, too."

Gangwish remains cautious about managerial accounting, still keeping a trucking business on a simpler QuickBooks system, for instance. But he'll continue testing managerial accounting. "Are we making good decisions based on the data we're getting? I keep having that hope that we're getting there," he says.

Here are five basics of managerial accounting, according to the Farm Financial Standards Council:

  1. Manage costs by organizing cost information logically. Classify costs correctly when entered.
  2. Do cost reporting where costs are controllable. For example, allocating costs to crop enterprises doesn't control costs. Put them in an equipment cost center.
  3. Mirror key drivers of cost. Crop costs are driven by acres, not bushels.
  4. Match costs and revenue in a way that allows accurate measurement of profit. Some revenue items are really cost reducers.
  5. Track costs as they flow through the farm: first, account for raw materials (seed, chemicals); second, work in the process (growing the crop); and third, add finished goods (harvested grain).

Most ag accounting consultants agree that managerial accounting (MA) isn't for everyone. It's expensive, time consuming, and requires someone in the business (or on retainer) with accounting knowledge.

As farms grow larger and expand businesses (like adding trucking or custom work), MA becomes vital. If several family members manage different businesses on a farm, consider it.

Randy Gangwish looks for more than a hunch to make decisions. Sitting in the boardroom of Gangwish Seed Farms near Shelton, Nebraska, he points to a stack of printouts. They list the account numbers for 80 cost centers in the family's farming and seed production businesses.

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