Sorting the numbers

Agriculture.com Staff 01/10/2008 @ 1:40pm

Canadian-born accountant Kathy Rancour had worked for a manufacturer of commercial cooling equipment, a lawyer, and other businesses before she hired on at Christiansen Land and Cattle, Ltd. in Kimball, South Dakota. Part of her new job was to move the business in 2001 to an accrual accounting system instead of the cash-based one widely used in farming. And she helped the owner, Christine Hamilton, divide the business into crop and livestock production cost centers and profit centers.

All this made overseeing the books for a cooling manufacturer look easy.

"I've worked in all sorts of industries, and this was a lot more complex than I anticipated," she recalls.

Roughly half of the 35,000-acre operation grows wheat, corn, soybeans, alfalfa, and prairie hay. The ranch side supports a cow-calf herd, backgrounding calves, feeding stocker calves, and a feedlot.

"The crops weren't what I found difficult. It was the livestock. I didn't know a backgrounder from a finisher," she recalls.

So Rancour learned the cattle business, with help from the ranch's livestock manager, Shawn Reis. Reis learned a lot about accounting. "We got the detail we needed. She was asking the right questions," he says.

Today, with five years of data, Reis wouldn't go back.

"I know exactly what we have in backgrounding or any stage of the calf. There is a cost for doing this, but it also simplifies my job a lot," he says. For example, knowing exactly how much they've incurred on a calf, per head or hundredweight, helps Reis decide whether to background longer or move it to a sale barn. He makes better-informed decisions.

For ranch owner Christine Hamilton, better understanding of the ranch's true costs has been key to major decisions as well.

"I decided to rent 5,500 acres north of Mitchell, for example," she says. That land 70 miles northeast of the ranch office is more expensive than land near Kimball. Because Hamilton knows her costs, she felt comfortable negotiating a cash lease.

The ranch also provides management of several hundred cows for another owner in addition to its own herd of about 1,000.

"We were able to get that on a cost-plus basis because we were willing to be transparent with our costs," she says. Adds Reis, "We knew exactly what it was going to cost us before we set up the deal."

Both of Hamilton's parents were well-established and successful before deciding in their 50s to adopt Christine. Her mother, Helen Christiansen, was an attorney who also managed farmland owned by her family. Her father, M. Dewey Christiansen, was a self-made cattleman who built up much of the business in the present-day ranch operation that lies west of the Missouri River near Chamberlain.

Their record keeping system, established long before the rise of personal computers, was basic.

"They would get all of their checks, wrap them up, put them in the shoebox, and take them to their accountant," Hamilton recalls.

Hamilton didn't immediately plan to take over the ranch, instead graduating from Smith College with a degree in philosophy. But when her father died in 1986 at the age of 88, she gradually began to help her mother's management of the ranch. In 1987, Hamilton got an MBA from the University of Arizona. She moved back to the ranch in 1994.

While managing the ranch, Hamilton attended a workshop in Nebraska with her veterinarian. The professor there was Eddie Hamilton, a veterinarian and ag economist who teaches at South Dakota State University and who would later become her husband. "I like to say the cows introduced us," Christine Hamilton jokes.

And Eddie introduced Christine to the concept of managerial accounting, encouraging her to attend meetings of the Farm Financial Standards Council. Eddie had represented the National Cattlemen's Beef Association on the Council.

Christine Hamilton was one of the few producers in the group of bankers, accountants and others interested in better record keeping.

"Most of us, our eyes glaze over when you get into some of the arcane minutia," she says.

Still, Hamilton quickly appreciated what agriculture's new interest in managerial accounting could mean. After her mother's death in 2001, she incorporated it into the business.

Deciding how to divide your business into cost and profit centers is a crucial, sometimes complicated first step in managerial accounting.

It's important not to have more than you need.

"Basically, there's no point in measuring what you don't want to manage or change," Hamilton says.

Her ranch ended up with 10 production cost centers for forage, each crop, and different stages of livestock production. It has seven other, cost centers that support production and include equipment, supplies and wages. The ranch and farm have five profits centers: live beef sales, processed beef sales from finishing, crop sales, horse sales, and land rent.

Neither horse sales nor land rent are significant parts of the business. They opted not to have a forage profit center. "We just reduce the cost of forage if we have an occasional forage sale," Rancour says.

Once the cost and profit centers were set up, ranch staff had to learn to allocate every purchase to the right cost center.

"When we buy anything - gas, minerals, vaccines - we charge it, and we write what place it's going into right on the ticket," Reis says.

As the ranch has gained better understanding of its true costs, it has made other changes. They include:

  • Late fall grazing on winter wheat. "We're running cows on winter wheat," Reis says. "In this area they say you can't do it. We've got records and the history of the ground. We put cows on there and it's not hurting anything. And it saves us money on the cows." Not only does it reduce hay usage, but also the grazing controls fall weeds, eliminating a herbicide treatment.

  • Less finishing of their own calves. Finishing is still on the ranch's flow chart of cost and profit centers, but there's more money in selling backgrounders or stockers at the sale barn. "There isn't enough profit there to hire somebody to feed them," Reis says. Custom finishing with additional non-owned cattle is one way to make finishing work.

  • More direct sales. Instead of selling calves in the January-February spot market, this year Reis contracted for December delivery. "I knew what we had in the calves, and I knew whether it would be profitable in August," he says.

Reis, Rancour, and Hamilton also see more subtle benefits to managerial accounting. There is better understanding of other employees' jobs and better communication. "It's hard to put a value on that," Reis says. And he credits all this with turning the ranch into a more viable business.

All that Rancour has learned from coworkers and Christine and Eddie Hamilton has given her a greater appreciation of production agriculture in general. "It is a business," she says. "And I've never seen a more complex business in my life."

Canadian-born accountant Kathy Rancour had worked for a manufacturer of commercial cooling equipment, a lawyer, and other businesses before she hired on at Christiansen Land and Cattle, Ltd. in Kimball, South Dakota. Part of her new job was to move the business in 2001 to an accrual accounting system instead of the cash-based one widely used in farming. And she helped the owner, Christine Hamilton, divide the business into crop and livestock production cost centers and profit centers.

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