Upgrading information

Agriculture.com Staff 02/06/2008 @ 9:06am

Adopting managerial accounting is a significant step for farms in terms of labor and dollar resources. Yet its payoffs can be huge in today's market environment. A system based on managerial accounting (MA) is designed to give you detailed, accurate cost information that is organized around drivers of those costs, which is the only way that information is truly useful. Here are answers to common questions.

Because costs are also beyond record levels. The issue is not the market price but levels of profit after all costs. The other record we expect this year and next is for huge variation in profit per unit. That's because people had to make decisions on-the-fly (and often in the dark). Machinery efficiency, enterprise trade-offs, cash rent bids, decisions to buy or sell real estate -- the bottom line impact of these decisions continues to grow.

If you have strong, historical cost information, you can spend time making the decision instead of scrambling to estimate the impacts on your cost and profit structure.

  1. Greater comfort level with historical results. Most people know if they made or lost money the previous year. Many have a reasonable feeling that it was because of their performance in corn production, corn marketing, swine production, and so on. But a very small number KNOW the answer to those questions and know the magnitude of the differences.
  2. Ability to evaluate options quickly. How much can you pay for additional rental ground if you increase your size by 20%? By 30%? If you are converting share to cash rent? Given enough time and the ability to ballpark, every producer can make these decisions based on reasonable numbers. With a good MA system, number crunching is very quick, and you can focus on the decision itself.
  3. Ability to communicate profit-ability details to others. Many producers have an almost mystical ability to assess profitability of various parts of the operation, often with uncanny accuracy. But communicating those feelings to sons or daughters involved in a succession plan, to your banker, or to a potential investor is often pretty tough. Good cost information is the precursor of good analytical information, and it is a major benefit of MA.

Farmers expect results too quickly and get frustrated. Further, they overestimate the quality of information they already have in their system and struggle to make it better. MA implementation requires a commitment of time, money, and patience. You may use it immediately to great advantage, or it may be two or three years before you start to see much benefit. It depends on your operation and the types of decisions you are trying to make.

Not necessarily. It depends on your operation's complexity; your comfort level with the financial, production, and marketing components of your operation; and the number of people involved in making management decisions. You could be better served picking a different part of your information system to upgrade.

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