It’s safe to assume that most dairy farmers prefer to focus on the day-to-day management of their operations rather than their financial records. But, unglamorous as it is, maintaining detailed financial reports is critical for making sound business decisions and for managing your operation’s strategy in the near and long term.
Many dairy operators primarily maintain financial records for tax purposes. There’s no question this is important to help fulfill your tax planning and limit your tax liability. Depending on the size of the operation, tax records typically use cash-based accounting methods.
But that type of accounting doesn’t tell the complete story of your operation. It doesn’t, for example, take into account the cash spent to grow the feed or breeding inventory, any loss of inventory or feed bills that may be unpaid.
The other occasion dairy operators usually put together financial records is to satisfy a bank’s requirements as part of a loan agreement or credit monitoring. The quality of records for this purpose tends to be more sophisticated than it is for tax planning, but it still doesn’t provide full visibility into your operation’s finances.
Increased visibility
Only managerial financial reporting provides the information you need to make sound financial decisions, such as capital purchases or changes to your operation. It’s also necessary if you’re looking for ways to gain efficiencies, particularly in the current depressed commodities climate. Because you can’t always borrow your way through this type of environment, you’ll need to run as efficiently as possible. That means knowing your cost of production, your operating expenses and your working capital position, among other factors.
Managerial financial records typically use accrual accounting. That is, expenses are matched with the related revenues and are reported when the expense occurs, not when the cash is paid. Compared with cash-based accounting, accrual accounting provides a better measure of your profitability during a specific time period.
When you start thinking in terms of accrual accounting, you’re in a better position to access the capital you need. Dairy operators often approach a banker with a specific plan in mind without considering the long-term financial effects. If you’re considering a land purchase, for example, you’ll have to consider the effects it could have on your cash flow or balance sheet, as well as what a potential correction in land values would do to your overall financial position.
Getting started
At the most basic level, you can start by asking yourself a few questions before making a major financial decision, including:
- What will it do to your cash flow?
- How will it improve profits?
- How will it improve the return on your assets or equity?
- Will it improve financial efficiency?
- Will it improve workflows and the quality of life for the operation’s owners and employees?
If you don’t know the answer to these questions, that means you need to start applying managerial accounting principles to your financial reporting.
The Farm Financial Standards Council (FFSC) is a great resource for making the transition to managerial accounting. The organization promotes uniform financial reporting and analysis for agriculture producers. The FFSC can be a great help for operations that need to convert their cash-based accounting records into managerial financial reports. You can purchase the council’s financial and management guidelines from its website.
Because managerial reporting is a key part of your operation’s overall strategy, it’s wise to meet regularly with all your financial partners – your accountant, banker and consultants – to make sure everyone is on the same page. In the end, your financial reports should be timely, accurate and accrual-based.
Maintaining managerial financial records allows you to identify your operation’s strengths and weaknesses. And once you know what your real financial position is, you’ll be in a better position to take advantage of opportunities when they arise. 
For more agriculture industry insights, visit the BMO Harris Bank website.
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Brad Guse
- Senior Vice President of Agriculture Banking
- BMO Harris Bank
- Email Brad Guse
