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As members of a SPA-IRM group, cattlemen began to understand which data they needed to keep in order to analyze their ranching business efficiency from a variety of angles. SPA is nothing new; it's still an extremely useful tool in gauging efficiency in a herd.
Experts have differing viewpoints on enterprise analysis and cost- and profit-center analysis.
“The accounting world and a lot of farm management has moved beyond enterprise analysis and does managerial accounting,” Barry Dunn, King Ranch Institute of Ranch Management executive director, says. “It's getting away from breaking an operation into its parts and arbitrary allocations.”
For example, say you're a cow-calf rancher who also produces hay. In an enterprise analysis, these would be separate enterprises. Hay is “sold” at market value to the cow-calf operation — even though there's no exchange of cash.
“If there isn't an entry in your chart of accounts, you can't make it up,” Dunn says. “Everything that goes into the calculation of unit cost of production (income statement, total costs and/or profit) has to be traced to a journal entry in your accounting system.”
In a cost- and profit-center approach, the haying portion is a cost center within the business and the cow-calf portion is a profit center. Hay is transferred at its cost of production, as opposed to the market value of the hay.
These differing philosophies are what Harlan Hughes, farm business management consultant and BEEF magazine “Market Advisor” columnist, describes as a “financial analysis” (cost- and profit-center approach) and an “economic analysis” (enterprise approach).
Financial analysis asks the question: “How well did I perform last year?” Dunn favors this approach, and says Ford and Wal-Mart approach their business this way.
Economic analysis asks: “Is this the best use of my resources?” Hughes uses this method and argues that if your beef cows can't pay market value for hay, why are you running cows when you can just sell the hay? “If it isn't the best use of resources, then it isn't the most profitable business plan,” Hughes says.
Dunn points to another philosophical difference. The fiscal year and production year in standardized performance analysis (SPA) guidelines don't align. Because bulls are turned out for breeding in June, the calf crop isn't realized until October the next year.
General Accepted Accounting Practices would characterize this as a crop year. “You accumulate the cost over the entire life of the production system,” Dunn explains. Unlike crop systems, such as corn planted in the spring and harvested in the fall, the production cycle for beef cattle isn't complete in the same calendar year. Timber companies and orchards use a crop year approach because they may plant a tree and not realize revenue from that tree for 30 years.