Management decisions to increase profitability
What does it take to determine if a ranch or farm is making money? Each farm or ranch has its own set of specific circumstances and reasons for being in the business. It could be for quality of life, for investment purposes or for making a profit.
Whatever the purpose for being in the business, each operation should have monetary goals for the business. Quality of life goals may include minimizing dollars spent on the operation. Investment goals could state a desired return on investment or, in today's economic conditions, minimizing the declining value of assets.
To determine if these goals are being accomplished, each farm or ranch must have some type of financial and production information system. This information will help measure the success of the operation. Please remember, the information gathered by any system only has value if it is used to make management decisions.
The basic components of any financial and production information system should include a cash accounting system with depreciation schedule, financial statements, cattle and feed inventories, and production records to measure production performance.
- In most operations, a cash accounting system can be handled adequately by computer programs such as Quicken®. This program and others can provide the information to meet tax needs and the basic data for preparing financial statements. However, information prepared for tax purposes does not measure the profitability of a business or its financial position. According to the Farm Financial Standards Guidelines, the minimum statements needed to document financial position and performance are:
- • a balance sheet, with both cost and market valuation;
- • an accrual adjusted income statement;
- • a statement of cash flow; and
- • statements of owner equity.
Another segment of the information system should be an inventory system. An accurate cattle and feed inventory is essential in measuring production performance and completing financial statements. A complete inventory by category of cattle (cows, bulls, heifers, stockers, etc.) should be done at least twice a year. If only done twice, the inventory should be taken at the beginning of the fiscal year and at the beginning of the breeding season. This inventory should include a record of all deaths, purchases, sales and movements among pastures.
These basic areas of information should be addressed in each operation. Too many operations only use tax-based information from which to make decisions or, worse, no information at all. Remember - management decisions cannot be made from tax information. If help is needed in the preparation of this information, contact The Samuel Roberts Noble Foundation.