In light of the Noble Research Institute Agricultural Division's renewed emphasis on serving the full-time producer through a multidisciplinary approach, I believe it is important we revisit the topic of measuring profitability through some type of management information system.
For most producers, making a profit is one of their top three goals. They gather information with the intent of determining profitability, yet they typically stop there with an accountant-prepared tax return. Please note that tax information does not measure the profitability or financial position of a business.
As identified by the Farm Financial Standards Guidelines, the following statements are the minimum needed to document financial position and performance:
- balance sheet with both cost and market valuation
- accrual adjusted income statement
- statement of cash flow
- statements of owner equity
Most farms or ranches have some type of system for preparing financial and production information. The kind of information you have and how you use it determines the success of your operation. Please remember that the information gathered by any system has value only if it is used to make decisions.
In most operations, your cash accounting system can be handled adequately by computer programs, such as Quicken, that can provide information for meeting tax needs and data for preparing financial statements.
In many situations, your accountant can prepare the statements for you in addition to preparing your cash accounting system. First, a cattle and feed inventory is essential to measure production performance and complete financial statements. Make a complete inventory of resources (first of cattle by class, and then of feed, equipment, and land) at least once a year. Inventorying cattle twice is better because you can do it at the beginning of the fiscal year and the breeding season. The inventory should include a record of all deaths, purchases, and sales of both raised and purchased animals.
You need this information to help you prepare a balance sheet and depreciation schedule. From these statements, you can generate a profit or loss statement.
Every operation should gather this basic information, but too many operations use only tax-based data to make decisions. You should not make management decisions from tax information.