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EDITORIAL
The too often used cliché “If it can be measured, it can be managed” applies as much to farming as to any business. The ability to manage any part of a farming operation depends largely upon the ability to produce meaningful information that allows the farmer to test the impact of change. This applies to non-financial as well as financial information.
Most farmers understand that manipulating input variables will have an impact on the quantity and quality of the output. Change the application rate or chemical mix of fertilizer and the yield and quality of the resulting crop will also change. Vary the amount of protein or nutrients in a feed mix and the rate of gain or the conversion ratio will change.
The astute farm manager will measure the exact impact of these changes and track the cause and effect relationship over the years. As he varies each component of the input matrix he measures the effect on quality and quantity to determine whether there was a net benefit or not. As he builds his library of knowledge he is able to evaluate his theories quickly with increasingly better confidence in his analysis. He develops either manual journals to track the data or uses computer technology to record and manipulate his data. While some farmers rely on the “head and gut” method of data tracking, the capacity and reliability of these storage mediums is somewhat suspect.
The accounting system for a farm enterprise is an important part of an effective measurement system. When all is said and done, the ultimate measure of the effect of a change is whether or not it generates more profit. The generally accepted method for the measurement of profit is by subtracting expenses incurred from revenue generated, measured in terms of dollars.
Important to the accuracy of this measurement of profit is the allocation of expenses and revenues to their proper period. Accounting systems for any business enterprise, including farms, should use the accrual method. That is, the accounting system should recognize expenses as they are incurred (accounts payable) rather than when they are paid.
It should recognize revenue when it is earned (accounts receivable) rather than when it is received. Inventory is an asset of the business until it is sold or consumed in operations. The accounting system must recognize that profit and cash are not necessarily the same.
Complete and accurate accrual-based accounting records can provide an entirely new dimension to the measurement of data and change. The dollar cost of a change in input compared to the dollar value of the resulting change in output is the ultimate measure of the success of a strategy. Breaking costs and revenues down to dollars per input unit (dollars per acre, dollars per tonne, dollars per bushel, dollars per pound) gives a manager the ability to compare over time the impact of change. After all, a small change in the cost per unit of input, or revenue per unit of output, can have a large effect on the profitability of the operation. To make good decisions the accuracy and completeness of the accounting information must be just as accurate and complete as the production information.
Farmers can look many places to help them with the type and format of information they should develop. The Ontario Ministry of Agriculture and Rural Affairs produces vast amounts of information which can be used as benchmarks for all different types of farms. Agriculture and Agri-Food Canada provides a “Benchmarking for Success” website www.agr.gc.ca/ren/BenchmarkApp/apps_e.cfm which enables farmers to compare their results with industry standards. There are also links to other farm related sites for “best practices” and farm management information.
Accurate and reliable information, analyzed and presented in a variety of ways, can lead a farmer to decisions based on facts. Gut feel will always play a role in business decision-making, but good information can give that gut feel a better chance of being right. Isn't it odd how a farmer's.
Brent VanParys
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