The past few months this column has focused on Management Accounting — setting up profit, cost and support centers for the purpose of more thoroughly understanding your business and the unit cost of production for different segments of your ranch. Interestingly, these columns have generated much more communication and questions from readers than most of my articles on production strategies. This suggests to me that more and more of us are realizing that hard work and high production numbers do not equate to profitability.
The foremost question has been “How do I get started?” That seems like a simple enough question, but in reality it raises other more important questions. The complexity of your operation will dictate many of the answers. For example, if you have a cow-calf operation, graze out year-round, sell calves off the cow and are not involved in any other activities such as raising other crops or livestock, you could get by with a simple accounting package and even do your analysis with a calculator and yellow pad. Now this may not be the most high-tech method, but it will work.
Taking this a step further, if you have a cow-calf operation and retain ownership to the processing plant, raise hay or a grain crop, buy stocker cattle, raise another species and do custom work, then you have a much more integrated, complicated business to get your hands around.
Before you decide which accounting system you need, it is important to determine what products you sell (which will become your profit centers), what type of costs will be incurred in producing those products (these will be your cost centers), and then what costs are associated with the overall operation, like overheads (support centers will pick up these). At this point you can begin to review accounting packages.
There are many accounting packages out there from which to choose. I am not recommending or discrediting any of the accounting systems available. You will need to do some research, but from what I hear from readers many of you don’t have a system that will give you the benefits you need. Many of you have Quicken and this does not have the ability to allocate costs and income as you will want to. Quick Books Pro, however, does have that capability with the “Class” option. Then, if you need more than this, there are more sophisticated and expensive programs (expense is relative to the return). Your accountant should be able to help you in this research. But remember to make sure your accountant knows what you want. The answers you want are for management and unit cost of production analysis, not tax purposes.
I am very encouraged to hear from ranchers taking a new look at their businesses from an economic standpoint and not just on production. I know how busy everyone is this time of year, but understanding your business is too important not to continue the necessary analysis.