accounting for progressive dairies bradley j. hilty business & information management specialist...

Accounting for Progressive Dairies

Bradley J. Hilty Business & Information Management Specialist Penn State University - Dairy Alliance [email protected]

An Innovative Approach to Teaching Proper Accounting Principles and Practices to Non-Accountants

mailto:[email protected]

What is your first reaction when you here the word ACCOUNTING?


IS IT THIS?

OR THIS?

Accounting for Progressive Dairies Establishing the Need Identifying the Audience Developing and Delivering the Program

Objectives Collaborators Theory (Principles & Practices) Method Results

Future Plans

Accounting For Progressive Dairies

Operations Exposed to Greater Risk Production - 1 pound loss in milk

= $ 4,000 (100 cows)

= $20,000 (500 cows) Financial –

Investment –$600-800 K vs. $3-4 M Price

Increased Price Volatility – Milk & Inputs Legal

Establishing the Need


Establishing the Need Accurate and Timely Accounting Records

- Foundation of: Financial Risk Management Business Analysis Sound Decision Making Basic Business Management

However……


Establishing the Need Poor on farm record keeping practices -

Validated by PSU Research Projects 2001- Dairy Profitability Study

~50 % of farms deleted from financial aspect of study 2005-06 – Business Models Research Project

Data validation - Analysis of Statement of CF Numerous attempts to reconcile to 1% of revenue > 16% of farms rejected from analysis

Accounting for Progressive DairiesEstablishing the Need Poor on farm record keeping practices-WHY?

- Accounting/book keeping Mostly done by people with little/no formal training Adoption of computer accounting programs

Everyone thinks they can do it ???

Results Poor information management practices Lack of timely and accurate information


Information Overload

Many businesses are data rich, but information poor and thus suffer from paralysis through analysis.

Managing Information is critical for making sound decisions

Establishing the Need


Identifying the Audience Individuals in Dairy Businesses

Responsible for any accounting function Responsible for financial risk management Decision Makers

Focused on progressive PA dairies Utilizing computerized accounting systems


The Program Objectives

Improve the knowledge of basic accounting principles of those people responsible for keeping records

Improve the quality of accounting records through implementation of basic accounting practices



Improve the ability of book keepers to spot accounting errors (reconciliation process)

Improve the ability of decision makers to generate, evaluate and interpret financial reports

Improve the ability of decision makers to use information for decision making



Make the Program Educational Effective Interactive….and most of all FUN!


The Program Two Day Workshop

Day 1 Focus on Basic Accounting Principles and Practices

Day 2 Focus on Advance Accounting Concepts

Collaborators Acuity CPA’s, Redwing, Agri-Solutions, Local

Educators


The Program The Theory

Understanding Information Management

Data does not equal information The conversion process Involves

Six Steps

Data CollectionObservation, measuring & recording of data

Data OrganizationProvides structure to the data set

Data ProcessingData entry & calculations

Data ReportingPresents data for interpretation

Data Integration1

Data Utilization2

The Six Steps of Information Management

Bradley J. Hilty, Information Management Specialist, Penn State Dairy Alliance

1 Brings all pertinent data sources together to provide feed back for decision-making. 2 Decisions made. Data used to initiate change.

Accounting Functions: Measurement and Communication

Data Organization: A Critical Step

Provides structure to raw data Production data –

DHIA Records Computer Programs

Financial Data Chart of Accounts Need Standardization

Getting this step wrong compromises the entire system

KEY to Organizing Financial Data: Chart of Accounts

Provide compact summary for generating reports

Provide sufficient detail for in-depth analysis Dairy Alliance Standardized Chart of Accts

Provides Uniformity for data analysis www.dairyalliance.org

http://www.dairyalliance.org/

Accounting for Progressive DairiesOrganizing a Chart of Accounts

There are Five Account “Types” ASSETS LIABILITIES INCOME EXPENSES EQUITY

Knowing the difference is

the KEY!

Principles of Cash Accounting Cash accounting for taxes - Good

Income reported when received Expenses reported when paid

no inventory adjustments no recording of accounts payable / receivable performance usually judged by check book

balance & tax return

Accounting Principles & PracticesCash vs Accrual Accounting Practices

Accounting Principles & PracticesCash vs. Accrual Accounting Practices

Principles of Accrual Accounting provides a more accurate picture of financial

performance of business! income reported when right to receive it is established expenses reported when they are incurred

adjustments for change in inventories includes accounts payable/receivable Integral relationship between BS & Profit/Loss

Balance Sheet Assets = Liabilities + Equity

Income StatementIncome - Expenses = Profit/(Loss)

$

Profit = Cash (Assets) and thus Increases Equity

Accounting Principles Understanding The Relationship of Financial Statements

Accounting Principles: Keeping the system in balance Thinking Through Data Entry

Assets = Liabilities + Equity

Understanding the Accounting Equation

Cash & Checking Accounts ReceivableInventoriesCoop StockCowsM & ERE ImprovementsLand

Accounts PayablePayroll tax deductionsCredit CardsLoans

• Operating• Cattle• Machinery & Equipment• Mortgage

Retained EarningsContributed CapitalOwner DrawsCurrent Year Profit/Loss

Assets = Liabilities + Equity

(RE - Owner Draws + Contributed Capital+ CY Profit / Loss)

Income – Expenses

The Expanded Accounting Equation that must be kept in balance looks like this:

Assets = Liabilities + Retained Earnings - Owner Draws + Contributed Capital + Income - Expenses

Understanding the Accounting Equation

Every transaction you make will affect one or more factors on either or both sides of the equation!

Accounting Principles: Keeping the system in balance Thinking Through Data Entry

Sample Transaction: Receiving a milk check

Current Year Profits

Assets = Liabilities + Equity (RE - Owner Draws - Owner Contributions + Income –

Expenses)

Receiving Milk Income

The Method: Keeping the system in balance using every day transactions

Sample Transaction:Entering a final milk check - Step 1



Expenses)

Entering Final Milk Income

What Asset would we increase?


Sample TransactionsEntering Deductions from Final Milk Check –Step 2


Milk Check Reductions – Hauling, Etc.

Assets = Liabilities + Equity (RE - Owner Draws + Owner Contributions + Income –

Expenses)


Sample Transaction:Depositing a final milk check – Step 3



Expenses)

Receiving (Depositing) Final Milk Income

What Assets would we increase/decrease?


Incorrect entry of items loan proceeds as income loan payments as expenses

Asset sales as income Asset purchases as expenses Enter gross income; not “Net” Too little detail

The Method: Keeping the system in balance. Mistakes to Avoid

Keep business & personal separate Upgrade quality of data Owner Draws = Negative Equity Family Living – Separate books

Reconcile Accounts Improves accuracy of data

Cost vs. Market Value of Assets (Principle) Cost basis-capital use efficiency Market Basis- what are you worth

The Method: Data Entry Tips

Method: Data Entry Tips

Enter or Track physical data cwt. milk bushels corn # head & cwt cull cows Tons feed; gallons fuel; kilowatt hrs. electricity

Enables business owner to monitor costs of production; price trends; efficiencies; etc.

Method – Data ReportingReading and Interpreting Financial Statements Income Statement (P & L) Balance Sheet

Cost Market

Change of Owner Equity Statement of Cash Flows Other Useful Reports

General Ledger, Transaction Journals, AP reports

Brad Hilty – Penn State Dairy Alliance

Statement of Cash flows:Where did all the money go?Cash from Operations

Cash Farm Receipts $450,000

Cash Farm Expenses ($320,000)

Net Cash Farm Income $130,000

Personal Withdrawals ($ 55,000)

Net From Operations $ 75,000

Cash From Investing Activities

Sale of Assets $20,000

Capital Purchases ($75,000)

Net From Investing Activities ($55,000)

Cash From Financing Activities

Money Borrowed $40,000

Principal Repaid ($55,000)

Net From Financing Activities ($ 15,000)

Cash From Reserves

Beginning Cash $10,000

Ending Cash $15,000

Net Cash From Reserves ($ 5,000)

IMBALANCE $ 0

Integrating Sources of information Accounting system (within business) Production records (within business) Analysis systems (inside/outside business)

Benchmark Programs /DFBS Internal Analysis Systems

Advisors (outside business) Peer Groups

Method: Data Integration

Method: Data Utilization Uses of Information

Monitor Business Performance Ratio Analysis ROA, ATO, OER, Etc. Calculate Cost of Production

Benchmark Analysis Establishing Risk Management Strategies Ultimately-Improved decision making, more

competitive

Managerial Cost Accounting – Day 2 Ultimate Level of Business

Accounting Employed by major corporations

Must Identify Cost and Profit Centers Commodity Based Activity Based Management responsibility -

Accountability Intricate relationship – P&L & BS

Simple accounting


Income StatementIncome- Expenses = Profit (Loss)

$

Profits = Cash (Assets) or Reduced Liabilities and thus Increases Equity

Managerial Cost Accounting


Cost Centers (Crops, Heifers, Others)

All costs of raising a crop or animal are allocated to that CC.

As crops are harvested moved to BS as inventory at COP

As Calves are born and raised they move through inventory at COP

Managerial Cost Accounting


Profit Center (Dairy) As crops are fed to Dairy moved from BS and charged

at COP

Heifers are moved from Heifer Inventory to Cow Inventory at COP upon Calving

Avg S.D. Min Max

Herd Size 288 198.7 50 800

Milkers 1.52 .51 1 3

Hourly Wage $9.64 $1.34 $7.50 $13.50

Ownership $ $0.28 $0.29 $0.05 $1.29

Labor $ $1.29 $0.39 $0.70 $2.06

Milking Labor $1.00 $0.33 $0.56 $1.73

Supplies $0.18 $0.06 $0.09 $0.28

Repairs $0.07 $0.06 $0.01 $.20

Utilities $0.16 $0.07 $0.05 $0.34

Total $1.98 $0.57 $1.30 $3.99

Milk Harvest Cost Study Results – 22 Dairies


Results Course Taught in 5 of past 6 years

110 Producers have participates PA, MD, NY, OH, VA, VT

Course evaluations Average Score 4.3- 4.5 (Scale of 5)

Content, Usefulness and Effectiveness of Teaching method > 90% of Participants would recommend to others > 95% rated skill level “Exactly What I Needed”


Results Pre-Post Test Scores

Consistently indicate a 56-62% average increase in knowledge levels

Average Pre-Test Average Post-Test

Some participants do much better Exceed 100 % increase in knowledge level


Impact 100 % indicated an improvement knowledge

52% - Moderate 44 % - Considerable to Significant

100% indicated improvement in ability to keep timely and accurate records 88 % indicated a moderate to significant 28% -considerable to significant


Impact 95% restructured their Chart of Accounts

36% set up COA to reflect management information 20% adopted Standardized COA

100% utilize their new knowledge and skill 52% weekly to daily 20% Monthly 28% Occasionally


Impact ~ 50 % Improve understanding of Financial

Reports ~ 40 % more frequent reports to lenders ~ 32 % use records to evaluate management

decisions more frequently ~ 28% implemented some level of Managerial

Accounting


Future Plans Collaborate with More Local Educators

Offer in conjunction w/ QB training Workshops Need More Follow up Follow up Refresher training via Adobe Connect “Ask The Experts” Forum Conduct a PD session of educators in NE Customized Educational Program

Accounting For Progressive Dairies

Questions?

Thank you for your time!

accounting for progressive dairies bradley j. hilty business & information management specialist...

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