Accounting for Progressive Dairies Bradley J. Hilty Business & Information Management Specialist...
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Transcript of 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
What is your first reaction when you here the word ACCOUNTING?
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
Establishing the Need Accurate and Timely Accounting Records
- Foundation of: Financial Risk Management Business Analysis Sound Decision Making Basic Business Management
However……
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
The Program Objectives
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
Accounting for Progressive Dairies
The Program Objectives
Make the Program Educational Effective Interactive….and most of all FUN!
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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
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
Current Year Profits
Assets = Liabilities + Equity (RE - Owner Draws - Owner Contributions + Income –
Expenses)
Entering Final Milk Income
What Asset would we increase?
The Method: Keeping the system in balance using every day transactions
Sample TransactionsEntering Deductions from Final Milk Check –Step 2
Current Year Profits
Milk Check Reductions – Hauling, Etc.
Assets = Liabilities + Equity (RE - Owner Draws + Owner Contributions + Income –
Expenses)
The Method: Keeping the system in balance using every day transactions
Sample Transaction:Depositing a final milk check – Step 3
Current Year Profits
Assets = Liabilities + Equity (RE - Owner Draws - Owner Contributions + Income –
Expenses)
Receiving (Depositing) Final Milk Income
What Assets would we increase/decrease?
The Method: Keeping the system in balance using every day transactions
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
Balance Sheet Assets = Liabilities + Equity
Income StatementIncome- Expenses = Profit (Loss)
$
Profits = Cash (Assets) or Reduced Liabilities and thus Increases Equity
Managerial Cost Accounting
Balance Sheet Assets = Liabilities + Equity
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
Balance Sheet Assets = Liabilities + Equity
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
Accounting for Progressive 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”
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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
Accounting for Progressive Dairies
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!