What’s the current state of your farm accounting? Are you using appropriate systems for your beef production? Depending on the type and purpose of your operation, you may need to consider utilizing specific accounting practices.
Beef Production Scenarios
For the purposes of this discussion, we are going to categorize beef producers into four types of production scenarios:
- Cow-Calf: may or may not finish calves in an owned or custom feedlot
- Backgrounding: may be short-term (60-90 days) or longer term (150-180 day) prior to resale
- Feedlot: cattle finished to market weight regardless of purchased weights
- Purebred: heifers and/or bulls produced for breeding stock sales
Beef Enterprise Managerial Accounting Practices
This discussion is relevant regardless of the type and size of your beef operation. Implementing beef enterprise (managerial) accounting into your farm accounting system is generally dependent on two main factors or questions:
- Is your beef operation one of the major revenue sources for your farm or ranch?
- Does your current accounting system allow you to implement managerial reporting?
The same managerial accounting principles can be used regardless of the size of your beef operation, but if your operation is a major (i.e. >25% of total farm revenue) revenue source for your business and farming or ranching is your livelihood, consider implementing beef managerial accounting practices.
There are various accounting software programs available that virtually all meet the minimum requirement of financial reporting for compliance (like income and payroll tax reporting). Is your current system designed specifically for agricultural accounting? Is it customizable to provide you with managerial reporting? Is it giving you valuable financial reporting metrics such as cost of production and accrual profitability?
For the types of beef production systems previously identified, all may utilize some similar production and managerial accounting principles, but each could be different in customizing the reporting of various production stages (cow-calf, replacement heifer, backgrounding, feedlot, etc.) and support operations (raised feeds, equipment, labor, land/pasture, etc.).
The farm’s available resources will dictate the type of support operations. If your farm also raises crops that can be used for cattle feeding, you have the option of “charging” the beef operation at each crops’ cost of production (determined by managerial reporting) or at a fair market price (opportunity cost) of using the crop as cattle feed. Feed, whether raised or purchased, will most likely be your largest cost factor in producing beef. A myriad of additional expenses are involved that, with good managerial reporting, can be recorded, reported, and analyzed with the goal of improving efficiencies and profitability.
Depending on your farm or ranch structure, you may also have capital costs involved for land, equipment, breeding stock, and buildings that you will want to include in your managerial accounting reporting. This will help you correctly assess your cost of production in order to evaluate whether there are adequate profits to fund the replacement of those various capital assets.
These same beef managerial accounting principles should also be considered when preparing a budget cash flow projection for the coming calendar year or production cycle. By incorporating a budget, you can more accurately and confidently make decisions regarding the purchase of capital assets or the expansion of the beef operation.
Financial Goals for Beef Producers
Earlier in this article, we categorized beef producers into four types of production scenarios. Now, let’s discuss some of the financial goals or targets of each type.
One goal would be to produce the most pounds of marketable calves at a breakeven cost well below whatever the current market is willing to pay for weaned calves. For example, if (with good managerial financials) you know that your total cost to produce a 500-pound weaned calf is $750 ($1.50/lb.), then how much total net margin does your business generate based on the current market?
The main goals are to keep cattle healthy while operating with as low a cost of gain as possible and to have cattle ready for resale to feedlots that recognize the value and are willing to pay for a properly backgrounded feeder. Again, the key is knowing your profit margin per head and the time it takes you to “turn your money.”
Knowing your costs, especially feed costs, and maximizing gains all the way to finished weight is imperative to minimizing your breakeven costs. Successfully purchasing good feeder cattle and having adequate risk management measures in place with marketing finished cattle is key.
Building the reputation of your “brand” is critical to developing new and repeat customers, and knowing your cost of production is just as critical as a commercial cow-calf operation. When economic downturns in the beef industry occur, you can know your break-evens and be able to project your operation’s sustainability until better economic times arrive.
Implementing managerial (enterprise) reporting into your beef operation’s accounting system can help you better keep track of your finances and allow for more sustainable, long-term success. For more information about some of the basics of farm finances and what's important for your operation, download our ebook!