Dairy enterprise accounting is a topic that is relevant regardless of the size of your dairy operation. Implementing dairy enterprise (managerial) accounting into your farm accounting system is generally dependent on two primary considerations:
- Is your dairy operation one of the major revenue sources (i.e. >25% of total farm revenue) for your farm?
- Does your current accounting system allow you to implement managerial reporting?
There are various accounting software programs available that meet the minimum requirement of financial reporting for compliance (income and payroll tax reporting), but is your current system designed specifically for agricultural accounting and customizable to provide you with managerial reporting? This capability could give you valuable financial reporting metrics, such as cost of production and profitability per head milked and per CWT of milk.
Customize Your Reporting
Dairy operations, regardless of size, may utilize similar production and managerial accounting principles, but could differ in how you choose to customize the reporting of various enterprises or production segments.
Milk Profit Center
Records milk revenues, cull cow sales, calf sales, government program payments, hedge gains/losses, or other risk management revenues.
Dairy Herd Center
Records all direct production expenses including feed for the milking herd and dry cows. If desired, this could be separated into lactation cows and dry cows.
Records labor and other direct production expense related to the milk parlor.
Records all direct production expenses to develop replacement heifers, whether that is on-farm or you contract those services to a custom heifer operation.
Use Your Information Effectively
You may select to utilize additional support operations centers (i.e. raised feeds, equipment, labor, facilities, etc.) depending on your farm’s available resources. If your farm also raises crops that are used in your dairy feed rations, you have the option of “charging” the dairy operation for each crops’ cost of production (determined by managerial reporting) or at a fair market price (opportunity cost) of using the crops as dairy feed. Whether raised or purchased, feed will be a large cost factor in producing milk. There is a myriad of additional expenses involved that, with good managerial reporting, can be recorded, reported, and analyzed with the goal of improving efficiencies and profitability.
Depending on the farm’s capital resources, there will most likely be capital costs involved for land, equipment, breeding stock, and buildings that should be included in your managerial accounting reporting. This will correctly assess your cost of production and evaluate whether there are adequate profits to fund the replacement of those various capital assets.
Accounting for the Future
Accounting records what has already happened, but these same dairy managerial accounting principles should also be considered when preparing a budget cash flow projection for the coming year(s). By incorporating a managerial budget and capital budget, you can more accurately and confidently make decisions regarding the replacement and purchase of capital assets or the expansion of the dairy operation.
If you need help implementing managerial (enterprise) reporting into your dairy operation’s accounting system, it’s best to work with an expert so you start on the right track. For more information about managing your farm’s finances, subscribe to our blog!