CATTLEFAX TRENDS
ENTERPRISE ACCOUNTING AND KPIS With another year ending, it is a good time for producers to evaluate the performance of their operation. As the cattle markets and industry become more volatile and complex there has never been a more critical time to measure and improve an operation. While there is a ton of data points available at the cow-calf segment, gathering the information can be a challenge. Still, there are several key production indicators that are fairly simple to collect that every herd should be analyzing. In the cow-calf business there are two general categories, financial and production, the data can fall into. While most are updating the books for tax season, there are different approaches to analyze the financial position of an operation besides what is reported in tax files. One method that is often recommended for internal use is managerial accounting. This allows businesses to compile and compare information that aligns more closely with their specific demands, as opposed to those outside of the organization. Because there are a lot of moving parts for a cow-calf operation, it can be difficult to calculate accurate costs that are directly tied to the cowherd. One recommendation to consider is separating the total operation into different enterprises. This method can be very detailed depending on the operation. However, a few simple examples will be discussed to give producers an idea how this process may look. Often a cow-calf operation has several different potential profit centers, besides just the cowherd itself. For example, if an operation raises its own hay, the cowherd and hay production should be two separate enterprises on paper. Consequently, costs and revenue will need to be correctly allocated to each respective enterprise. This allows the operation to better understand which part of the organization is most profitable, or which area is costing the most money. A tractor and employee may be used to care for the cowherd, while also putting up hay a few months out of the year. Expenses from that employee and tractor should show up in reports for both the cow-calf and hay enterprise, instead of expensing the entire salary against the cowherd, for example. Obviously, there will be a long list of other costs for each, but this is a good way to calculate what is the cost of production, especially for the hay enterprise. This will help 22
March 2022
with the decision regarding whether it is better to put up your own hay, custom bale it, or purchase hay. To measure profitability, revenue is obviously necessary. If calves are not sold at weaning, use a realistic price to represent what the income would be for the cow-calf enterprise at weaning. It is recommended that if calves are backgrounded or retained that becomes a new enterprise. The cost of production, or the market value of the hay, can be used for income if it is recorded consistently each year. If cost of production is utilized, the hay enterprise will never show a profit, rather it will always be a breakeven business. If the market value is used, and exceeds cost of production, that would represent the opportunity cost. Regardless of which value is selected, the hay enterprise charges that amount to the cow-calf business when hay is fed. That amount would show up as a line item on the expense report for the cow-calf enterprise. The same applies to the backgrounding enterprise if calves are retained and the ranchraised hay is incorporated in the ration. Because calves are removed from the cow-calf business at weaning, in the scenario that has been laid out, heifer development would be an additional enterprise for operations that retain replacements. This structure would be very similar to a backgrounding enterprise, except the sale or marketing price and timing is not as cut and dry for replacements. Some might recommend the female is still in the developing phase until her first calf is born, or even weaned and sold. Others might apply her to the cow-calf enterprise sooner. Nonetheless, applying the same methodology each year is necessary. Understanding the cost structure to develop a heifer is important when making decisions regarding the cowherd. An operation can break out as many different enterprises as necessary. Another one that may be considered, especially depending on how much of the grazing land is owned, is a custom grazing enterprise. This business would essentially charge the cow-calf enterprise a lease rate. That rate could be as simple as the land payments. If the land is paid off, a realistic value for that area can be used, which would represent the opportunity cost. Again, it is important the method used is consistent over time.
