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 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.

Like the many various ways a ranch can do managerial accounting, there is a long list of production metrics an operation can collect and analyze. While it may seem rather easy to keep track of, inventory is the most important variable for both financial and production analysis. Having an accurate headcount gives operations the ability to break costs down to a per head basis. On the production side, cow inventory at different times of the year is often the base for many calculations.

One of the most popular calculations used to measure the productivity of a herd is weaned calf crop percent, or calves weaned per cow exposed. The math is simple by dividing the number of calves weaned by the total cows exposed in the prior breeding season. This is a good starting point to see whether there are any potential fertility, health, or nutrition concerns in the cowherd. Also, tracking conception rates after breeding, and calving percent will provide an earlier glimpse of these trends and help track where the greatest losses occur.

While mother nature has a significant impact on weaning weights, recording weights over time can be used to track historical long-term trends and in other production measurements. Pounds weaned per cow exposed, calculated similar to weaned calf crop percent, allows an operation to evaluate growth performance, while also encompassing other productivity metrics – making it one of the most important key production indicators.

A simple yet very important metric is stocking rate. Combine this with measured annual rainfall or percent normal rainfall, and it helps producers respond to drought quickly and effectively to put the operation in a better position for both the short and long term.

A couple other data points an operation may consider collecting is calf birthdates and cow age. These two variables can be especially useful for operations that retain their own replacements. An older cow that consistently calves early in the calving season, implies she has bred back on time to maintain a shorter calving interval. This suggests that female possesses better maternal and fertility genetics. Obviously, other factors need to be considered when selecting replacements or culling. However, with fertility or reproductive efficiency being the single most important economic trait for a cow-calf operation, these two variables can be beneficial to track.

CattleFax provides producers with different resources to help evaluate operations. A very detailed breakeven calculator is available online at www.cattlefax.com/ccbe/. This specific calculator analyzes the cow-calf enterprise. However, a similar layout can be used for other enterprises within an operation. CattleFax also collects national and regional benchmarking data by conducting an annual producer survey. More information about how to participate and receive the results can be found on the front page of this article.

The saying “you can’t manage what you don’t measure” has never been more relevant in today’s fast-paced environment. With tight margins affecting the cow-calf segment, thoroughly collecting, and analyzing data to make better business decisions can be extremely beneficial. Understanding where an operation excels from an efficiency standpoint, and where there is room for improvement can pay huge dividends. An operation may also find that a specific enterprise is underperforming and dragging down the total operation’s bottom line. Correcting some potential issues may come at a cost. However, having both production and financial data will help prove whether it is worth it to make major corrections. While an operation doesn’t need to do a complete overhaul of its current accounting and record keeping system, making minor adjustments can provide significant value and insight.