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SPA 7: Improved Financial Records Editor's note: This is the seventh installment in a 12-part series on Cow-calf Standardized Production Analysis (SPA) that was developed by the IRM Committee of the National Cattlemen's Beef Association. This series has been created in partnership with Dr. Damona Doye, Regents Professor and Extension Economist at Oklahoma State University/Oklahoma Cooperative Extension Service, and Stan Bevers, Professor and Extension Economist at Texas AgriLife Extension Service/Texas A&M University. The monthly articles are supplemented by monthly "homework" assignments and links to related educational publications that are posted on The Cattleman's Web site, www.texascattleraisers.org. Ranchers generally prefer to be outside working cattle instead of inside wrangling papers. While the urge to avoid paperwork is understandable, it's not always the best course of action for improving an operation's bottom line. "An accountant once told me if ranchers would just allocate a little time each day or each week to their business enterprise, they would realize a lot more money per hour," Dr. Damona Doye, Regents Professor and Extension Economist at Oklahoma State University/Oklahoma Cooperative Extension Service, says. "If you don't want to handle the business side, find someone else, either in the family or outside the family, to do it because everyone will benefit from the improved information." For many people, the first step to improving the information available to support financial decisions is upgrading their record-keeping system. "If you're keeping your receipts in a shoe box and pulling them out once a year to help with tax preparation, you're not making the most of the information at hand," Doye says. "It's a chore to go back through receipts, categorize them and add them up to find out your feed costs during a given period of time, much less to do it for several years so you can compare them. When it's too much trouble, people won't do it, no matter how important the information might be." One resource that is readily available is computer technology and, yet, recent statistics show that less than 30 percent of farms and ranches use computers for business purposes. "I understand that computers come with a learning curve and that some people's initial experiences weren't good, but a lot of progress has been made since the technology first emerged," Doye says. "When you invest time in learning to use a software tool, you can reap benefits from that point forward. Computers allow you to summarize and analyze data efficiently and effectively." In addition, computers can help supply the information that can be a platform for additional analysis. For instance, if ranchers are using the financial software Quicken® or QuickBooks, they can apply "tags" and sort income and expenses for different business enterprises, which can help identify profit, cost and support centers. (The Texas AgriLife Extension Service and the Oklahoma Agricultural Extension Service have additional information on these products to help producers determine which program might best fit the needs of their operation.) "This type of analysis helps you determine your operation's strengths and weaknesses," Doye says. "When you take a look, you might discover that it would be cheaper to buy hay than to raise it, or you might find out that you do an exceptional job of raising replacement heifers." A side effect of having complete records is having the ability to effectively communicate the position of your operation to landlords and lenders. In the case of landlords, you might be able to negotiate a more favorable lease rate when you can demonstrate the effects of an unexpected upturn in costs, like last year's astronomic increase in fertilizer costs, Doye says. Whether producers decide to do the accounting and business analysis internally or have someone to do it for them, the caveat to this communication is the producers will need a base understanding of accounting and business analysis, she said. Otherwise, the communication breaks down. "Some lenders will tell you that borrowers who present complete, accurate information are awarded a better interest rate because those borrowers represent a smaller risk," Doye says. "Why? The complete records demonstrate that these producers are leaving nothing to chance and are doing everything possible to take care of the resources provided by the bank." Another action that will help draw a clear financial picture is tracking business expenses separately from living expenses. "As a family, you need a realistic expectation for what your lifestyle can be," Doye says. "A close examination may reveal that you need to expand profit centers to reach family goals or it may reveal that the living expenses are draining the financial resources of the business, making it impossible to achieve a desired level of growth. Information is power because it allows you to make informed decisions."
"SPA 7: Improved Financial Records" is from the July 2009 issue of The Cattleman magazine.
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