SpreadNGrow Case Study a tool for Implementing MA

1
Spread-N-Grow Case Studya tool for Implementing
MA

• 2004 FFSC Annual Meeting

2
Agenda

• Purpose Design of Spread-N-Grow Case Study
• Grower exposures to case study and MA
  implementation experiences
• Conclusions and lessons for designing future
  teaching strategy
• Attitude toward MA implementation
• Demand for Education vs. Cost/benefit of MA
• Impact on strategic decisions, management behavior

3
Producer Professional Exposures To Management
Accounting

• Idaho Grain Producers Convention 11/2002
• TEPAP Ag Executive Program 2003, 2004
• FFSC 2003 Summer Symposium - Practitioners
• Clearwater Direct Seeders 02 -03 RMA Grant
  Project
• FarmTech 2004 MA Workshop 300 growers

4
6 Principals 2 brothers, 2 cousins, 2
non-relatives
What is your job?
empower a skilled team of responsibility center
managers to make quality decisions.
5
Purpose of MA Tie to our Job

• Assess performance in manageable segments of the
  business
• Enable decision-makers to link financial and
  operational analysis with strategic planning
• Empower improved decisions
• ? increased ROE, ROA

6
Spread-N-Grow Case Study

• Goal Design profit, cost and support centers
  for diversified farm with custom enterprise
• Unique features of case
• Multiple crop enterprises plus custom operation
• Management team with unique accountability roles
  decision-making discretion
• Center managers desire improved information
  systems to track performance.
• Case illustrates how to
• Design management control system to fit
  management structure of the business
• Set up system for allocating indirect costs

7
Operational Data

• 6,000 acre diversified farm wheat, barley, and
  canola under direct seed tillage program
• Gross revenue 1,350,000 (3 yr ave.)
• Custom seeds 2,500 acres _at_25/acre
• Custom fertilizes 5,000 acres - 300,000 revenue
  from application and fertilizer sales

8
George GM General Manager
Glenda Office Manager
Clint CPM Crop Production Manager
Cory COM Custom Operations Manager
Ed ESTM Equip Support and Transportation Mgr
9
Expression of Management Intent

• Manage three commodities and custom application
  as for profit enterprises (Criteria
  significant activity to manage opportunity to
  control performance)
• Custom trucking incidental income viewed as
  cost recovery to reduce net cost of equipment
  support

10
Special Areas of Management Concern

• Marketer determine cost of production to
  develop more sound marketing plan
• Crop Manager identify how production costs
  compare with historical cost trends
• Equip Support Manager determine how direct
  seeding impacts cost of production compared to
  conventional tillage.

11
Areas of Mgmt Concern- contd

• Custom Operations Manager Is custom work
  profitable or just wearing out equipment?
• General Manager looking for balance between
  growing and status quo. Questions what
  strategies will optimize farms potential to
  remain competitive, profitable and survive.

12
Key Management Behaviors-(Goals)

• Crop Manager produce high quality, high yield
  with minimum direct production cost/unit
• Marketer market based on known cost of
  production plus a profit margin vs. highest
  price
• Equipment Support minimize equipment costs and
  assure adequate equipment to perform farm
  operations on timely basis

13
Key Management Behaviors contd

• Custom Farm Mgr steady growth and good margin
  in product applied as well as services provided
  (dont just wear out equipment.)
• General Mgr focus on strategic options to
• grow farm profitability and improve overall
  financial performance
• Empower management team with performance data
  that will insure optimal operating decisions in
  each management segment of business

14
Case Solution

• Task 1 Define profit centers
• Task 2 Define cost centers and accounts that
  would normally have activity in each center
• Task 3 Define allocation methodology and
  sequence for linking various cost centers

15
Profit Centers

• Decided on four profit centers
• Wheat
• Barley
• Canola
• Custom Application
• Ruled out custom trucking not significant
  activity nor managed for profit

16
Cost Centers

• Production Cost Centers set up one for each
  crop enterprise to accumulate work-in-progress
  costs
• Support Cost Centers
• Equipment Support
• Labor
• General Farm
• Land Cost Center
• SGA
• Finance

17
Support Centers
Production Cost Centers
Profit Centers
General Farm
Wheat Prodn Costs
Labor
Barley Prodn Costs
Land
Canola Prodn Costs
Wheat Profit Center
Barley Profit Center
Equipment Support
Canola Profit Center
Sales,General Administrative
Custom Application Profit Center
Finance
Other Inc/Exp -- Non-farm Revenue -- Govt Pmts
non-crop specifc.
18
Step 1 Re-think how we organize
Data Standardized ? Profit Center format to
organize data Recommended by Farm Financial
Standards Council
19

• Production Cost Center Report design (same for
  Wheat, Canola, Barley)
• Revenue/Cost Recovery
•    Grain by-products, straw
• Production Costs
• Direct Costs
•   Seed
•   Fertilizer
•   Chemicals
•   Crop Insurance
• Indirect Costs
•   Costs Allocated from General Farm Overhead
  Center
•   Costs Allocated from Equipment Support Center
•   Costs allocated from Labor Support Center
•   Costs allocated from Land Cost Center

20

• General Farm Overhead Cost Center Report Design
•  
• Revenue/Cost Recovery
• Conservation Cost share payments (could also go
  in Land Cost Center)
•  
• Production Costs
• Direct Costs
• Labor and Benefits (include here or in separate
  Cost Center?)
• Utilities
• Supplies
• Fuel (non-farm related, i.e. bosss pickup,
  wives and kids)
• Indirect Costs
• No transactions likely to come as indirect
  allocation to GFO
• Allocation Criteria Allocate to Wheat, Barley,
  Canola, Custom Application
•  
• Use a two-step staging of allocation rules
• 1. Use of total revenue to allocate between
  custom application and grain
• Allocate portion going to each grain crop by pro
  rata share of acres in each crop

21

• Cost Center Report Design Equipment Support
• Revenue/Cost Recovery
• Gains (Losses) on Equipment Sales
• Custom Trucking Income
• Production Costs
• Direct Costs
• Fuel
• Repairs
• Depreciation (Mach Equip)
• Property Taxes (Equipment)
• Custom Equipment Hire
• Equipment Rental Expense
• Indirect Costs
• General Farm Overhead (allocated from GFO Cost
  Center)
• Labor (allocated from Labor Center)
• Allocation Options
• Use standardized rates for assigning cost portion
  to custom farming then allocate balance of costs
  to crop enterprises on pro rata basis
• Allocate based on of gross revenues realized
  from custom farming balance of costs to crop
  enterprises on pro rata basis

22

• Report Design Land Cost Center
•  
• Revenue/Cost Recovery
• Gains (losses) on sale of real estate
• Land rental income
• Operating Costs
• Cash Rent
• Repairs Costs Building Improvements
• Real estate taxes
• Fire Liability insurance Fixed Improvements
• Professional fees land management fees, lease
  renewal fees and transaction costs
• Property management fees
• Allocation Method Allocate to crop production
  cost centers based on of farm in each crop

This is a controversial concept still in debate
stage
23

• SG A Cost Center Report Design
• Revenue/Cost Adjustments
•  
• Operating Costs
• Liability Insurance
• General Management
• Office/postage
• Professional fees
•  
• Allocation Formula (same as Gen Farm allocation
  rules)
• Finance Cost Center Report Design
• Similar report design to G A
• Accumulate costs and allocate based on
• of gross revenue
• of total production expenses
• of assets

24
Profit Center Report Design Wheat Revenue Comm
odity Revenue xx,000 Protein
Premiums xx,000 LDPs-CCC xx,000   Direct
Production Costs xx,000 Indirect
Production Costs Transferred from Production
Cost Center xx,000   SGA Allocated from SGA
cost center xx,000   Finance Allocated from
Finance cost center xx,000 Other Income
Expense Non-crop specific Govt Payments (AMTA)
xx,000   Same Format for Barley and Canola
Profit Centers
25
Profit Center Report Design Custom
Application Revenue Custom Seeding
Income xx,000 Custom Fertilizer
Sales xx,000 Production Costs xx,000
Direct Custom License Fees xx,000 Cost of
Fertilizer Resold xx,000 Indirect Gen
Farm Overhead (allocated from GF OH
center) xx,000 Equipment (allocated from
Equipment Cost Center) xx,000 Labor (allocated
from Labor Support center) xx,000 SG A -
allocated xx,000 Finance
allocated xx,000
26
RME Grant ProjectTest Drive FFSC Mgmt Acctg
Concepts

• Study group Clearwater Direct Seeders
• Farms following similar management practices
• Direct Seeding (NoTill) diversified PNW crops
• Goal optimize economical and environmentally
  sound farming practices
• Task
• Design implement managerial reporting system
• Update strategic plan

27
Teaching Strategy 1st Workshop

• Participant Surveys
• Farm Management Proficiency
• Cost of Production key crops
• Compensation Summary
• Primer/review session Financial Analysis
• Overview of Sweet 16 ratios trend analysis
• Dupont Model Simulation
• Relationships Core Concepts Management
  Accounting, Strategic Analysis
• Case Studies
• Shoe Box Farm, Spread-N-Grow
• Handling Unusual Transactions
• Assigned Homework!!!

28
Workshop 2

• Center Design Manageable segments
• Capture Periods for Cost Centers
• Allocation Strategies
• Financial Analysis Issues Cash vs Accrual,
  Transfer Pricing
• Spread-N-Grow Case Study built templates for
  recording center data (see samples)
• Transaction Worksheet record data attributes
  for select transactions with a MA mindset
• Software Alternatives for Implementing MA
  Simulation of Spread-N-Grow with Perception

29
Results from Teaching Exposures

• Concept is complexbut teachable
• Revived interest Financial Ratio Analysis,
  particularly
• OPM, ATR, ROA ROE
• 5 Growers actually completed the template
  worksheets for the Profit and Cost Centers many
  others working on it
• General consensus Producers need to master MA,
  but HUGE learning/implementation curve
• Primary Motivator - Fear factor growers may
  lose competitive edge if they cant get this
  figured out

30
5 Grower Data Sets

• Support Cost Centers Prepared
• General Farm Overhead
• Equipment Support Cost
• Land Support Cost Center
• S G A
• Finance
• Other Income/Expense

31
Production Cost and Profit Centers

• Winter Wheat 5
• Spring Wheat 4
• Spring Barley 3
• Spring Canola 4
• Dry Green Peas 2
• ? Ave 5.4 crops/farm!

• Lentils 2
• Austr Winter Peas 1
• Bluegrass 3
• Oats 1
• Summer Fallow

32
Review Grower Data Results

• ..\RME MA grant\MA Data Sets\MA Center Reports
  Summary-02.xls

33
MA Conclusions Implementation is bigger job
than most realize

• Few have adequate foundation (skills or
  practices)
• Accrual understanding cost vs. market values
• Ratio analysis
• Whole Farm Financial analysis skills primitive
  at best segment level even more challenging
• Full implementation will likely involve
• Developing skilled CFO (internal or outsourced)
• Major change in accounting software design
  implementation

34
Conclusions MA design needs to mirror business
management structure

• MA key premise measure performance by
  manageable segment
• MA design process will expose major weaknesses in
  many business structuresparticularly poorly
  delineated accountability assignment
• MA provides a teachable moment for
  re-evaluating personnel management
• (see Organization Chart Center Design)

35
6 Principals 2 brothers, 2 cousins, 2
non-relatives
What is your (my) job?
empower a skilled team of responsibility center
managers to make quality decisions.
36
Board of Directors Dick, Bob, Mark, Todd Policy,
Management Direction, Owner Return on Investment
Financial Control
Does structure reflect authority accountability
flows? Board ? Management? Responsibility Center
Mgrs
RLW Pres/Gen Mgr Finance, Mktg
Office Staff Dawn, Cori
Advisory Board
Todd Specialty Enterprises Mgr
RHW Crop Production Mgr
Mark Equip. Support Transportation Mgr
Virgil Cattle Production Mgr
Advisory Board Insurance- Don
McQuary Investment- John Weibler, Jeff
Nesset Credit- Greg Sonnen Marketing-
Keith Crop Support- Jeff Becker Acctg- Jerry
Eikum Legal- Steve Cox Peer Board- Clearwater
Direct Seeders Cattle Breeding- Willard Wolf
Asst Mgr, Bldg Improvements and Rentals
Seasonal Pool Pete, Tom C, Tom L., Cori, James,
Matt, Josh, Nic, Gary Roberts
37
Custom Application Profit Center
38
Conclusions Peer Group Benchmarking is
Secondary Benefit of MA

• Benchmarking often billed as key reason for MA
• Loses importance once producers get into process
• Too many variations in structure, enterprises,
  and methods of operation
• REAL VALUE comparison of current to past trends
  in same operation and how strategic shifts can
  enhance performance in the future.

39
Conclusions MA Process Flushes Out Bad
Analytical/Accounting Practices

• Using market values for transfer pricing
• Grossing Up crop shares
• Adding economic rental charges in accounting
  analysis

40
Conclusions - Cost Management is where the
opportunities are

• Historical focus has been on revenue enhancement
• Milked this cow till it is dry!
• Government bailouts less helpful in future
• Real opportunities lie in managing costs
• Segment analysis helps identify problems and
  opportunity areas
• ? focusing on bottom line doesnt tell us much

41
Conclusions What CARROT motivates
implementation of MA?

• not erotic satisfaction of doing cost and
  profit center reports!
• MA positions firm to identify strategies that
  enhance performance in specific segments
• Challenge Improve ability to link business
  performance analysis and strategic management
• (Discuss experience with Dupont Model Simulation
  Exercises)

42
Mission
Quality of Life
Business Structure
Strategic Plan How we do it
Vision
Succession Planning
Long Range Objectives
Short-term Goals
Marketing
Financing
In-source Out-Source
Operating Plan- What We Do
Crop Rotation
Production
Capital Plan
Budget
Value- Added
Evaluate
Action Plans
Diversification
Strategic Alliances
KRAs
Environmental Stewardship
Technology Adoption
Tillage System
Growth
WF Version-MikeBoehlje Strategic Thinking Model
43
Major Strategies Under Scrutiny

• Sharing/trading labor, equipment
• Analyzing buy, lease, vs custom hire
• Direct Seeding (NT) transitions on the rise
• Beefing up CFO role
• Re-examining software adequacy

• Looking at value added opportunities derived from
  conservation tillage
• Re-assessing growth goals strategies
• More focus on cropping systems vs. single crop
  performance

44
ROE
Debt/ Equity
Asset Turnover
Operating Margin
Every Strategic Decision impacts financial
performance
45

• Dupont Model
• Simulation Exercise
• Review Cases A D test data
• Test Alternative Strategies
• 1. Identify strategic shift
• 2. Develop changes in operation
• 3. Enter revised compared to baseline (Case
  A)
• 4. Record data changes and revised ratios on
  worksheet.

Management Accounting allows analyst to build new
level of performance analysis at the base of the
Dupont Model
46
Conclusions - Capture Periods for indirect cost
accumulation and allocation will be huge obstacle
for diversified growers multi-year production
cycles

• Corn/soybeans is fairly simple
• Combination operations with fall/spring crops,
  perennials, livestock/crop combos - tough
  challenge defining beginning and ending dates for
  transaction capture
• Farms with most complicated MA implementation
  have most to gain from the processif dont use
  MA, never get realistic cost of production data.
• Need to develop some alternative scenarios to
  standardize implementation

47
Conclusions Consensus that MA can change
marketing behaviors

• Helps identify cost of production
• Allows producers to set market price targets and
  execute marketing strategies tied to profit
  margin objectives
• Alternative is Market based on hope
• That selling price covers costs
• That you hit top of market (whatever that is)

48
Conclusions Is Accurate Data One Day per year
adequate?

• Commercial producers managing millions of dollars
  of production costs, and inventory
• Cash to accrual approaches give us
• semi-accurate data 1 day/year (12/31)
• garbage the other 364 days!

49
Conclusions Need to Assess Cost/Benefit of MA

• Implementing MA is expensive
• Time commitment
• Software requirements
• Professional support
• Training Programs
• What are benefits?
• Cost savings revenue enhancements
• More sustainable business
• Proactive marketing programs

50
Conclusions - MA Implementation Is a L.T. Process

• Similar to learning path for Precision Farming
• Year 1 Guidance System
• Year 2 Build field maps add field records
• Year 3 Start collecting yield data
• Year 4 Build prescription files and do VRA
• Need to identify learning path or building
  blocks to fully implement MA

51
Conclusions Digestible Steps in a Learning
Path

• LONG TERM GOAL
• Accumulating real time inventory costs on
  balance sheet at cost
• Baby Steps
• Building standardized cost profit center report
  formats
• Standardizing terminology - direct and indirect
  costs variable vs. fixed costs accounting vs.
  economic analysis
• Learning alternative allocation systems
• Isolating manageable segments that people manage
  modifying management structure then building
  system to measure results
• Understanding data attributes of transactions and
  how accounting treatment effects integrity of
  managerial reporting
• Accumulating direct costs in WIP
• Learning linkages between performance analysis
  and strategic planning

52
Time for Questions...
53
Conclusion 4 - Ability to analyze overhead and
indirect costs is KEY BENEFIT of MA

• Cost Center Report Direct vs Indirect
• Not lots of differences in direct costs
• Indirect/Overhead costs are often where the
  problems are HIDDEN!
• Lots of part-time corn, bean, livestock and
  wheat farmers that dont realize this global
  competition will force strategic shifts or day of
  reckoning!
• Review Compensation Summary

54
Grower Testimonials - MA

• Completing the MA report formats confirmed my
  thoughts that my fixed costs are too high for the
  number of acres I farmI am also making some
  changes based on the Dupont Analysis. Art S.
• When I saw Riggers s, it scared me! No. 1, I
  couldnt get to those numbers, and No. 2, I would
  be afraid of what theyd be, if I could! Steve M.

55
Conclusion 10 Developing Adequate Computer
Software Is Critical Component

• Software vendors actively engaged in MA
  debatesome more than others
• Producers will find most current software
  inadequate to do MA properly efficiently

56
Major Differences Enterprising vs. MA

• Enterprising provided a foundation for MA
• Enterprising most useful for 1-horse show
• OK for Investorsnot for Center Managers
• Investors concerned about bottom line
• Managers concerned about responsibility areas
• Goals, decision-roles, strategies, resources
• Performance results, cost management
• Profit Center (aka Enterprise) Results ? function
  of multiple cost center managers efforts

57
Be careful how you draw conclusions