Title: SpreadNGrow Case Study a tool for Implementing MA
1Spread-N-Grow Case Studya tool for Implementing
MA
2Agenda
- 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
3Producer 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
46 Principals 2 brothers, 2 cousins, 2
non-relatives
What is your job?
empower a skilled team of responsibility center
managers to make quality decisions.
5Purpose 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
6Spread-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
7Operational 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
8George GM General Manager
Glenda Office Manager
Clint CPM Crop Production Manager
Cory COM Custom Operations Manager
Ed ESTM Equip Support and Transportation Mgr
9Expression 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
10Special 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.
11Areas 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.
12Key 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
13Key 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
14Case 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
15Profit Centers
- Decided on four profit centers
- Wheat
- Barley
- Canola
- Custom Application
- Ruled out custom trucking not significant
activity nor managed for profit
16Cost 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
17Support 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.
18Step 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
- Â Â Grain by-products, straw
- Production Costs
- Direct Costs
- Â Â Seed
- Â Â Fertilizer
- Â Â Chemicals
- Â Â Crop Insurance
- Indirect Costs
- Â Costs Allocated from General Farm Overhead
Center - Â Â Costs Allocated from Equipment Support Center
- Â Â Costs allocated from Labor Support Center
- Â Â Costs allocated from Land Cost Center
20- General Farm Overhead Cost Center Report Design
- Â
- Revenue/Cost Recovery
- Conservation Cost share payments (could also go
in Land Cost Center) - Â
- 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 - Â
- 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
- Â
- 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
- Â
- Operating Costs
- Liability Insurance
- General Management
- Office/postage
- Professional fees
- Â
- 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
24Profit Center Report Design Wheat Revenue Comm
odity Revenue xx,000 Protein
Premiums xx,000 LDPs-CCC xx,000 Â Direct
Production Costs xx,000 Indirect
Production Costs Transferred from Production
Cost Center xx,000 Â SGA Allocated from SGA
cost center xx,000 Â Finance Allocated from
Finance cost center xx,000 Other Income
Expense Non-crop specific Govt Payments (AMTA)
xx,000 Â Same Format for Barley and Canola
Profit Centers
25Profit 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
26RME 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
27Teaching 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!!!
28Workshop 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
29Results 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
305 Grower Data Sets
- Support Cost Centers Prepared
- General Farm Overhead
- Equipment Support Cost
- Land Support Cost Center
- S G A
- Finance
- Other Income/Expense
31Production 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
32Review Grower Data Results
- ..\RME MA grant\MA Data Sets\MA Center Reports
Summary-02.xls
33MA 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
34Conclusions 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)
356 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.
36Board 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
37Custom Application Profit Center
38Conclusions 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.
39Conclusions 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
40Conclusions - 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
41Conclusions 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)
42Mission
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
43Major 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
44ROE
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
46Conclusions - 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
47Conclusions 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)
48Conclusions 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!
49Conclusions 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
50Conclusions - 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
51Conclusions 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
52Time for Questions...
53Conclusion 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
54Grower 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.
55Conclusion 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
56Major 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
57Be careful how you draw conclusions