Accounting for Progressive Dairies
An Innovative Approach to
Teaching Proper Accounting
Principles and Practices to
Non-Accountants
Bradley J. Hilty
Business & Information Management Specialist
Penn State University - Dairy Alliance
bhilty@psu.edu
Accounting for Progressive Dairies
What is your first
reaction when you
here the word
ACCOUNTING?
IS IT THIS?
OR THIS?
Accounting for Progressive Dairies
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Establishing the Need
Identifying the Audience
Developing and Delivering the Program
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Objectives
Collaborators
Theory (Principles & Practices)
Method
Results
Future Plans
Accounting For Progressive Dairies
Establishing the Need
 Operations Exposed to Greater Risk
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Production - 1 pound loss in milk
= $ 4,000 (100 cows)
= $20,000 (500 cows)
Financial –
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Price
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Investment –$600-800 K vs. $3-4 M
Increased Price Volatility – Milk & Inputs
Legal
Accounting for Progressive Dairies
Establishing the Need
 Accurate and Timely Accounting Records
- Foundation of:
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Financial Risk Management
Business Analysis
Sound Decision Making
Basic Business Management
However……
Accounting for Progressive Dairies
Establishing the Need
 Poor on farm record keeping practices
- Validated by PSU Research Projects
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2001- Dairy Profitability Study
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~50 % of farms deleted from financial aspect of study
2005-06 – Business Models Research Project
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Data validation - Analysis of Statement of CF
Numerous attempts to reconcile to 1% of revenue
> 16% of farms rejected from analysis
Accounting for Progressive Dairies
Establishing the Need
 Poor on farm record keeping practices-WHY?
- Accounting/book keeping
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Mostly done by people with little/no formal training
Adoption of computer accounting programs
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Everyone thinks they can do it ???
Results
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Poor information management practices
Lack of timely and accurate information
Accounting for Progressive Dairies
Establishing the Need
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Information Overload
Many businesses are data
rich, but information poor
and thus suffer from
paralysis through analysis.
Managing Information is critical
for making sound decisions
Accounting for Progressive Dairies
Identifying the Audience
 Individuals in Dairy Businesses
 Responsible for any accounting function
 Responsible for financial risk management
 Decision Makers
 Focused on progressive PA dairies
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Utilizing computerized accounting systems
Accounting for Progressive Dairies
The Program
 Objectives
 Improve the knowledge of basic accounting
principles of those people responsible for
keeping records
 Improve the quality of accounting records
through implementation of basic
accounting practices
Accounting for Progressive Dairies
The Program
 Objectives
 Improve the ability of book keepers to spot
accounting errors (reconciliation process)
 Improve the ability of decision makers to
generate, evaluate and interpret financial
reports
 Improve the ability of decision makers to
use information for decision making
Accounting for Progressive Dairies
The Program
 Objectives
 Make the Program
Educational
 Effective
 Interactive….and most of all
 FUN!
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Accounting for Progressive Dairies
The Program
 Two Day Workshop
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Day 1
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Day 2
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Focus on Basic Accounting Principles and Practices
Focus on Advance Accounting Concepts
Collaborators
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Acuity CPA’s, Redwing, Agri-Solutions, Local
Educators
Accounting for Progressive Dairies
The Program
 The Theory
Understanding Information Management
Data does not equal information
 The conversion process Involves
Six Steps
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Accounting Functions:
Measurement and Communication
The Six Steps
of Information
Management
Data
Utilization2
Data Integration1
Data Reporting
Presents data for interpretation
Data Processing
Data entry & calculations
Data Organization
Provides structure to the data set
Data Collection
Observation, measuring & recording of data
1
Brings all pertinent data sources together to provide feed back for decision-making.
2
Decisions made. Data used to initiate change.
Bradley J. Hilty, Information Management Specialist, Penn State Dairy Alliance
Data Organization: A Critical Step
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Provides structure to raw data
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Production data –
 DHIA Records
 Computer Programs
Financial Data
 Chart of Accounts
 Need Standardization
Getting this step
wrong compromises
the entire system
KEY to Organizing Financial Data:
Chart of Accounts
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Provide compact summary for generating
reports
Provide sufficient detail for in-depth analysis
Dairy Alliance Standardized Chart of Accts
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Provides Uniformity for data analysis
www.dairyalliance.org
Accounting for Progressive Dairies
Organizing a Chart of Accounts
There are Five Account “Types”
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ASSETS
LIABILITIES
INCOME
EXPENSES
EQUITY
Knowing the
difference is
the KEY!
Accounting Principles & Practices
Cash vs Accrual Accounting Practices
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Principles of Cash Accounting
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Cash accounting for taxes - Good
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Income reported when received
Expenses reported when paid
no inventory adjustments
no recording of accounts payable / receivable
performance usually judged by check book
balance & tax return
Accounting Principles & Practices
Cash vs. Accrual Accounting Practices
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Principles of Accrual Accounting
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provides a more accurate picture of financial
performance of business!
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income reported when right to receive it is established
expenses reported when they are incurred
adjustments for change in inventories
includes accounts payable/receivable
Integral relationship between BS & Profit/Loss
Accounting Principles
Understanding The Relationship of Financial Statements
Balance Sheet
Assets = Liabilities + Equity
Income Statement
Income - Expenses = Profit/(Loss)
Profit = Cash (Assets) and thus Increases Equity
$
Accounting Principles: Keeping the system in balance
Thinking Through Data Entry
Understanding the Accounting Equation
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Assets
Cash & Checking
Accounts Receivable
Inventories
Coop Stock
Cows
M&E
RE Improvements
Land
=
Liabilities
Accounts Payable
Payroll tax deductions
Credit Cards
Loans
•Operating
•Cattle
•Machinery & Equipment
•Mortgage
+
Equity
Retained Earnings
Contributed Capital
Owner Draws
Current Year Profit/Loss
Accounting Principles: Keeping the system in balance
Thinking Through Data Entry
Understanding the Accounting Equation
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Assets = Liabilities + Equity
(RE - Owner Draws + Contributed Capital+ CY Profit / Loss)
Income – Expenses
The Expanded Accounting Equation that must be kept in balance looks like this:
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Assets = Liabilities + Retained Earnings - Owner Draws + Contributed Capital + Income - Expenses
Every transaction you make will affect one or more factors
on either or both sides of the equation!
The Method: Keeping the system in balance
using every day transactions
Sample Transaction: Receiving a milk check
Receiving Milk Income
Assets = Liabilities + Equity
(RE - Owner Draws - Owner Contributions + Income – Expenses)
Current Year Profits
The Method: Keeping the system in balance
using every day transactions
Sample Transaction:
Entering a final milk check - Step 1
Entering Final Milk Income
Assets = Liabilities + Equity
(RE - Owner Draws - Owner Contributions + Income – Expenses)
Current Year Profits
What
would we increase?
The Method: Keeping the system in balance
using every day transactions
Sample Transactions
Entering Deductions from Final Milk Check –Step 2
Milk Check Reductions – Hauling, Etc.
Assets = Liabilities + Equity
(RE - Owner Draws + Owner Contributions + Income – Expenses)
Current Year Profits
The Method: Keeping the system in balance
using every day transactions
Sample Transaction:
Depositing a final milk check – Step 3
Receiving (Depositing) Final Milk Income
Assets = Liabilities + Equity
(RE - Owner Draws - Owner Contributions + Income – Expenses)
Current Year Profits
What
would we increase/decrease?
The Method: Keeping the system in balance.
Mistakes to Avoid
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Incorrect entry of items
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loan proceeds as income
loan payments as expenses
Asset sales as income
Asset purchases as expenses
Enter gross income; not “Net”
Too little detail
The Method: Data Entry Tips
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Keep business & personal separate
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Reconcile Accounts
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Upgrade quality of data
Owner Draws = Negative Equity
Family Living – Separate books
Improves accuracy of data
Cost vs. Market Value of Assets (Principle)
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Cost basis-capital use efficiency
Market Basis- what are you worth
Method: Data Entry Tips
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Enter or Track physical data
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cwt. milk
bushels corn
# head & cwt cull cows
Tons feed; gallons fuel; kilowatt hrs. electricity
Enables business owner to monitor costs of
production; price trends; efficiencies; etc.
Method – Data Reporting
Reading and Interpreting Financial Statements
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Income Statement (P & L)
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Balance Sheet
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Cost
Market
Change of Owner Equity
Statement of Cash Flows
Other Useful Reports
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General Ledger, Transaction Journals, AP reports
Statement of Cash flows:
Where did all the money go?
Cash from Operations
Cash Farm Receipts
Cash Farm Expenses
Net Cash Farm Income
Personal Withdrawals
Net From Operations
$450,000
($320,000)
$130,000
($ 55,000)
$ 75,000
Cash From Investing Activities
Sale of Assets
Capital Purchases
Net From Investing Activities
$20,000
($75,000)
Cash From Financing Activities
Money Borrowed
Principal Repaid
Net From Financing Activities
$40,000
($55,000)
Cash From Reserves
Beginning Cash
Ending Cash
Net Cash From Reserves
$10,000
$15,000
IMBALANCE
Brad Hilty – Penn State Dairy Alliance
($55,000)
($ 15,000)
($ 5,000)
$ 0
Method: Data Integration
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Integrating Sources of information
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Accounting system (within business)
Production records (within business)
Analysis systems (inside/outside business)
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Benchmark Programs /DFBS
Internal Analysis Systems
Advisors (outside business)
Peer Groups
Method: Data Utilization
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Uses of Information
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Monitor Business Performance
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Ratio Analysis
ROA, ATO, OER, Etc.
Calculate Cost of Production
Benchmark Analysis
Establishing Risk Management Strategies
Ultimately-Improved decision making, more
competitive
Managerial Cost Accounting – Day 2
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Ultimate Level of Business Accounting
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Must Identify Cost and Profit Centers
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Employed by major corporations
Commodity Based
Activity Based
Management responsibility - Accountability
Intricate relationship – P&L & BS
Simple accounting
Balance Sheet
Assets = Liabilities + Equity
Income Statement
Income- Expenses = Profit (Loss)
$
Profits = Cash (Assets) or Reduced Liabilities and thus Increases Equity
Managerial Cost Accounting
Balance Sheet
Assets = Liabilities + Equity
Cost Centers (Crops, Heifers, Others)
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All costs of raising a crop or animal are allocated to that CC.
As crops are harvested moved to BS as inventory at COP
As Calves are born and raised they move through inventory at
COP
Managerial Cost Accounting
Balance Sheet
Assets = Liabilities + Equity
Profit Center (Dairy)
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As crops are fed to Dairy moved from BS and charged at COP
Heifers are moved from Heifer Inventory to Cow Inventory at
COP upon Calving
Milk Harvest Cost Study Results – 22 Dairies
Avg
288
S.D.
198.7
Min
50
Max
800
1.52
$9.64
$0.28
$1.29
.51
$1.34
$0.29
$0.39
1
$7.50
$0.05
$0.70
3
$13.50
$1.29
$2.06
Supplies
Repairs
$1.00
$0.18
$0.07
$0.33
$0.06
$0.06
$0.56
$0.09
$0.01
$1.73
$0.28
$.20
Utilities
$0.16
$0.07
$0.05
$0.34
Total
$1.98
$0.57
$1.30
$3.99
Herd Size
Milkers
Hourly Wage
Ownership $
Labor $
Milking Labor
Accounting for Progressive Dairies
Results
 Course Taught in 5 of past 6 years
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110 Producers have participates
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PA, MD, NY, OH, VA, VT
Course evaluations
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Average Score 4.3- 4.5 (Scale of 5)
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Content, Usefulness and Effectiveness of Teaching method
> 90% of Participants would recommend to others
> 95% rated skill level “Exactly What I Needed”
Accounting for Progressive Dairies
Results
 Pre-Post Test Scores
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Consistently indicate a 56-62% average increase in
knowledge levels
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Average Pre-Test
Average Post-Test
Some participants do much better
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Exceed 100 % increase in knowledge level
Accounting for Progressive Dairies
Impact
 100 % indicated an improvement knowledge
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52% - Moderate
44 % - Considerable to Significant
100% indicated improvement in ability to keep
timely and accurate records
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88 % indicated a moderate to significant
28% -considerable to significant
Accounting for Progressive Dairies
Impact
 95% restructured their Chart of Accounts
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36% set up COA to reflect management information
20% adopted Standardized COA
100% utilize their new knowledge and skill
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52% weekly to daily
20% Monthly
28% Occasionally
Accounting for Progressive Dairies
Impact
 ~ 50 % Improve understanding of Financial
Reports
 ~ 40 % more frequent reports to lenders
 ~ 32 % use records to evaluate management
decisions more frequently
 ~ 28% implemented some level of Managerial
Accounting
Accounting for Progressive Dairies
Future Plans
 Collaborate with More Local Educators
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Offer in conjunction w/ QB training Workshops
Need More Follow up
Follow up Refresher training via Adobe Connect
“Ask The Experts” Forum
Conduct a PD session of educators in NE
Customized Educational Program
Accounting For Progressive Dairies
Thank you for your time!
Questions?