Today's dairy manager must be aggressive in many different aspects of the dairy operation. Managers must be knowledgeable on such subjects as nutrition, health, and overall herd management. The one element of modern dairying that is quickly becoming more critical is financial management.

Financial statements prepared by an independent third-party – typically, a certified public accountant – are quickly gaining the reputation as a necessary management tool. While dairy producers have typically prepared cash-basis statements, they also need to use accrual systems which will improve their ability to analyze the operation.

Accrual advantage
The accrual-basis financial statement considers items sold or consumed during the period under review – regardless of when you pay the expense or deposit the revenue. Thus, you become aware of what occurred during a specific period without worrying about income or expenses from other months.

Accrual-basis financial statements include accounts receivable, feed inventories and self-raised dairy animals.

For example, if a dairy producer wrote a check for the prepayment of feed on Dec. 31, 1997, and was preparing a cash-basis financial statement, this feed would be recorded as a 1997 expense, even though it would not be fed until 1998. However, in an accrual system, the expense would be recorded when the product was used.

This item alone drastically skews the analysis on a cash-basis financial statement. An accrual-basis financial statement, on the other hand, reports an expense when the feed is consumed.

A complete accrual-basis financial statement contains four parts:
1. Balance sheet. The balance sheet summarizes what you own and what you owe. It also identifies your capital or net worth at a certain point in time. The balance sheet enables the dairy producer to analyze such things as the working capital position and debt-to-net worth – both of which are keys to identifying how the operation is doing financially.
2. Profit and loss statement. The profit and loss statement itemizes income and expenses and reports profitability. It considers all items of income, labor, herd replacements, and other operating expenses.
3. Statement of cash flow. The statement of cash flow reports the inflow and outflow of cash during the period under review. It begins by stating the net income from the profit and loss statement, adds back any non-cash items such as depreciation, and deducts items such as principal payments, the purchase of assets, and the owner's personal draws.
4. Statement of capital. The statement of capital details ownership in the business and how the balance was affected during the period of review. It reports the beginning balance, the amount of income (or loss) the business generated for the period, and any personal draws.

Ultimately, with an accrual-basis financial statement, the dairy producer receives an accurate picture of the true cost of production during the period under review.

Cody Goswick is a financial planner with Frazer and Torbet in Visalia, Calif.