While some people contend that past performance doesn’t really matter, I wouldn’t want to chart a course for my business without that knowledge. And you shouldn’t either. Good records can provide a wealth of information. Here are four reasons why I consider records to be a worthwhile investment for all businesses.

1. We use our records to provide the information necessary to complete our income-tax
returns. Poor records can lead to overpaying on income tax.

2. Good records allow us to prove our performance to lenders. Financial records, presented on an accrual basis, demonstrate that our operations are profitable and that we deserve to receive the credit we need to run our operations. Why accrual? While dairy operations market their “produce” on a regular basis, we incur some of our costs in just a few transactions throughout the year. For example, if we purchase seven months’ supply of feed because we like the price, but don’t use all of the feed this year, cash-basis reporting would distort our 2007 feed cost. Accrual accounting only charges the feed we actually use during the year against our 2007 income.

Accrual accounting doesn’t mean you have to develop a complex accounting system to track actual input usage.

You just need to adjust costs and income for these four things:

  • Purchases made this year that won’t be used until next year.
  • Purchases made last year that are used this year.
  • Products produced this year but not sold until next year.
  • Products produced last year and sold this year.

3. The most important reason to keep good records is to analyze the performance of your business. For example, you made a profit last year, but do you know why you made a profit? Was it because of a good price for milk or because your cost to produce a hundredweight of milk was lower than the previous year? Without knowing why, predicting what 2007 will bring really becomes a guessing game.

One of the best ways to analyze your business is to compare your performance with your peers. When you compare records with your peers, it provides clues to reveal potential problems in your operation that you might not otherwise see. These clues come from being able to analyze why a difference occurred. For example, comparison reveals that your feed-cost-per-hundredweight-of-milk produced is higher than your peers. Is this because you pay more for feed than your peers, have poor feed utilization, or have a vastly different ration? When you have good records, you have a standard by which to make measured comparisons.

Where do you find records to compare your performance? Your first step might be to join a farm-business-analysis group. A number of states have farm-record services that provide their members with comparable financial and technical measures. Visit www.nafbas.org or call Dale Lattz at (217) 333-0754 to see if your state has a business-analysis group. Your input suppliers and your local Dairy Herd Improvement Association (www.dhia.org) also may be a source of financial data. Some accounting firms specializing in dairy operations may collect their own performance data, also.

4. Past performance can help you make future projections. For example, your records tell you that utilities cost 96 cents per hundredweight of milk produced in 2006. Your local supplier announces a 3 percent cost increase for the year. So, you prepare your 2007 budget with a 3 percent increase — a cost of 99 cents per hundredweight of milk produced. In this case, your past records provide the base for making future projections.

Your records provide you with a snapshot of your financial performance and demonstrate areas of strength and weakness in your business. Plan now to work with your consultant to design a record system to provide you with the management information you need to make your operation successful.

Darrell L. Dunteman is an agricultural financial consultant and accountant with offices in Bushnell and Havana, Ill.You can e-mail him at farmandranchtaxletter@earthlink.net.