Accounting software isn’t enough

A county agent recently asked if I could recommend a good computerized recordkeeping system for a dairy producer to use. My response was that he was asking the wrong question. The question should be "Where can a dairy producer get the full range of accounting services needed to effectively manage a dairy business today?"

Not your father's dairy farm

Dairy farm businesses are bigger and more complex today. As a result, few producers have the time to develop all of the expertise in accounting and finance needed to handle every decision with financial consequences. I'm not saying producers lack the ability to develop this financial expertise. But the reality is that dairy farm managers have so many demands placed on them regarding cow care, nutrition, genetics, and employee management that they do not have time to conduct the type of detailed financial analyses needed to make smart business decisions.

As dairy farms have grown, producers have learned there are advantages to getting management assistance from specialists. Nutritionists, herdsmen, agronomists, crop scouts, reproductive specialists and other management consultants are commonly used on many dairies today. The natural extension of this model is for producers to retain the services of an accountant who can assist with income taxes, financial-reporting requirements, investment decisions and loan negotiations.

Producers have generally relied on their lenders to tell them if they see any problems or deficiencies in the financial positions of their dairy farm businesses. This can work, but you must understand that lenders have a conflict of interest similar to that of a nutritionist employed by a feed company. That's because lenders only earn money if they loan money. The implication is that a lender could be inclined to support credit-financed projects that, while adequately secured, may not be the most profitable projects for the dairy to undertake.

Similar to what many of you have done with nutritionists, hiring an independent accountant can take care of this potential conflict of interest. In addition, this person can now be charged with the responsibility of safeguarding the financial interests of the dairy farm business.

A worthwhile investment

Many dairy producers are reluctant to retain the services of an accountant because the fees can be rather high. But, on the margin, these fees do not have to be much more than what dairy farmers typically pay for accounting software licenses and the preparation of their income tax returns. The key thing to remember is that accountants earn their keep by making complex financial issues easily understood and managed. 

In the past, most dairy producers could do a respectable job of managing their finances because they were generally operating at modest scales. Now that dairy farmers have expanded their operations, their management challenges have increased to the point where they need the help of experts in a variety of fields. 

It's true that it can be costly to utilize the services of accountants. But it can be even more costly to make investment or credit decisions that put a drag on the profitability of your dairy farms or, at worst, push your operation into bankruptcy.

Bruce Jones is a professor of agricultural economics and extension farm management specialist at the University of Wisconsin-Madison.



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