1. Accounting for Progressive Dairies Bradley J. Hilty Business & Information Management Specialist Penn State University - Dairy Alliance bhilty@psu.edu bhilty@psu.edu An Innovative Approach to Teaching Proper Accounting Principles and Practices to Non-Accountants

2. What is your first reaction when you here the word ACCOUNTING? Accounting for Progressive Dairies IS IT THIS? OR THIS?

4. Accounting for Progressive Dairies Establishing the Need Identifying the Audience Developing and Delivering the Program Objectives Collaborators Theory (Principles & Practices) Method Results Future Plans

5. Accounting For Progressive Dairies Operations Exposed to Greater Risk Production - 1 pound loss in milk = $ 4,000 (100 cows) = $20,000 (500 cows) Financial – Investment –$600-800 K vs. $3-4 M Price Increased Price Volatility – Milk & Inputs Legal Establishing the Need

6. Accounting for Progressive Dairies Establishing the Need Accurate and Timely Accounting Records - Foundation of: Financial Risk Management Business Analysis Sound Decision Making Basic Business Management However……

7. Accounting for Progressive Dairies Establishing the Need Poor on farm record keeping practices - Validated by PSU Research Projects 2001- Dairy Profitability Study ~50 % of farms deleted from financial aspect of study 2005-06 – Business Models Research Project Data validation - Analysis of Statement of CF Numerous attempts to reconcile to 1% of revenue > 16% of farms rejected from analysis

8. Accounting for Progressive Dairies Establishing the Need Poor on farm record keeping practices-WHY? - Accounting/book keeping Mostly done by people with little/no formal training Adoption of computer accounting programs Everyone thinks they can do it ??? Results Poor information management practices Lack of timely and accurate information

9. Accounting for Progressive Dairies 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 Establishing the Need

10. 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 Utilizing computerized accounting systems

11. 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

12. 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

13. Accounting for Progressive Dairies The Program Objectives Make the Program Educational Effective Interactive….and most of all FUN!

14. Accounting for Progressive Dairies The Program Two Day Workshop Day 1 Focus on Basic Accounting Principles and Practices Day 2 Focus on Advance Accounting Concepts Collaborators Acuity CPA’s, Redwing, Agri-Solutions, Local Educators

15. Accounting for Progressive Dairies The Program The Theory Understanding Information Management Data does not equal information The conversion process Involves Six Steps

16. Data Collection Observation, measuring & recording of data Data Organization Provides structure to the data set Data Processing Data entry & calculations Data Reporting Presents data for interpretation Data Integration 1 Data Utilization 2 The Six Steps of Information Management Bradley J. Hilty, Information Management Specialist, Penn State Dairy Alliance 1 Brings all pertinent data sources together to provide feed back for decision-making. 2 Decisions made. Data used to initiate change. Accounting Functions: Measurement and Communication

17. Data Organization: A Critical Step Provides structure to raw data Production data – DHIA Records Computer Programs Financial Data Chart of Accounts Need Standardization Getting this step wrong compromises the entire system

18. KEY to Organizing Financial Data: Chart of Accounts Provide compact summary for generating reports Provide sufficient detail for in-depth analysis Dairy Alliance Standardized Chart of Accts Provides Uniformity for data analysis www.dairyalliance.org

19. Accounting for Progressive Dairies Organizing a Chart of Accounts There are Five Account “Types” ASSETS LIABILITIES INCOME EXPENSES EQUITY Knowing the difference is the KEY!

20. Principles of Cash Accounting Principles of Cash Accounting Cash accounting for taxes - Good 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 Cash vs Accrual Accounting Practices Accounting Principles & Practices Cash vs Accrual Accounting Practices

21. Accounting Principles & Practices Cash vs. Accrual Accounting Practices Principles of Accrual Accounting Principles of Accrual Accounting provides a more accurate picture of financial performance of business! 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

22. Balance Sheet Assets = Liabilities + Equity Income Statement Income - Expenses = Profit/(Loss) $ Profit = Cash (Assets) and thus Increases Equity Accounting Principles Understanding The Relationship of Financial Statements

23. Accounting Principles: Keeping the system in balance Thinking Through Data Entry Assets = Liabilities + Equity Understanding the Accounting Equation Cash & Checking Accounts Receivable Inventories Coop Stock Cows M & E RE Improvements Land Accounts Payable Payroll tax deductions Credit Cards Loans Operating Cattle Machinery & Equipment Mortgage Retained Earnings Contributed Capital Owner Draws Current Year Profit/Loss

24. 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: Assets = Liabilities + Retained Earnings - Owner Draws + Contributed Capital + Income - Expenses Understanding the Accounting Equation Every transaction you make will affect one or more factors on either or both sides of the equation! Accounting Principles: Keeping the system in balance Thinking Through Data Entry

25. Sample Transaction: Receiving a milk check Current Year Profits Assets = Liabilities + Equity (RE - Owner Draws - Owner Contributions + Income – Expenses) Receiving Milk Income The Method: Keeping the system in balance using every day transactions

26. Sample Transaction: Entering a final milk check - Step 1 Current Year Profits Assets = Liabilities + Equity (RE - Owner Draws - Owner Contributions + Income – Expenses) Entering Final Milk Income The Method: Keeping the system in balance using every day transactions

27. Sample Transactions Entering Deductions from Final Milk Check –Step 2 Current Year Profits Milk Check Reductions – Hauling, Etc. Assets = Liabilities + Equity (RE - Owner Draws + Owner Contributions + Income – Expenses) The Method: Keeping the system in balance using every day transactions

28. Sample Transaction: Depositing a final milk check – Step 3 Current Year Profits Assets = Liabilities + Equity (RE - Owner Draws - Owner Contributions + Income – Expenses) Receiving (Depositing) Final Milk Income The Method: Keeping the system in balance using every day transactions

29. Incorrect entry of items 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: Keeping the system in balance. Mistakes to Avoid

30. Keep business & personal separate Upgrade quality of data Owner Draws = Negative Equity Family Living – Separate books Reconcile Accounts Improves accuracy of data Cost vs. Market Value of Assets (Principle) Cost basis-capital use efficiency Market Basis- what are you worth The Method: Data Entry Tips

31. Method: Data Entry Tips Enter or Track physical data 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.

32. Method – Data Reporting Reading and Interpreting Financial Statements Income Statement (P & L) Balance Sheet Cost Market Change of Owner Equity Statement of Cash Flows Other Useful Reports General Ledger, Transaction Journals, AP reports

33. Brad Hilty – Penn State Dairy Alliance Statement of Cash flows: Where did all the money go? Cash from Operations Cash Farm Receipts$450,000 Cash Farm Expenses($320,000) Net Cash Farm Income$130,000 Personal Withdrawals($ 55,000) Net From Operations$ 75,000 Cash From Investing Activities Sale of Assets $20,000 Capital Purchases($75,000) Net From Investing Activities($55,000) Cash From Financing Activities Money Borrowed $40,000 Principal Repaid($55,000) Net From Financing Activities($ 15,000) Cash From Reserves Beginning Cash$10,000 Ending Cash$15,000 Net Cash From Reserves($ 5,000) IMBALANCE$ 0

34. Integrating Sources of information Accounting system (within business) Production records (within business) Analysis systems (inside/outside business) Benchmark Programs /DFBS Internal Analysis Systems Advisors (outside business) Peer Groups Method: Data Integration

35. Method : Data Utilization Uses of Information Monitor Business Performance Ratio Analysis ROA, ATO, OER, Etc. Calculate Cost of Production Benchmark Analysis Establishing Risk Management Strategies Ultimately-Improved decision making, more competitive

36. Managerial Cost Accounting – Day 2 Ultimate Level of Business Accounting Employed by major corporations Must Identify Cost and Profit Centers Commodity Based Activity Based Management responsibility - Accountability Intricate relationship – P&L & BS

37. Simple accounting Balance Sheet Assets = Liabilities + Equity Income Statement Income- Expenses = Profit (Loss) $ Profits = Cash (Assets) or Reduced Liabilities and thus Increases Equity

38. Managerial Cost Accounting Balance Sheet Assets = Liabilities + Equity Cost Centers (Crops, Heifers, Others) 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

39. Managerial Cost Accounting Balance Sheet Assets = Liabilities + Equity Profit Center (Dairy) 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

40. AvgS.D.MinMax Herd Size288198.750800 Milkers1.52.5113 Hourly Wage$9.64$1.34$7.50$13.50 Ownership $$0.28$0.29$0.05$1.29 Labor $$1.29$0.39$0.70$2.06 Milking Labor $1.00$0.33$0.56$1.73 Supplies$0.18$0.06$0.09$0.28 Repairs$0.07$0.06$0.01$.20 Utilities$0.16$0.07$0.05$0.34 Total$1.98$0.57$1.30$3.99 Milk Harvest Cost Study Results – 22 Dairies

41. Accounting for Progressive Dairies Results Course Taught in 5 of past 6 years 110 Producers have participates PA, MD, NY, OH, VA, VT Course evaluations Average Score 4.3- 4.5 (Scale of 5) Content, Usefulness and Effectiveness of Teaching method > 90% of Participants would recommend to others > 95% rated skill level “Exactly What I Needed”

42. Accounting for Progressive Dairies Results Pre-Post Test Scores Consistently indicate a 56-62% average increase in knowledge levels Average Pre-Test Average Post-Test Some participants do much better Exceed 100 % increase in knowledge level

43. Accounting for Progressive Dairies Impact 100 % indicated an improvement knowledge 52% - Moderate 44 % - Considerable to Significant 100% indicated improvement in ability to keep timely and accurate records 88 % indicated a moderate to significant 28% -considerable to significant

44. Accounting for Progressive Dairies Impact 95% restructured their Chart of Accounts 36% set up COA to reflect management information 20% adopted Standardized COA 100% utilize their new knowledge and skill 52% weekly to daily 20% Monthly 28% Occasionally

45. 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

46. Accounting for Progressive Dairies Future Plans Collaborate with More Local Educators 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

47. Accounting For Progressive Dairies Questions? Thank you for your time!