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What is…the Farm Financial Standards Council (FFSC)?

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Presentation on theme: "What is…the Farm Financial Standards Council (FFSC)?"— Presentation transcript:

1 What is…the Farm Financial Standards Council (FFSC)?

2 Farm Financial Standards Council The Council [FFSC] came about because of the Farm Debt Crisis of 1983 to 1987….In January 1989 a Farm Financial Standards Task Force was created with the mandate to develop and publish standardized Financial Guidelines for Agricultural Producers. In 1996 the FFSC was urged to develop a uniform chart of accounts. This ultimately led, with funding and support from commodity groups, to the development and publishing in 2006 of the Management Accounting Guidelines for Agricultural Producers.

3 Farm Financial Standards Council The Council today is a non-profit organization consisting of professionals representing agricultural producer groups, banking, the Farm Credit System, accounting, insurance companies, financial advisors, agribusiness companies, academics and universities, private finance companies, cooperative extension, and other experts involved with agricultural production and finance.

4 FFSC - Mission Statement To provide a national forum for developing standards and implementation guidelines for preparers and users of agricultural financial information that will promote uniformity and integrity in financial analysis and reporting for agricultural producers.

5 Todays business environment in agriculture is becoming increasingly complex. Producers need to process large amounts of information from a variety of sources in order to operate efficiently and effectively. The accounting systems that farmers and ranchers employ must generate information for reporting to: Creditors Government Agencies Ownership and Management

6 The Farm Financial Standards Council today offers two sets of Guidelines to aid producers in 1) capturing this information, 2) preparing reports and 3) performing financial analysis in a uniform manner: Financial Guidelines for Agricultural Producers Management Accounting Guidelines for Agricultural Producers These are not static, but are subject to ongoing updating and review in the context of continual monitoring of financial issues that are relevant to agriculture:

7 Financial Guidelines for Agricultural Producers Reporting and analysis at entity level Heavy emphasis on external parties Financial position and performance

8 Financial Guidelines for Agricultural Producers The Financial Guidelines for Agricultural Producers are intended to: 1.Promote uniformity in financial reporting for agricultural producers by presenting methods for financial reporting which are theoretically correct and technically sound; 2.Present standardized definitions and methods for calculating financial measures which may be used in the measurement of financial position and financial performance of agricultural producers; and 3.Identify alternatives for development of a national agricultural financial database.

9 Financial Guidelines for Agricultural Producers The recommendations of the FFSC have been published in a Report containing three substantive sections: Universal Financial Reports. This section contains suggested procedures and concepts for constructing farm financial statements for the purposes of financial reporting and financial analysis (i.e., the balance sheet, the income statement, the statement of cash flows, and the statement of owner equity). Universal Financial Criteria and Measures. This section contains material regarding definitions, computations, interpretations, and limitations of some of the most widely used measures of financial position and financial performance. Universal Information Management. This section contains suggestions for collecting and using standardized farm financial data for the benefit of agricultural producers and those that serve them.

10 Management Accounting Guidelines for Agricultural Producers Reporting and analysis by business components Heavy emphasis on management purposes Closely linked to business strategy

11 The Need for the Managerial Accounting Guidelines Because the concepts and process addressed by the project are critically important for commercial producers –Ultimately for benchmarking and continuous improvement applications –Initially to create more robustness in internal accounting systems and understanding of cost Implementation and training activities continue in the private sector There is a strong need for a forum to achieve whatever consensus may be possible – to at least provide a baseline, independent source of information for producers as well as suppliers

12 Managerial Accounting Guidelines 114 page document 6 Core Concepts: 1.Requirement for accrual, cost-based accounting records 2.Responsibility center approach for information accumulation and reporting will be used 3.Integration of production factors/measurements 4.Accumulated core transactional information supplemented with economic concepts and analysis 5.Guided by consistency with Generally Accepted Accounting Principals (GAAP), commercial industry practice, multi-commodity applicability, and standardization capabilities. 6.Accommodation of multiple period production cycles.

13 Managerial Accounting Guidelines Eight Sections: 1.The need for understanding costs 2.Basics of managerial accounting 3.Management accounting levels of reporting 4.Management accounting issues for agriculture 5.Chart of accounts 6.A process for setting up your system 7.Glossary and definitions 8.Appendix A

14 This is not your fathers record system

15 Information Sources – What do we have? What should we have? Weather forecast Weather trends Market trend Political developments Status of economy Economic costs Planning Cost studies Tax policy & position Production reports Tax revenue and expense Crop scouting reports Consumer attitudes Environmental assessments ???

16 Questions We Ask Constantly… Which strategies keeping us successful? What strategies should we change? How will strategic change impact performance? What information is needed to make good decisions and survive?

17 Characteristics of a Good Decision Optimizes financial results – least cost, most profitable Improves or sustains profitability Financially feasible – Cashflows, services debt, and supports family living Contributes to long-term financial soundness – proactive…not reactive Promotes quality of life and teamwork

18 Operating Plan Operating Plan- What We Do Strategic Plan How we do it Production MarketingFinancing Capital Plan Growth Succession Planning Value- Added Strategic Alliances Tillage System Diversification Crop Rotation Business Structure Environmental Stewardship WF Version-Mike Boehlje Strategic Thinking Model Vision Long Range Objectives Short-term Goals Action Plans KRAs Evaluate Budget MissionQuality of Life Technology Adoption Why farmers are paid big bucks! Genetics

19 Key Question for the Farm Manager: How can managerial accounting be used to measure the impact of Strategic Decisions?

20 5 Steps to Strategic Management Step #1 – Analyze costs and activity in each management activity center Step #2 – Identify strategies that influence performance Step #3 – Simulate impact of alternative strategic decisions Step #4 – Implement high impact strategic options Step #5 – Measure the impact of decisions made

21 Strategic Options – Revenue Enhancement Adopt technology to improve yields Marketing options to maximize price –Value-added –GMOs –Organics Off-farm supplementation Custom services to utilize underemployed assets, fixed overhead Lobby for more government support!

22 Strategic Options - Cost Structure Management Strategic Alliances/Joint Ventures-inputs, equipment access Precision Farming Direct Seeding/NoTill Optimizing buy,lease, custom hire decisions GMO crops-Bt corn, RR Feed enhancements- rBST, Ralgro Pre-pricing key input costs: interest rates, chemical/fertilizer, fuel Optimizing in-sourced vs. out-sourced services (spraying, fertilizing, seed procurement, accounting/CFO) Growth/OH Cost dilution

23 How Do We Implement Managerial Reporting? Learn core concepts of managerial accounting Standardize definitions and methodology Work through case study applications Test drive concepts in your business

24 Implementation Issues Sorting out Accounting and Economic Analyses Identifying manageable segments Profit/Cost center report formats Handling unusual transactions – cost recovery, revenue adjmt Integrating financial and physical quantities ($, bu, acres, employees) Definitions: Direct vs indirect; variable vs. fixed Transfer pricing Alternatives for allocating indirect costs/overhead Other technical issues –Inventory valuations –Equipment gains/losses –Tax vs. Book Depreciation Case Studies – Sample Farms

25 Major Differences Enterprising vs. MA Enterprising built foundation for MA OK for investors, bankers & 1-horse management team…not Responsibility Center Managers –Investors & bankers concerned about bottom line –Managers concerned about responsibility areas Goals, decision-roles, strategies, resources Performance results, cost management

26 MA not new revelation…why such little adoption in AG? Past margins allowed SLOP…didnt force focus on costs…decline in farm margins will FORCE more attention on MA CASH ACCOUNTING convenient, but set industry backwards for looking at accrual performance and management performance Whole entity analysis has dominated attention of lenders and educators

27 Can You Answer? What is cost/unit to produce each commodity? How have costs changed in last 5 years? To what extent is operation relying on government payments to maintain profit? What are key strategies that will be re-evaluated in next 1-5 years?

28 Obstacles to MA Adoption Procrastination – know show do it Too used to shoebox approach; doing it for tax purposes only Limited software capacity to implement Challenge of getting everybody on the farm on board with disciplines in record keeping required to make it work Doing timely entries of overhead transactions (i.e. depreciation expense) to give full accounting picture Perception that MA is too complicated… so never start Production focus…do accounting because HAVE TO…not because they like doing it Historical focus on cash (tax) accounting vs. need for accrual foundation

29 Summary: MA = New Frontier in Farm Management Complex, but teachable Adopters will have competitive edge Requires producers to brush up on basic financial management skills, first Will require major professional support + CFO skills to implement New product opportunity for professional services industry Will require endorsement, encouragement and funding from stakeholders interested in farm viability

30 You are welcome to learn, join, and contribute…How to find us: Farm Financial Standards Council N78W14573 Appleton Ave., #287 Menomonee Falls, WI (262)


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