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SpreadNGrow Case Study a tool for Implementing MA


Multiple crop enterprises plus custom operation ... Design management control system to fit management structure of the business ... – PowerPoint PPT presentation

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Title: SpreadNGrow Case Study a tool for Implementing MA

Spread-N-Grow Case Studya tool for Implementing
  • 2004 FFSC Annual Meeting

  • Purpose Design of Spread-N-Grow Case Study
  • Grower exposures to case study and MA
    implementation experiences
  • Conclusions and lessons for designing future
    teaching strategy
  • Attitude toward MA implementation
  • Demand for Education vs. Cost/benefit of MA
  • Impact on strategic decisions, management behavior

Producer Professional Exposures To Management
  • Idaho Grain Producers Convention 11/2002
  • TEPAP Ag Executive Program 2003, 2004
  • FFSC 2003 Summer Symposium - Practitioners
  • Clearwater Direct Seeders 02 -03 RMA Grant
  • FarmTech 2004 MA Workshop 300 growers

6 Principals 2 brothers, 2 cousins, 2
What is your job?
empower a skilled team of responsibility center
managers to make quality decisions.
Purpose of MA Tie to our Job
  • Assess performance in manageable segments of the
  • Enable decision-makers to link financial and
    operational analysis with strategic planning
  • Empower improved decisions
  • ? increased ROE, ROA

Spread-N-Grow Case Study
  • Goal Design profit, cost and support centers
    for diversified farm with custom enterprise
  • Unique features of case
  • Multiple crop enterprises plus custom operation
  • Management team with unique accountability roles
    decision-making discretion
  • Center managers desire improved information
    systems to track performance.
  • Case illustrates how to
  • Design management control system to fit
    management structure of the business
  • Set up system for allocating indirect costs

Operational Data
  • 6,000 acre diversified farm wheat, barley, and
    canola under direct seed tillage program
  • Gross revenue 1,350,000 (3 yr ave.)
  • Custom seeds 2,500 acres _at_25/acre
  • Custom fertilizes 5,000 acres - 300,000 revenue
    from application and fertilizer sales

George GM General Manager
Glenda Office Manager
Clint CPM Crop Production Manager
Cory COM Custom Operations Manager
Ed ESTM Equip Support and Transportation Mgr
Expression of Management Intent
  • Manage three commodities and custom application
    as for profit enterprises (Criteria
    significant activity to manage opportunity to
    control performance)
  • Custom trucking incidental income viewed as
    cost recovery to reduce net cost of equipment

Special Areas of Management Concern
  • Marketer determine cost of production to
    develop more sound marketing plan
  • Crop Manager identify how production costs
    compare with historical cost trends
  • Equip Support Manager determine how direct
    seeding impacts cost of production compared to
    conventional tillage.

Areas of Mgmt Concern- contd
  • Custom Operations Manager Is custom work
    profitable or just wearing out equipment?
  • General Manager looking for balance between
    growing and status quo. Questions what
    strategies will optimize farms potential to
    remain competitive, profitable and survive.

Key Management Behaviors-(Goals)
  • Crop Manager produce high quality, high yield
    with minimum direct production cost/unit
  • Marketer market based on known cost of
    production plus a profit margin vs. highest
  • Equipment Support minimize equipment costs and
    assure adequate equipment to perform farm
    operations on timely basis

Key Management Behaviors contd
  • Custom Farm Mgr steady growth and good margin
    in product applied as well as services provided
    (dont just wear out equipment.)
  • General Mgr focus on strategic options to
  • grow farm profitability and improve overall
    financial performance
  • Empower management team with performance data
    that will insure optimal operating decisions in
    each management segment of business

Case Solution
  • Task 1 Define profit centers
  • Task 2 Define cost centers and accounts that
    would normally have activity in each center
  • Task 3 Define allocation methodology and
    sequence for linking various cost centers

Profit Centers
  • Decided on four profit centers
  • Wheat
  • Barley
  • Canola
  • Custom Application
  • Ruled out custom trucking not significant
    activity nor managed for profit

Cost Centers
  • Production Cost Centers set up one for each
    crop enterprise to accumulate work-in-progress
  • Support Cost Centers
  • Equipment Support
  • Labor
  • General Farm
  • Land Cost Center
  • SGA
  • Finance

Support Centers
Production Cost Centers
Profit Centers
General Farm
Wheat Prodn Costs
Barley Prodn Costs
Canola Prodn Costs
Wheat Profit Center
Barley Profit Center
Equipment Support
Canola Profit Center
Sales,General Administrative
Custom Application Profit Center
Other Inc/Exp -- Non-farm Revenue -- Govt Pmts
non-crop specifc.
Step 1 Re-think how we organize
Data Standardized ? Profit Center format to
organize data Recommended by Farm Financial
Standards Council
  • Production Cost Center Report design (same for
    Wheat, Canola, Barley)
  • Revenue/Cost Recovery
  •    Grain by-products, straw
  • Production Costs
  • Direct Costs
  •   Seed
  •   Fertilizer
  •   Chemicals
  •   Crop Insurance
  • Indirect Costs
  •   Costs Allocated from General Farm Overhead
  •   Costs Allocated from Equipment Support Center
  •   Costs allocated from Labor Support Center
  •   Costs allocated from Land Cost Center

  • General Farm Overhead Cost Center Report Design
  • Revenue/Cost Recovery
  • Conservation Cost share payments (could also go
    in Land Cost Center)
  • Production Costs
  • Direct Costs
  • Labor and Benefits (include here or in separate
    Cost Center?)
  • Utilities
  • Supplies
  • Fuel (non-farm related, i.e. bosss pickup,
    wives and kids)
  • Indirect Costs
  • No transactions likely to come as indirect
    allocation to GFO
  • Allocation Criteria Allocate to Wheat, Barley,
    Canola, Custom Application
  • Use a two-step staging of allocation rules
  • 1. Use of total revenue to allocate between
    custom application and grain
  • Allocate portion going to each grain crop by pro
    rata share of acres in each crop

  • Cost Center Report Design Equipment Support
  • Revenue/Cost Recovery
  • Gains (Losses) on Equipment Sales
  • Custom Trucking Income
  • Production Costs
  • Direct Costs
  • Fuel
  • Repairs
  • Depreciation (Mach Equip)
  • Property Taxes (Equipment)
  • Custom Equipment Hire
  • Equipment Rental Expense
  • Indirect Costs
  • General Farm Overhead (allocated from GFO Cost
  • Labor (allocated from Labor Center)
  • Allocation Options
  • Use standardized rates for assigning cost portion
    to custom farming then allocate balance of costs
    to crop enterprises on pro rata basis
  • Allocate based on of gross revenues realized
    from custom farming balance of costs to crop
    enterprises on pro rata basis

  • Report Design Land Cost Center
  • Revenue/Cost Recovery
  • Gains (losses) on sale of real estate
  • Land rental income
  • Operating Costs
  • Cash Rent
  • Repairs Costs Building Improvements
  • Real estate taxes
  • Fire Liability insurance Fixed Improvements
  • Professional fees land management fees, lease
    renewal fees and transaction costs
  • Property management fees
  • Allocation Method Allocate to crop production
    cost centers based on of farm in each crop

This is a controversial concept still in debate
  • SG A Cost Center Report Design
  • Revenue/Cost Adjustments
  • Operating Costs
  • Liability Insurance
  • General Management
  • Office/postage
  • Professional fees
  • Allocation Formula (same as Gen Farm allocation
  • Finance Cost Center Report Design
  • Similar report design to G A
  • Accumulate costs and allocate based on
  • of gross revenue
  • of total production expenses
  • of assets

Profit Center Report Design Wheat Revenue Comm
odity Revenue xx,000 Protein
Premiums xx,000 LDPs-CCC xx,000   Direct
Production Costs xx,000 Indirect
Production Costs Transferred from Production
Cost Center xx,000   SGA Allocated from SGA
cost center xx,000   Finance Allocated from
Finance cost center xx,000 Other Income
Expense Non-crop specific Govt Payments (AMTA)
xx,000   Same Format for Barley and Canola
Profit Centers
Profit Center Report Design Custom
Application Revenue Custom Seeding
Income xx,000 Custom Fertilizer
Sales xx,000 Production Costs xx,000
Direct Custom License Fees xx,000 Cost of
Fertilizer Resold xx,000 Indirect Gen
Farm Overhead (allocated from GF OH
center) xx,000 Equipment (allocated from
Equipment Cost Center) xx,000 Labor (allocated
from Labor Support center) xx,000 SG A -
allocated xx,000 Finance
allocated xx,000
RME Grant ProjectTest Drive FFSC Mgmt Acctg
  • Study group Clearwater Direct Seeders
  • Farms following similar management practices
  • Direct Seeding (NoTill) diversified PNW crops
  • Goal optimize economical and environmentally
    sound farming practices
  • Task
  • Design implement managerial reporting system
  • Update strategic plan

Teaching Strategy 1st Workshop
  • Participant Surveys
  • Farm Management Proficiency
  • Cost of Production key crops
  • Compensation Summary
  • Primer/review session Financial Analysis
  • Overview of Sweet 16 ratios trend analysis
  • Dupont Model Simulation
  • Relationships Core Concepts Management
    Accounting, Strategic Analysis
  • Case Studies
  • Shoe Box Farm, Spread-N-Grow
  • Handling Unusual Transactions
  • Assigned Homework!!!

Workshop 2
  • Center Design Manageable segments
  • Capture Periods for Cost Centers
  • Allocation Strategies
  • Financial Analysis Issues Cash vs Accrual,
    Transfer Pricing
  • Spread-N-Grow Case Study built templates for
    recording center data (see samples)
  • Transaction Worksheet record data attributes
    for select transactions with a MA mindset
  • Software Alternatives for Implementing MA
    Simulation of Spread-N-Grow with Perception

Results from Teaching Exposures
  • Concept is complexbut teachable
  • Revived interest Financial Ratio Analysis,
  • 5 Growers actually completed the template
    worksheets for the Profit and Cost Centers many
    others working on it
  • General consensus Producers need to master MA,
    but HUGE learning/implementation curve
  • Primary Motivator - Fear factor growers may
    lose competitive edge if they cant get this
    figured out

5 Grower Data Sets
  • Support Cost Centers Prepared
  • General Farm Overhead
  • Equipment Support Cost
  • Land Support Cost Center
  • S G A
  • Finance
  • Other Income/Expense

Production Cost and Profit Centers
  • Winter Wheat 5
  • Spring Wheat 4
  • Spring Barley 3
  • Spring Canola 4
  • Dry Green Peas 2
  • ? Ave 5.4 crops/farm!
  • Lentils 2
  • Austr Winter Peas 1
  • Bluegrass 3
  • Oats 1
  • Summer Fallow

Review Grower Data Results
  • ..\RME MA grant\MA Data Sets\MA Center Reports

MA Conclusions Implementation is bigger job
than most realize
  • Few have adequate foundation (skills or
  • Accrual understanding cost vs. market values
  • Ratio analysis
  • Whole Farm Financial analysis skills primitive
    at best segment level even more challenging
  • Full implementation will likely involve
  • Developing skilled CFO (internal or outsourced)
  • Major change in accounting software design

Conclusions MA design needs to mirror business
management structure
  • MA key premise measure performance by
    manageable segment
  • MA design process will expose major weaknesses in
    many business structuresparticularly poorly
    delineated accountability assignment
  • MA provides a teachable moment for
    re-evaluating personnel management
  • (see Organization Chart Center Design)

6 Principals 2 brothers, 2 cousins, 2
What is your (my) job?
empower a skilled team of responsibility center
managers to make quality decisions.
Board of Directors Dick, Bob, Mark, Todd Policy,
Management Direction, Owner Return on Investment
Financial Control
Does structure reflect authority accountability
flows? Board ? Management? Responsibility Center
RLW Pres/Gen Mgr Finance, Mktg
Office Staff Dawn, Cori
Advisory Board
Todd Specialty Enterprises Mgr
RHW Crop Production Mgr
Mark Equip. Support Transportation Mgr
Virgil Cattle Production Mgr
Advisory Board Insurance- Don
McQuary Investment- John Weibler, Jeff
Nesset Credit- Greg Sonnen Marketing-
Keith Crop Support- Jeff Becker Acctg- Jerry
Eikum Legal- Steve Cox Peer Board- Clearwater
Direct Seeders Cattle Breeding- Willard Wolf
Asst Mgr, Bldg Improvements and Rentals
Seasonal Pool Pete, Tom C, Tom L., Cori, James,
Matt, Josh, Nic, Gary Roberts
Custom Application Profit Center
Conclusions Peer Group Benchmarking is
Secondary Benefit of MA
  • Benchmarking often billed as key reason for MA
  • Loses importance once producers get into process
  • Too many variations in structure, enterprises,
    and methods of operation
  • REAL VALUE comparison of current to past trends
    in same operation and how strategic shifts can
    enhance performance in the future.

Conclusions MA Process Flushes Out Bad
Analytical/Accounting Practices
  • Using market values for transfer pricing
  • Grossing Up crop shares
  • Adding economic rental charges in accounting

Conclusions - Cost Management is where the
opportunities are
  • Historical focus has been on revenue enhancement
  • Milked this cow till it is dry!
  • Government bailouts less helpful in future
  • Real opportunities lie in managing costs
  • Segment analysis helps identify problems and
    opportunity areas
  • ? focusing on bottom line doesnt tell us much

Conclusions What CARROT motivates
implementation of MA?
  • not erotic satisfaction of doing cost and
    profit center reports!
  • MA positions firm to identify strategies that
    enhance performance in specific segments
  • Challenge Improve ability to link business
    performance analysis and strategic management
  • (Discuss experience with Dupont Model Simulation

Quality of Life
Business Structure
Strategic Plan How we do it
Succession Planning
Long Range Objectives
Short-term Goals
In-source Out-Source
Operating Plan- What We Do
Crop Rotation
Capital Plan
Value- Added
Action Plans
Strategic Alliances
Environmental Stewardship
Technology Adoption
Tillage System
WF Version-MikeBoehlje Strategic Thinking Model
Major Strategies Under Scrutiny
  • Sharing/trading labor, equipment
  • Analyzing buy, lease, vs custom hire
  • Direct Seeding (NT) transitions on the rise
  • Beefing up CFO role
  • Re-examining software adequacy
  • Looking at value added opportunities derived from
    conservation tillage
  • Re-assessing growth goals strategies
  • More focus on cropping systems vs. single crop

Debt/ Equity
Asset Turnover
Operating Margin
Every Strategic Decision impacts financial
  • Dupont Model
  • Simulation Exercise
  • Review Cases A D test data
  • Test Alternative Strategies
  • 1. Identify strategic shift
  • 2. Develop changes in operation
  • 3. Enter revised compared to baseline (Case
  • 4. Record data changes and revised ratios on

Management Accounting allows analyst to build new
level of performance analysis at the base of the
Dupont Model
Conclusions - Capture Periods for indirect cost
accumulation and allocation will be huge obstacle
for diversified growers multi-year production
  • Corn/soybeans is fairly simple
  • Combination operations with fall/spring crops,
    perennials, livestock/crop combos - tough
    challenge defining beginning and ending dates for
    transaction capture
  • Farms with most complicated MA implementation
    have most to gain from the processif dont use
    MA, never get realistic cost of production data.
  • Need to develop some alternative scenarios to
    standardize implementation

Conclusions Consensus that MA can change
marketing behaviors
  • Helps identify cost of production
  • Allows producers to set market price targets and
    execute marketing strategies tied to profit
    margin objectives
  • Alternative is Market based on hope
  • That selling price covers costs
  • That you hit top of market (whatever that is)

Conclusions Is Accurate Data One Day per year
  • Commercial producers managing millions of dollars
    of production costs, and inventory
  • Cash to accrual approaches give us
  • semi-accurate data 1 day/year (12/31)
  • garbage the other 364 days!

Conclusions Need to Assess Cost/Benefit of MA
  • Implementing MA is expensive
  • Time commitment
  • Software requirements
  • Professional support
  • Training Programs
  • What are benefits?
  • Cost savings revenue enhancements
  • More sustainable business
  • Proactive marketing programs

Conclusions - MA Implementation Is a L.T. Process
  • Similar to learning path for Precision Farming
  • Year 1 Guidance System
  • Year 2 Build field maps add field records
  • Year 3 Start collecting yield data
  • Year 4 Build prescription files and do VRA
  • Need to identify learning path or building
    blocks to fully implement MA

Conclusions Digestible Steps in a Learning
  • Accumulating real time inventory costs on
    balance sheet at cost
  • Baby Steps
  • Building standardized cost profit center report
  • Standardizing terminology - direct and indirect
    costs variable vs. fixed costs accounting vs.
    economic analysis
  • Learning alternative allocation systems
  • Isolating manageable segments that people manage
    modifying management structure then building
    system to measure results
  • Understanding data attributes of transactions and
    how accounting treatment effects integrity of
    managerial reporting
  • Accumulating direct costs in WIP
  • Learning linkages between performance analysis
    and strategic planning

Time for Questions...
Conclusion 4 - Ability to analyze overhead and
indirect costs is KEY BENEFIT of MA
  • Cost Center Report Direct vs Indirect
  • Not lots of differences in direct costs
  • Indirect/Overhead costs are often where the
    problems are HIDDEN!
  • Lots of part-time corn, bean, livestock and
    wheat farmers that dont realize this global
    competition will force strategic shifts or day of
  • Review Compensation Summary

Grower Testimonials - MA
  • Completing the MA report formats confirmed my
    thoughts that my fixed costs are too high for the
    number of acres I farmI am also making some
    changes based on the Dupont Analysis. Art S.
  • When I saw Riggers s, it scared me! No. 1, I
    couldnt get to those numbers, and No. 2, I would
    be afraid of what theyd be, if I could! Steve M.

Conclusion 10 Developing Adequate Computer
Software Is Critical Component
  • Software vendors actively engaged in MA
    debatesome more than others
  • Producers will find most current software
    inadequate to do MA properly efficiently

Major Differences Enterprising vs. MA
  • Enterprising provided a foundation for MA
  • Enterprising most useful for 1-horse show
  • OK for Investorsnot for Center Managers
  • Investors concerned about bottom line
  • Managers concerned about responsibility areas
  • Goals, decision-roles, strategies, resources
  • Performance results, cost management
  • Profit Center (aka Enterprise) Results ? function
    of multiple cost center managers efforts

Be careful how you draw conclusions
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