Managerial Accounting Extends Knowledge Base

Knowing more about your business requires accumulating transactional information for every business segment.

Competitive advantage can take many forms. The number of management options and combinations that may offer our businesses some competitive advantage is nearly infinite.

Examples might include superior production performance in certain areas, such as:

• A greater number of weaned pigs/mated breeding female/year than is typical for specific genetics or for our area.

• A more effective wean-to-service interval resulting in a greater number of pigs/litter.

• More current information on the rate of gain in a nursery or finisher. This may give us the ability to respond more quickly to deviations from planned performance — managing prospectively rather than retroactively.

We may have superior financial performance in certain aspects of our business, such as:

• Greater than typical amount of working capital allowing us more flexibility in procuring inputs such as feed.

• Greater amount of sales for the dollars we have invested in our business resulting in superior asset utilization.

• Lower weaned pig production costs than those who purchase weaned pigs from others.

With all the possibilities, how do we know whether we have a competitive advantage or what that competitive advantage might be?

Presuming we do know our competitive standing in an area of our business, and presuming we wish to improve our position, how do we know what to do about it?

One of the intents of the National Pork Producers Council (NPPC) production and financial standards is to help producers answer these and other questions.

The production and financial standards are about improving the knowledge we have about our businesses. In light of the significantly changing nature of our business environment, improved knowledge is essential.

Some say that in today's business world, doing things right is not sufficient to deliver business success. Today, more than ever, we also must focus on doing the right things. Of course, one of the challenges is doing things right, while also focusing on doing the right things. To meet this challenge requires appropriate use of our business and industry knowledge.

An essential part of the production and financial standards is the use of managerial accounting methods to provide us with greater knowledge of our business.

Managerial accounting, as employed in the production and financial standards, is about accumulating transactional information for manageable segments of our business. These manageable segments are some combination of profit and cost centers.

Managerial accounting methods have been the essential means of handling accounting information for internal management decision-making in all areas of our commerce — except production agriculture.

Managerial accounting has been a key tool used by managers and owners of businesses to gain more knowledge of their businesses and to seek competitive advantage. This is especially true in the manufacturing sectors of our economy. These tools are now available to those of us involved in agricultural production.

Profit centers are the parts of our business that comprise our main efforts at generating revenue — generally the various commodities. These parts of our business are the primary source of our profit.

Cost centers are those parts of our business established to provide some form of support for other cost centers or for the profit centers. For example, breeding and finishing production segment cost centers provide support for our pork profit center.

To effectively employ managerial accounting in our businesses, we must evaluate a number of aspects of our operations.

Some of these aspects deal with our ability to do a quality job of capturing appropriate information along with an assessment of the tools we have available. Another might deal with an issue such as management intent.

We must ask ourselves the reason we have included a specific area as part of our business.

For example, why do we grow corn? Do we raise corn to make a profit by being in the corn business? Or, do we grow corn because we seek a competitive advantage by lowering feed costs while assuring a specific quality of feed?

Is our behavior as a manager consistent with our stated rationale for an area of the business?

The answers to these types of questions help us determine our true management intent. This, in turn, helps us determine if a manageable segment of the business is a profit or cost center.

These questions and many others are addressed in a process used as part of the production and financial standards training program. Participating producers end up with a managerial accounting structure and action plans they have created to meet their unique situation.

Another aspect of the managerial accounting component of the production and financial standards is reporting guidelines. Specified income statement reporting for profit and cost centers provides, for the first time in agriculture, a separation of the cost of production, the cost of general business administration and the cost of financing.

This innovative reporting approach permits a more complete understanding of cost components of our businesses. When this is combined with the common-sized income statement components of three columns/unit of production information (e.g. dollars/female farrowed, dollars/head sold or dollars/cwt. sold) we have new capabilities of assessing our business performance.

From both an internal and external comparison perspective, we are better able to look at our performance in spite of size differences and are better able to review the viability of different production and financial strategies. These strategies may be technology driven, geographically driven or simply the result of choices made by different managers and owners.

Whatever the reason, interested producers have the opportunity to obtain more complete knowledge of their business, its performance and their competitive advantage.

Throughout the development and educational programs of the production and financial standards, much of our discussion has focused on the production and financial measures used and how they are reported.

However, internal communications is another area in which the use of a sound managerial accounting approach has enhanced competitive advantage for its users.

The accumulation of information based on production and financial standards methods creates a platform from which more effective internal communication can more easily occur. Communication can be more effective because the information is more complete and coordinated with the way the business is managed.

Similarly, communication occurs more easily when the information is based on well-founded systems and processes. This allows much of the emotion to be removed from the information.

Complete, effective communication is an essential component of establishing and maintaining competitive advantage.

Donald W. Gillings, Ag Education & Consulting, LLC, Savoy, IL and E. Allen Lash, AgriSolutions Inc., Brighton, IL