What is…the

Farm Financial Standards Council (FFSC)?

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.

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.

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.

Today’s 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

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:

Financial Guidelines for Agricultural Producers

• Reporting and analysis at entity level

• Heavy emphasis on external parties

• Financial position and performance

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.

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.

Management Accounting Guidelines for Agricultural Producers

• Reporting and analysis by business components

• Heavy emphasis on management purposes

• Closely linked to business strategy

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

Managerial Accounting Guidelines

114 page document6 Core Concepts:

1. Requirement for accrual, cost-based accounting records2. Responsibility center approach for information

accumulation and reporting will be used3. Integration of production factors/measurements4. 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.

Managerial Accounting Guidelines

Eight Sections:

1. The need for understanding costs2. Basics of managerial accounting3. Management accounting levels of reporting4. Management accounting issues for agriculture5. Chart of accounts6. A process for setting up your system7. Glossary and definitions8. Appendix A

This is not your father’s record system

Information Sources – What do we have? What should we have?

Weather forecastWeather trends

Market trend

Political developmentsStatus of economy

Economic costs

Planning

Cost studiesTax policy & position

Production reports

Tax revenue and expense

Crop scouting reports

Consumer attitudes

Environmental assessments

???

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?

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

Operating PlanOperating Plan- “What We Do”

Strategic PlanStrategic Plan“How we do it”

Production

MarketingFinancing

Capital Plan

Growth

SuccessionPlanning

Value-Added

StrategicAlliances

TillageSystem

Diversification

CropRotation

BusinessStructure

EnvironmentalStewardship

WF Version-Mike Boehlje Strategic Thinking Model

Vision

Long RangeObjectives

Short-term Goals

Action PlansKRAs

Evaluate

Budget

MissionQuality of Life

TechnologyAdoption

Why farmers are paid big bucks!Why farmers are paid big bucks!

Genetics

Key Question for the Farm Manager:

“How can managerial accounting

be used to measure the impact of

Strategic Decisions?”

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

Strategic Options – Revenue Enhancement

• Adopt technology to improve yields• Marketing options to maximize price

– Value-added– GMO’s– Organics

• Off-farm supplementation• Custom services to utilize underemployed assets, fixed

overhead• Lobby for more government support!

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

How Do We ImplementManagerial Reporting?

• Learn core concepts of managerial accounting

• Standardize definitions and methodology

• Work through case study applications

• “Test drive” concepts in your business

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

Major DifferencesEnterprising 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

MA not “new revelation”…why such little adoption in AG?

• Past margins allowed SLOP…didn’t 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

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?

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

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

You are welcome to learn, join, and contribute…How to find us:

Farm Financial Standards CouncilN78W14573 Appleton Ave., #287

Menomonee Falls, WI 53051

(262) 253-6902cmerry@countryside-marketing.com

www.ffsc.org