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Life Cycle Budgets: The Next Step in Accounting

Editor’s note: Ron Swanson is a Galt, Iowa grower who’s taken a leading role in helping improve financial reporting systems for farmers. He’s made the transition from cash records to accrual and then management accounting. Now, he’s incorporating a new idea, life cycle budgets, which attempt to develop a database of spending to help improve projections and analysis. Farm Futures asked him why he’s tackled this new system and how it fits into his operation.

Life Cycle Budget is an enhanced computerized version of the cash flow budget that was a part of the Coordinated Financial Statements for Agriculture developed by Tom Frey in the 1970's. I started using this long hand form during this period as I felt it was a financial road map of where my operation was headed during the upcoming year. While it was an excellent tool, needless to say, since it was done with a pencil and eraser I was lucky to get it done once a year.

In the 1980's the Farm Financial Standards Council got involved and used the concepts of the Coordinated Financial Statements as the basis of their recommendations in the Agricultural Financial Reporting and Analysis (AFRA). At that time Norm Brown (of Farm Business Software Systems) took these recommendations and developed an AFRA module which included the Cash Flow Budget that was a computerized version of the long hand cash flow form I had been using. This took the drudgery out of cash flow work. This became the precursor to the Life Cycle Budget. I still use this DOS program today as I feel it is still the best cash flow budget development tool I have found.

Some time back, Norm crossed paths with Howard Doster (retired Purdue University farm management professor) and his Life Cycle Budget concept. My analysis is that this is the old AFRA cash flow program with a lot of "what if" options available. It also links back to the current financial records for the farm operation, which AFRA did not.

I served on the Brenton, Iowa, Bank Board for a number of years and I was always impressed with how they developed an annual budget for the bank and then monthly compared actual to budget on both the monthly and year to date basis. The Coordinated Financial Statements/Agricultural Financial Reporting and Analysis/Life Cycle Budget allows me the same options on my operation.

As I said in the beginning, one would probably not take off for California without a roadmap and therefore should not do the same with your financial plan.

Cost and profit centers Management accounting segregates your operation into cost and profit centers that each have to stand on their own. It takes a fundamental shift in mind set from the traditional agricultural approach to management. It is a lot like a manufacturing business where you're making a widget with raw material inventory. Costs accrue to the widget as it moves through the system. For agriculture, this allows for a better understanding of true costs for each segment. We are in the business of manufacturing ag products.

With the tighter margins, greater volatility and the ever increasing number of variables in the future ag environment, it is going to be imperative that one be cognoscente of where he is at all times in order to make best decisions for his operation.

Life Cycle Budget and Management Accounting are two tools that help one make them from a non-emotional standpoint. Producers will no longer have the option of just giving it a shot from the hip and hoping everything will work out.

Computerized "what if" scenario capabilities will become more important in determining potential outcome possibilities before making the actual decision. However, this has to be based on accurate and up-to-date data in order to be of value.

All of this is going to lead to an interesting winter in planning for 2010. Add to this the complexities of this year's weather and harvest problems and it may strain the mental health of producers, the likes of which we haven't witnessed since the 1980's.