Farm Management Software Blog

What’s Your Farm Information Management Level?

Posted by Norman Brown on Wed, Oct 03, 2012 @ 05:12 PM

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What do you use your computer for?  Likely it’s to generate one of three levels of information.  This article will discuss the objectives and limitations of each and describe how to balance and coordinated them in order to a more effective awareness and control of your business.

Level #1: Compliance—What We Have to Do

Why do most farmers keep records?  It’s sad to say that somebody—usually the government or a lender—is forcing them do it.  From tax returns to crop insurance to FSA forms to a banker’s balance sheet, it’s the job every producer does grudgingly and sometimes half-heartedly.  Compliance records are indeed the “great equalizer”—a cost center that every business has to maintain, producing information that’s neither timely nor relevant for management decisions due to these limitations:

[1]. Low perceived value and quality of the information are the natural outcome from shoveling random data into the jaws of a bureaucracy without the benefit of clear feedback or tangible payback.  [2].  The generic format required to fit a complex farming operation into broad categories on a government form or a non-agricultural accounting program dilute most of the  benefits of keeping that data in the first place.  [3]. Lack of continuity results from most compliance records’ “zero-based” format, which means starting from “scratch” in each reporting cycle.

It’s no wonder that a majority of producers never climb above this level.

Level #3:  Decision Support—Where We Want to Go

Timely, well-informed decision support is the real profit center and ultimate objective (therefore, “Level #3”) behind an information system.  The Ferguson System is a classic example of using financial ratios and indices as means to an end:  objective, timely decisions.  Other decision support tools include Kaizen (continuous improvement) budgets, contribution margin analysis, Statistical Process Control, production benchmarking, executive dashboards, and consulting services.

Decision support often comes in the form of “decision aid” software, usually based on specialized scientific or economic models.  These programs are widely accepted because they offer instant gratification, are forward looking, provide a logical outlet for domain expertise from universities, Extension and agribusinesses, are often free or subsidized by their providers, and can be created and maintained easily through spreadsheets or web applications.

The latent hazard behind free-standing decision aids, however, is that they too often hinge on “heroic assumptions:” 

Easily-accessible “Rules of thumb” become “quick and dirty” substitutes for localized knowledge (which requires significant time and effort to accumulate and organize).  As a result, decisions are based on either an amalgamation of industry averages or even worse, assumptions cherry-picked from the upper echelon of performance standards (since what producer doesn’t consider himself “above average?”). 

The more specialized (and therefore parochial) the source of the knowledge behind an application, the more likely the developers will either ignore critical factors outside their field of expertise or even worse, use naïve or over-simplified assumptions as they venture beyond their competency.  For example, production-focused programs such as mapping and livestock feeding software often used “plugged” costs with no tie-out with accounting.

Pre-programmed decision aids assume that the end user understands the terminology and is providing data that is accurate, complete, objective and standardized.  A deviation in any of these areas will distort the reliability of the analysis.  For instance, if an economic crop model calls for a land cost input, it must be clear what is and isn’t included in that land cost.

Most ad hoc decisions are now solved using the “Crescent Wrench” of the farm office—spreadsheet software.  While infinitely malleable and powerful, this tool is only as reliable as the assumptions and debugging process provided by the “do-it-yourselfer” operator.

Modern production agriculture is getting much too complex, dynamic and integrated to make critical decisions based on single-dimension, partial budgets isolated from other inputs and consequences within the business. 

That’s one reason an intermediate level (#2) is crucial step in reaching Level #3.

Level #2:  Business Processes—How We Get Things Done

Compared to the wide adoption of occasional decision support and annual compliance reporting by average producers, only the most intense managers use computers to control day-to-day business processes such as budget monitoring, inventory control, purchasing, marketing, production records, human resources and managerial-level accounting.  It’s not that the rest of agricultural world doesn’t somehow perform these functions, it’s just that they do them out of habit or in a reactive, off-the-cuff manner as opposed to the formal, standardized approach employed by other industries.

Important as business process cost centers are for tracking operations, these applications’ real potential is when they begin connecting with decision support software.  As a result, your decisions can finally combine knowledge (Level #3) with accurate, up-to-date, and relevant data (Level #2).

Tags: cost accounting, accrual accounting, agricultural managerial accounting, agricultural decision support, business processes, agricultural inventories, quickbooks, agricultural compliance