It often comes up, should we transfer hay to our livestock enterprises at cost or market value? Should we transfer our calves to our yearling operation at cost?
Of course it can be done either way. In fact, you might do it both ways, one way for your tax accounting and one way for your management accounting. Good arguments can be made for either approach.
Ultimately, what we choose to do reflects on how we think about our business. If we’re cattle ranchers, we probably only think of our hay as a necessary evil to get our cows through winter. And producing our own hay has certain advantages, especially if we only consider our cash costs. Recently, I had a manager tell me that the only cost of haying was fuel and bale string. The tractor was paid for and the labor was already living in the house. That type of incomplete accounting certainly doesn’t give us the information we need to make good decisions that drive us toward profitability.
In my mind, the biggest danger of transferring at cost is information loss. Transferring at cost risks giving up a lot of information. Losses and gains can be passed along to the next enterprise without stopping to be analyzed where they occur. If your feed production costs are high, it’s probably making your cow-calf enterprise look bad and your yearling enterprise look worse! If your feed production costs really are low, maybe you’re propping up an inefficient livestock enterprise. Even if you’re not actually going to sell the hay off the ranch, knowing your real costs identifies areas that need improvement.
Transferring at market values shows profits and losses at the levels of the business where they are occurring. Many ranches are made up of two or more enterprises. Often they don’t contribute equally to the bottom line. Let’s set ourselves up to quickly identify the thoroughbreds and the dogs. Then, we can make changes accordingly. Maybe we drop laggard enterprises and focus on our strengths. Or, maybe we allow our thoroughbreds to carry us for a bit while we focus on areas that need improvement. Transferring at cost shows us where we need to focus and allows us to make informed decisions.
True single-enterprise ranches are rare. Unfortunately, most ranches (even large ones) are accounted for in one big bucket. Essentially there are two categories: costs and sales. That approach leaves us with little ability to find problems. Even worse, the all-in-one-bucket approach makes decision making time consuming and VERY slow and inaccurate. Decision making feels like gambling. While reasonable people can debate the pros and cons of transferring at cost or market, the all-in-one-bucket accounting system is universally inadequate.
Do you know what it costs you to raise a ton of hay? Do you know the cost of raising your replacement heifers? If you can’t get to that number quickly, you need a new accounting system. And don’t use the number your tax accountant gives you. He has different goals.
The profit oriented ranch needs a bookkeeping and accounting system that produces quality information quickly. Test the time it takes you to make informed decisions. There are plenty of variables that we can’t control in ranching like weather and markets, take control of the things you can: Know your numbers.