For many farmers, it's common to hold a year-end meeting with their accountant approximately six months after their year-end date. By that time, they are well into the next cycle of their farming operation and are focusing on what's currently happening, rather than thinking about what happened during the previous year. This type of thinking results in missing important opportunities to not only evaluate the previous year's success, but to help plan for the future and improve the farm's performance.
The starting point in doing this type of analysis is the income statement. Often the main focus of the income statement is the net income or the bottom line – is it better or worse than last year? However, looking only at your bottom line may not give an accurate picture of how well the farm is really performing. It's important to go through the income statement in detail, analyzing different revenues and expenses and the relationships between them. This will give you a better picture as to why the bottom line ended up where it did. If your yearly income statement shows your revenues have doubled, review if your bottom line doubled as well. If it hasn't, why not? What expenses increased disproportionately to keep the bottom line from doubling? The question is then, how can those expenses be reduced?
Often too much of the focus is on revenue and not enough on expenses, resulting in situations where the increase in revenue does not translate into an increase in the bottom line. When reviewing the income statement, it is useful to look back over several periods, typically five years, to see how the current year's performance measures up. Compare your feed expense from the current year against expenses from previous years and determine if it's up or down. Do you know why it is up or down? What did you expect it to be? To understand the fluctuations in the expense, several years need to be considered to determine if the change is a one-time anomaly or the trend.
To understand the changing relationship between revenues and expenses, don't just look at the final numbers, instead, view those numbers as a percentage of revenue. For example, if your feed costs doubled in the year, what does that number look like in terms of the change in revenue? If the doubling in real dollar costs came about with a doubling of revenues so that both year's feed costs are the same percentage of revenue, it would appear that you're growing your operation at a controlled rate.
If the feed costs increased from 20% of revenue to 39% of revenue, some questions need to be asked to determine why this change occurred and how it will affect operations in the future.
Our use of trend analysis is done annually based on your year-end. As management, you can take this analysis to the next level and use your internal financial statements to monitor the trends on a monthly rotating basis. This would allow you to look at the trends closer to real time and spot issues and opportunities to improve the operations of your farm on a timely basis.
You have more data in your records than what appears in your year-end financial statements. An analysis based on a number of inputs would also be very useful, for example comparing the cost of fertilizer to the total kilograms of fertilizer purchased.
This would allow management to segregate changes in cost in components based on price and quantity. You would be able to determine how much of the change in costs is controllable (i.e. quantity used) and how much is not controllable (i.e. price), or perhaps that is also controllable, by using techniques like hedging or volume purchasing.
Trend analysis is looking back at what happened in the past and applying it to the future. BDO's team of professionals can help you perform an in-depth trend analysis in order to fully assess your farm's performance and establish benchmarks and models to help you better manage your future.
To learn more, please contact your local BDO office or:
Bill Lodewyk, CPA, CA
Partner
Jennifer Milman, CPA, CA
Manager
About BDO
One of the nation's leading accounting firms, BDO Canada provides assurance, accounting, tax, and advisory services. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs.
About BDO's Agriculture Practice
BDO's dedicated team of professionals works with producers, agribusiness owners, farm organizations, and co-operatives, offering a full range of assurance, tax, business transition, and other services to help them succeed. As farms evolve and leverage new methods to streamline their operations, cut costs, and increase production, our professionals are ready to advise on how to maximize these investments for success.