Additional Information
The below has been taken from the Breedcow and Dynama user manual version 6.02 Holmes WE, Chudleigh F and Simpson G (2017)
Accounting and budgeting processes used in Breedcow and Dynama
The Breedcow and Dynama package is based on conventional accounting and budgeting concepts, as adapted to extensive beef cattle enterprises. The concepts of net income, the return on capital, net worth, gross margins and cash flow are employed in the construction of these software programs.
Breedcow and Dynama analyses are used to make better decisions on sales, investment and adoption or non-adoption of husbandry practices. Beef cattle enterprises operate on a production cycle of up to five years for turnoff stock, and ten or eleven years for breeders. Cash flow budgeting measures usually cut the production cycle into segments of one year and cash transactions occurring in one year do not tell the whole story, since changes in herd composition also add value to the business or take it away. Keeping track of the livestock numbers and values enables inventory changes to be valued and incorporated in analyses of profit.
For this reason, the Dynamaplus program pays special attention to calculating herd structures and projecting stock numbers by age and sex. The budgeting processes of the Breedcow and Dynama suite of programs use the same concepts and measures of financial outcome as used in accounting, although accounting records and analyses past performance, while budgeting attempts to plan or predict future performance.
Tax accounting versus management accounting
Tax accounting uses rules which simplify the more comprehensive ‘management accounting’ but may end up giving a less than true picture of the financial result for that year. Examples include:
- The treatment of livestock trading accounts. For cattle enterprises, inventory values (the values of opening and closing stock) in tax accounts of $40 or $50 per head are typically shown, while the real values may be more like $400 to $400 per head. Tax based estimates of “net income” will thus be understated in years when cattle numbers increase and will be overstated in years when the herd is sold down.
- Balance sheet adjustments. Most assets will be shown at their original purchase cost or at unrealistically low written down values in taxation accounts (due to higher than actual depreciation rates being applied). Consequently the balance sheet may not give a true representation of the current value of the business and of the owner’s net worth. Major listed companies solve this problem by periodic asset revaluations (up or down) to ensure that the balance sheet shows a true picture, and a better one to present to a lender.
- Depreciation rates. Machinery has, in the past especially, been written off in taxation accounts at a rate well in excess of its real loss in value and some long lived water improvements have been written off either in one year or over three years. Consequently, most tax depreciation schedules now show only some of the plant and equipment still being used and some depreciation rates will be excessive. These effects might or might not cancel each other.
- Tax accounts may have the business spread over several accounting entities. One or more partnerships (or sole traders, or companies, or trustees) may own the land and the improvements on it, while another entity operates it.
Some grazing businesses address these shortcomings in the tax accounts by having their accountants prepare both management and tax accounts from the same set of figures.
The Breedcow and Dynama suite of programs (except Taxinc) assume the use of management accounting values and processes in all budgets. The accounting entity analysed need not be the same as analysed by the tax return(s). Livestock trading accounts are calculated with inventory values based on sale prices (these may be adjusted in Dynama+). Asset values and depreciation should be stated at realistic market (not tax) values.
How the accounting measures fit together
Key measures of business performance and position include net income (or net profit), cash flow, gross margins and net worth. Net profit is the primary measure of business performance and includes cash and non-cash components. It is a measure of outcome for a specific time period, e.g. the financial year 1st July 2011 to 30th June 2012.
In a beef business, net profit equals
- livestock trading profit, plus
- sundry income from other sources, less
- cash business expenses, less
- non-cash business expenses
The main non-cash business expense is depreciation, although the value of inventory change (plus or minus) may be included if there are variable quantities of fuel, fodder etc. on hand. (The value of livestock inventory change is dealt with in the livestock trading accounts).
Net profit represents a return to equity (net worth) and unpaid labour.
Livestock trading profit (or loss) also has cash and non-cash components. The cash component is the value of sales less purchases. The non-cash component is the increase or decrease in livestock inventory value. Cash flow, for a specific time period, comprises all cash coming into the business, less all cash passing out of the business. The cash flow calculation includes the cash components of net income plus any capital transactions plus non-business outlays (drawings).
A gross margin is a subset of net income. It is a measure used on one component of the business at a time, e.g. the cattle enterprise or the haymaking enterprise. The gross margin comprises the income from the enterprise, including inventory value increase or decrease, less the variable costs of the enterprise. The gross margin per unit of enterprise measures the effect on net income of adding or removing one unit of that enterprise.