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ACCOUNTING TIPS FROM DAD'S DAIRY FARM

Updated: Feb 4, 2023




This article was originally written and published in The Business Bulletin.


People often ask me about how I got started in the Accounting and Tax business. So here’s some background history, including a bit of a tribute to my Dad, who passed away in August 2008.


Dad never was a big success in the business of farming, but in the business of child training he scored well. Now looking back, I see he mixed it all together somehow. As I work through the dialogue, I’ll try to mix in some helpful advice.


We were a big family on a small dairy farm. By the time I came along as child number ten, Dad had learned the art of delegation. So growing up I knew that records were a part of life. Each month the DHIA worker would drop off meters so we could sample each individual cow’s milk and record the amount they produced. Dad chose the cheaper method of doing most of that testing ourselves instead of hiring the worker. From little on up I was fascinated by the process of rows of milk samples and a big green and white printout with row after row of performance and health records. Each time a calf was born the dam and sire were recorded. Each cow we culled was listed along with a date and reason. In order for us to know the sire of a new heifer calf, breeding records were kept, including the sire’s registration number from the AI catalog.


Now along with his ability to delegate, he also had the ability to motivate his children, aka employees through various ways and means, some more subtle than others. For example the person in charge of the herd records was given the title “Assistant Herd Manager.” So that felt good, along with a cash bonus every time the rolling herd average (milk production) passed another 1,000 mark. You can imagine that we paid attention to the numbers and objected strongly if Dad wanted to cull a good producer just because she was a kicker or mastitis prone. We also understood well the meaning of the term “assistant” which means your vote is secondary to Dad’s.


The youngest boys always had to feed the calves, but even that job carried a title. My older brother Danny was “Calf Manager” and I was “Assistant Calf Manager.” True to his motivation skill Dad took his calf managers along with him to a meeting on calf health hosted by a local vet. We were the youngest and most enthusiastic listeners in the crowd and the vet took a liking to us. When he had to make a trip to the farm he always consulted with us about our death loss rates and what we were doing to prevent and treat scours, vaccinations, etc, etc. It was a great lesson to learn as boys, that record keeping was a management tool and good management made a difference. If you don’t have records, how can you know if you’re making progress and thus reward yourself at the end of the day?


Dad helped us get a checking account as teenagers when we barely had enough money to pay for an order of checks. He said we needed to know how to handle money. He then made it very important to us to “Reconcile with the bank every month without fail.” Too bad all Dad’s don’t teach their boys that, it’s very good advice. I remember helping him as a little guy, I would flip through the cancelled checks calling out the amount as he called off the check number. Then, when we got that stressful reconciling done, Mom would record the checks and deposits in the columnar book. We call that method “single entry accounting” and it’s still good enough today for many. At any rate it’s better than just adding up your checks or receipts that you’ve sorted on piles on the kitchen table.


Then one day when I was about 16 or 17, Dad took me along to an FHA meeting where they explained the significance of Balance Sheets and Profit and Loss, or Income Statements. “Cash Flow” was a term that was beginning to be important in those days when loans were not being paid on time anymore and many of the farmers were in trouble with their loans, even though their financial statements showed they were “solvent” or had more assets than liabilities. Dad showed his confidence in our ability to learn and manage by getting us involved, even though our input was subject to the Presidential Veto.


Today in my practice, I find that many people in business don’t understand the concept of a Balance Sheet and an Income Statement and how they work together to tell about financial health. But if you don’t understand it, don’t feel bad, because I’m going to try to help you understand it. See the example below:




A Balance Sheet is simply a report that shows your current financial position as of a certain date. For example a Balance Sheet dated 12/31/2008 shows your financial picture that day. If you had $500 in the bank and owed your neighbor $100, then you had equity of $400. If early on the 31st you accidentally threw a rock through your neighbor’s window and that’s why you owed him the $100, or if the day before you were $100 in the hole but somebody donated the $500 to you, none of that would matter. A Balance Sheet just shows your financial position on that day, period, not how you got into that position. That’s why you need an Income Statement to go along with it.


An Income Statement is a report that shows the results of your business operations over a given period of time. An Income Statement should always give the date it covers like “month of January 2008” or “calendar year 2008.” So how are these financial statements used? Well, for one thing, bankers look at them. A Balance Sheet is usually arranged with the assets on one side and the liabilities on the other. Then it is further broken down to current (or short term) assets, long term assets, current liabilities and long term liabilities.


It is readily apparent that if you have many more short term liabilities than short term assets, you’re going to run out of cash soon. You will either have to make quick profits, sell long term assets, or borrow money. But a Balance Sheet like the one above is what we would call fairly healthy with a current ratio (short term assets versus short term debt) of 2:1. Also the total debt to asset ratio is less than 50%. But can the business service it’s debt? We don’t know that yet, we need to look at the Income Statement following:




So if we leave a lot of details out, we could say that the above business could likely service it’s $12,000 debt with it’s $15,000 annual profit. We can also see that it wouldn’t take very many months of no sales to use up the cash reserve. But as long as sales keep coming in, this business is viable. You’re starting to get the picture now, I hope, of how financial statements work together to tell a story. Dare I say you should begin to use them, not just grudgingly produce them for your banker at his request? And don’t forget another old saying Dad used to quote: “Figures don’t lie, but liars figure.” (Samuel Clemens)


Dad loved to memorize and he had many, many sayings committed to memory, including some of the old “Burma Shave” advertisements that used to line the roads when he was a boy. Here is a sampling, the first being his all time favorite:


In this world

Of toil and sin,

The head grows bald

But not the chin!

- Burma Shave


At the school zone

Heed instructions.

Protect our little

Tax Deductions!

- Burma Shave


From the cradle

To the hearse,

Nothing happens

But could be worse.

- Burma Shave

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