Setting up a reliable record-keeping system is one of the first stages of becoming a good ranch manager. Accurate recordkeeping has numerous benefits, like helping an operator develop realistic forecasts for the next year and improving relationships between accountants, lenders and commodity brokers. A strong inventory management system is an important part of financial recordkeeping because it allows producers to keep track of raw materials like hay and feed and finished goods like calves, stockers and fed cattle.
However, while it is necessary for ranchers to monitor the number of cattle on hand, finding a good inventory software program can be challenging. Many operators choose QuickBooks for this job, especially if they are already using the program to meet other financial accounting needs such as paying bills, making deposits and creating invoices. However, keeping accurate inventory records in this program is difficult.
According to Mark Wilsdorf, author of the QuickBooks Farm Accounting Cookbook (1999), three primary problems exist when accounting for agriculture inventories in QuickBooks. The first relates to inventory feature confusion. Program users often find that inventory management capabilities are buried under layers of menus, small business accounting jargon and reports with unfamiliar names. For example, livestock purchases are entered under the Items tab of a check instead of the more common Categories tab, and livestock sales work best when recorded as a sales receipt instead of a typical deposit. Also, to see if inventory flows correctly, the user must run an Inventory Valuation Detail Report, which is hard to find in the Report Center. Simply put, knowing where to go and how to properly enter ranch inventory can be challenging.
The second program issue is a lack of manufacturing inventory features. Farmers and ranchers are similar to manufacturers because they buy raw materials (hay, feed, etc.), supplies and labor, and then use them to make (raise or produce) a finished product. However, the QuickBooks inventory system was designed for retail businesses that simply purchase merchandise at wholesale then sell it at retail. As a result, the basic design of QuickBooks assumes all inventory is purchased and does not provide an easy way to account for raised crops and livestock. While manufacturers can work around this problem by creating Work in Progress and Finished Goods inventories, this approach does not work well for agricultural operations that use cash-based accounting systems.
The final problem with QuickBooks inventory is the program makes automatic postings which are wrong for agricultural cash accounting. In other words, it simplifies inventory transactions by posting certain accounts “behind the scenes” without the user’s input. Since QuickBooks was designed for accrual accounting, these automatic entries produce incorrect results for cash-based ranching operations. This poor design of inventory features causes many producers to use a different program such as Excel to manage day-to-day cattle tracking and just enter inventory values in QuickBooks when they need to create financial reports for bankers, accountants, etc.
While QuickBooks doesn’t work well for raised inventories, it can be effective under other circumstances. For example, if a rancher’s primary business is to purchase stocker cattle for resale, this type of business structure is similar enough to a retail business that the program’s inventory system operates quite effectively. To demonstrate this concept, let’s work a stocker inventory example in the QuickBooks Online Practice Company.
Before we begin, keep in mind that inventory tracking is only available in QuickBooks Online Plus or higher versions. Ranchers with QuickBooks Simple Start or QuickBooks Essentials subscriptions cannot take advantage of this feature.
QuickBooks stocker cattle inventory example
Assume a rancher purchases 100 light stocker cattle for $1,200 per head from Dylan Sollfrank (a preset vendor). Approximately four months later, he sells 95 heavier stocker cattle for $1,700 per head to Diego Rodriguez and makes an inventory adjustment of five head for death loss.
Steps to inventory management
- Make sure the inventory feature is turned on by clicking the top gear icon and choosing Your Company: Account and Setting. Then, under the Sales menu, scroll to Products and Services and click on the pencil icon to activate inventory tracking.
- Set up a stocker inventory item by choosing Sales: Products and Services on the left navigation bar. Select New, then enter an inventory item called Stockers and a category called Cattle. The beginning inventory will be zero, and the date should be before the initial purchase date.
- Purchase light stocker cattle by writing a check. Select +New, then Vendors: Check on the left navigation bar. Be sure to choose the Item details instead of Category details in the voucher section at the bottom (Figure 1).
- Sell heavier stocker cattle a few months later by creating a Sales Receipt. Select +New, then choose Customer: Sales Receipt on the left navigation bar (Figure 2).
- Account for death loss by making an inventory adjustment in the Sales: Products and Services list on the left navigation bar. Scroll down to the Stockers item and select Edit: Adjust Quantity. Make sure the adjustment date is after the sale date, then enter 0 as the new quantity on hand (Figure 3).
- Last, check if everything worked correctly by running an Inventory Valuation Detail Report in the QuickBooks Report Center (Figure 4).
In conclusion, keeping a comprehensive ranch inventory system is crucial for efficient management, financial planning and overall success. However, while QuickBooks is a useful accounting program that helps ranchers perform multiple bookkeeping transactions, the inventory system has major shortcomings when dealing with raised crops and livestock. Whether or not this feature is worth the more expensive subscription level depends on the type of cattle operation and personal preferences. Many ranchers find it’s faster and easier to keep track of livestock numbers outside of the program in an Excel spreadsheet and only enter inventory values in QuickBooks when they want to run financial reports.
For producers wanting to learn more about financial accounting, Texas A&M AgriLife Extension offers Beginning QuickBooks Online for Farmers and Ranchers. This self-paced, three-hour class teaches the financial concepts and features most important to agricultural operations and can be found online.
