Problems of Group Accounting
This essay summarizes our experience with group accounting to date (August 2009). As we get more experience, we will update this essay. At this stage, this essay is incomplete.
What do we mean "group accounting"?
We mean groups that do business together, where the members of the group are not employees but free agents. That is, the groups are loosely-coupled. And we mean accounting in the largest sense of the word: accountability to all members of the group for all group economic activities. In other words, a lot more than the typical financial reports (but including the typical financial reports on group activities).
Examples of such groups: limited liability companies (LLC's), co-operatives, joint ventures, open source development projects, and groups with no formal organization at all.
Typical accounting systems do not deal with the problems of loosely-coupled groups. That makes organizing and managing such groups a lot more difficult.
For example, we know several groups who use QuickBooks for some of their accounting needs. But QuickBooks does not handle the problems listed below. for example:
- inventory: on the farm, in packing sheds, warehouses and processing centers
- lot tracing from source to destination, through all stages of processing and distribution
- balancing supply and demand
- allocating customer payments to members
- managing manufacturing processes
- manufacturing process cost accounting
- managing member investments and returns
- planning for next season
Those problems can take a lot of time (often people who do not have much time) and cause mistrust in a group if the group money flows are not clear to all the members.
The purpose of group-accounting.com is to help to deal with these problems, to make it easier to organize and manage loosely-coupled business groups.
Who owes how much to whom, for what, and when do they pay?
Who does the group owe? Do this group pay the members after the group has been paid by customers, or before? Do members owe each other for deals that are done within the group? If so, how do they know, and when do they pay? What if two members both owe each other? Can they tell how the debts cancel out, and who really owes whom?
In the Southeast Minnesota Food Network (SMFN), the group owed producers for food delivered to customers, and they paid the producers when the customers paid the group for an order. Figuring out how much they owed to which producers used to take the group 15 hours per week. Now they just click a button.
SMFN is an example of a group that uses QuickBooks for a lot of their accounting needs, but uses group-accounting food distribution software for managing all of their food availability, orders, deliveries and payments to members.
The Eau Claire WI Producers and Buyers Co-op (PBC) has an even more complicated set of payment problems. While SMFN owns their own truck and warehouse and does all their own distribution, PBC uses separate distributors, and has to pay them for both pickups and deliveries. And they also need to pay meat processors for butchering and cutting. They're just getting started with group-accounting food distribution software, so we'll see how it works for them. But so far, they like it a lot.
One of the group-accounting programmers was once part of a software joint venture. The members were a group of software and consulting companies who sold and supported a software product that they had collaborated on. The members also sometimes used each others' consultants for larger projects. So sometimes the joint venture owed the members, and sometimes the members owed each other. The accountant for the joint venture ran one accounting system for the joint venture, one system for each of the joint venture members, and a bunch of spreadsheets to keep track of who owed whom for these side deals. The group-accounting software we did for the timber group could have handled all of these accounting problems in one system, with no auxiliary spreadsheets.
For the timber group, we did something to manage complicated payment scenarios like that software joint venture. The group could owe members for timber or services like logging, sawing, drying, etc. And the members could owe the group for services like marking or installation. And the members could possibly owe each other for services and timber products. So we implemented a feature that managed payables, receivables and cash flows for each of the members and for the group as a whole. If the debts between members cancelled out in whole or in part, the system would only show the remainder as payable.
Who owns what, when, and what's available for use or sale?
Does the group own anything, or is it just a pass-through?
Does the group own resources, for example, equipment or inventories of products for sale?
Both of the food networks we've worked with, SMFN and PBC, never take ownership of food products. They just market and distribute the food for their members, get paid for deliveries by customers, and pass on the payments to members, after taking a fee for their services. SMFN owns a warehouse and a refrigerated truck, and wants to set up a commercial food processing kitchen.
But in both cases, the group needs to keep track of inventories of food products that are available for sale, whether they are still on the farm, or in the group's or a distributor's warehouse, so they know what is available for customer orders. And they need to know who produced the food, who has custody now (where the food is located), and whether the food has passed its expiration date.
The timber group did take ownership of timber products once the trees had been logged. They needed to keep track of standing timber that had been marked for logging, and then track timber products at all stages of processing: logs, sawn lumber, dried lumber, finished boards, and floors and cabinets installed in customer houses. The marked trees were still owned by the timber grower, the installed products became owned by the customer once paid for, and everything in between was owned by the group.
How much of what do our customers want, and how much can they get?
How goes the group balance supply and demand?
All of our groups grow their products (food, timber). Food in particular needs to be planted or raised long before the exact customer demands can be known. So to some extent, they are supply-driven. But their customers may want more or less than the available supply. So they also need to be responsive to demand, especially because food products are perishable.
PBC had demands for a lot more hamburger, for example, than the initial group of farmers could supply. So they needed to recruit more farmers, and more meat processors.
SMFN often gets customer orders for more of particular products than their farmers have available this week, but the farmers can often go to their neighbors to supplement their own supplies.
But in all of these cases, the groups do a dance between demands and supplies, and their GA software helps them maintain their balance. Expensive ERP systems can also balance supplies and demands, but QuickBooks cannot.
How do we trace the source of a product that caused an illness?
This is called lot tracing. It is required by the USDA for food and drug products. Each food product must be traceable from the point of sale back to the original producer, and in the case of meat, back to the original animal. GA software handles strict lot traceability. QuickBooks does not.
How much money did we make on that order, project or product?
You might think of many of these groups as non-profits, but all of them have group expenses and need to make at least enough money to pay for their expenses. And the members want to make enough money to provide for their own businesses and their families. And some of the groups want to expand their operations, for example, to get into food processing, not just distribution.
We did a full set of manufacturing cost accounting features for the timber group. They could account for the costs of each product at each stage of processing, and we also provided a detailed overall profit-and-loss statement.
Manufacturing or process cost accounting is usually available only in very expensive software, and is also usually very difficult to administer and use. We made the timber features very simple to use.
Those same features will be useful to groups that want to get into any other kind of processing, for example food processing. We see a strong growth in community food processing kitchens, and are discussing software now with one such group.
Do the members invest in the group? And do they get a return on their investment?
Members have invested in each of the groups we mentioned. How those investments are handled will depend on the legal form and rules of the group.
The timber group was a limited liability company (LLC), and each of the members had capital accounts that held their contributions to the group in the form of money, timber and services. When the group got any surplus income, each member was entitled to a share in proportion to their capital account ratios.
The Producers and Buyers Co-op is a legal cooperative. We are discussing how to handle dividends to members, and will add some features to their software when we get them collaboratively figured out.
The problems we've seen include
- practical problems of administration, some that are not handled by programs like QuickBooks, and some that are not handled by very expensive ERP software'
- and problems of transparency and trust, where members of the group want to know the overall shape and often the details of the cash flows inside and arouknd the group. In particular, each member want to know all of the details of cash flows affecting them.
Solutions to the administrative problems are necessary for an economic group to work at all. Solutions to the transparency and trust problems are necessary for the group to survive and prosper, or often to get organized in the first place.