LAST week Harry and Sally had a discussion with their accountant about the way the farm books are kept.

The accountant does a great job in preparing tax accounts and while he is doing their tax returns they will never go to jail.

The frustration they share is that the annual accounts are of little use in making decisions about the relative profitability of their enterprises.

The accounts tell them little about what proportion of the available land they should devote to each farm enterprise.

The way the books are kept they cannot tell whether they should increase the sheep numbers in relation to the cattle numbers or the wool flock in relation to the prime lamb flock.

The overwhelming consideration in choosing an enterprise and the right mix is to enjoy working in that enterprise and be good at it.

Sally is very competent with stock, especially cattle, Harry enjoys sheep but prefers to use contractors for cropping. That could be because his father Ted was a keen cropper.

When Sally discussed the enterprise mix with the accountant and he started to talk in terms of enterprise margins, she saw red because she has been trying to get Harry to think beyond gross margins.

She understands very well that a gross margin is the total amount of income from an enterprise, minus the direct costs.

In the case of sheep that will be shearing, crutching, animal health, fodder purchases, freight, commissions and any other costs which increase as they carry extra sheep.

The attached table shows why it is important to think beyond gross margins and look at the whole business.

In the table you can see that the division "gross margin" shows that the farm made $365,000 on a gross margin basis.

The cattle had a gross margin of $120,000, farming (cropping) $90,000 and sheep $155,000.

But when the overheads have been deducted - cattle $40,000, cropping $80,000 and sheep $50,000 (totalling $170,000) - the total property gross margin is $195,000.

From that $195,000 the business still has to find the business and capital expenses, which in this example total $60,000.

In this instance, the operating profit reduces from an apparent $365,000 to $135,000.

In most cases the operating profit will not include a partner's drawings and tax has to be paid before the farm can spend capital. Capital expenditure is "post-tax" expenditure.

Modern farm management and/or general small business accounting packages make it easy to keep a track of both income and expenditure.

All it requires is a few minutes each week to go through invoices and allocate the items to each enterprise or to overheads.

Sally is determined that the accountant will have to change the reports so they are useful or she and Harry will change accountants.