Cost Control Considerations, Part 2: Budget, Plan, and Monitor

Cost control is a major driver of profitability in any business, let alone a dairy business. While cost control may be a recent topic of conversation in relation to where milk prices are presently, it really should be considered and focused on consistently in a well-run business. The key to effective cost control is not necessarily cutting expenses, but rather spending dollars wisely. Over the next several posts, we will share a collection of advice geared toward considerations when aiming to lower your net cost of production. Last week we discussed the net cost of production and breakeven milk price, the starting point in managing cost control. This week we go over the usefulness of a budget.

 

Budget, plan, and monitor 

Creating an annual budget, reviewing, and updating it periodically can help identify trends early, make adjustments quickly, and plan accordingly. A budget is often compared to a road map that charts a course through the year or some other time period, identifying obstacles along the way. You anticipate what will be coming in as income and what will be going out as expenses, as well as any principal payments or capital replacement needs. It helps when making a plan to accomplish goals you may have, or to satisfy any needs that may arise.

 

When considering cost control, a budget helps to track expenses especially when compared to actual results. This can shine a light on areas that may need more attention. For example, perhaps you discover that insurance premiums have gone up significantly without any other material changes in the business. A call to your insurance agent can help to set things right again, or maybe it’s time to find a new insurer. Another example is bedding cost per cow is up significantly – is it a result of the supplier’s cost increasing or is usage increasing? There are many other examples.

 

A few other reasons to budget as you consider strategies for more effective cost control:

1. Evaluate performance of specific area
2. Employee management and/or engagement
3. Sharpen understanding of operations
4. Help meet goals
5. Facilitate discussions
6. Avoid surprises
7. Motivate to be creative/use resources more effectively 

“What use is a budget if I’m just going to blow it the next week with some big tractor repair?”

I sometimes hear this objection to creating a budget. Consider making your budget a work-in-progress, updating it when you have new and better information. You could update the budget and make plans for a big tractor repair, adjusting other aspects accordingly. Milk price forecast is another area that changes several times throughout the year – adjusting for these changes can help hone expectations.

 

In the next post, we will discuss several specific cost control strategies.


By: Joanna Lidback, Business Consultant
JLidback@YankeeFarmCredit.com

Yankee Farm Credit through the Ups and Downs

When profits are up it’s easy to think about what your lender can do for you: finance new equipment, construction of a new building, or help you buy land. When times get a bit more stressful, however, your lender may not be on your radar as someone to turn to for potential help.

It’s important to know that Yankee is here for you both in good times and when things aren’t quite as rosy.

 

If a time comes when finances feel challenging it is important to communicate with your lender and work together to create a plan. We understand the ups and downs of agriculture, and also how much heart and soul our borrowers invest in their businesses. Here are some options that Yankee may be able to so do for you during low periods:

 

• Work with you to ensure quality financial records in order to accurately analyze balance sheets and income statements
• Offer up to three hours of free business consultation to get started on a detailed budget 
• If the current debt load isn’t affordable, help to identify how much debt you can afford and suggest ways to achieve that
• If we are not able to lend new money, we may still be able to defer principal on the current debt
• We may be able to re-amortize the loan in order to lengthen the term and reduce payment levels
• Help preserve net worth

We stand by the Farm Credit System's mission to support rural communities and agriculture with reliable, consistent credit and financial services, today and tomorrow. 

 

For more information on how we can help you, please contact your local branch office by clicking here: YankeeFarmCredit.com/locations

Cost Control Considerations: Part 1

Cost control is a major driver of profitability in any business, let alone a dairy business. While cost control may be a recent topic of conversation in relation to where milk prices are at present, it really should be considered and focused on consistently in a well-run business. The key to effective cost control is not necessarily cutting expenses, but rather spending dollars wisely. Over the next several posts, we will share a collection of advice geared toward considerations when aiming to lower your net cost of production.

Know your cost of production, your breakeven milk price, and the difference between them. 

The first step in knowing where you stand in dairy production economics is knowing your cost of production – but that’s not enough. Your cost of production takes into account operating expenses like, feed, labor, and overhead costs such as interest. It does not, however, include principal payments or capital replacement. And it may or may not include family living expenses. What’s more, sometimes analysts will net non-milk income out against variable expenses, so what you’re left with is a net cost of production – one that can easily be compared against a milk price forecast in order to get an idea of where profit or loss levels will be.

However, cost of production and net cost of production leaves out a very important element, particularly if you have any debt. What you really need to be aware of is how much cash is needed to fully fund the operation, including those non-deductible items like principal payments. Breakeven milk price starts with net cost of production, subtracts depreciation as it is a non-cash item, and adds principal payments. It’s called “breakeven” because it leaves you in an even position cash-wise – not in the negative nor in the positive. Again, comparing the actual milk price and its forecast will give you a good idea of what to expect.

Still, breakeven milk price leaves out capital replacement, which is needed to keep your operation running smoothly for the long term.

You may find that you are burning through cash reserves.

In some cases, you may find that you are “burning” through cash reserves – in some circles, this is known as the “burn rate”. More is going out than coming in. You and your banker may be interested in this number as it is a measure of negative cash flow and what will be required to fund operations until you are in positive cash flow again. This is accomplished by using cash reserves, liquidating unproductive assets, accessing new capital, or deferring principal payments.

Next week we will discuss the usefulness of a budget, or a road map when considering cost control.


By: Joanna Lidback
JLidback@YankeeFarmCredit.com

 

Stop Worrying, Start Planning: Preparing for Estate Planning.

Joanna Lidback, Business Consultant

This article was first run in the March issue of the Miner Institute Farm Report.

It’s a Thursday evening. Chores are done, the bunk’s been covered, and supper was an hour ago. You’ve been thinking about the future while you stare at whatever show is flashing on the television screen – what’s going to happen to the farm? Are the kids ready to take over? Is it time to pass on owning the farm? You know you’re not going to live forever, but how does this all work? How will your living expenses be covered if you no longer operate the business? What exactly will you do in “retirement”? Maybe it’s time to start the discussion.  

Starting the discussion is the first step in estate and succession planning. Estate planning is the process of arranging for the passing on of an estate – your assets (and liabilities). Succession planning is arranging for transferring of management – both daily operations and major decision making. For this article, we’ll focus on preparing for estate planning.

Knowing where you are and how you stand is critical to beginning the estate plan. Advisors, both financial and legal, will be looking for a checklist of information that often includes the following:

• Family information: Names, ages, and statuses of family members (and whether any are interested in taking over the farm); any other beneficiaries
• Business information: Form of business, co-owners, and if entity – details of ownership, pertinent documents
• A list of assets and liabilities: both personal and farm-related
• Rented real estate acreage essential to the farm – any related lease documents
• Bank accounts
• Insurance policies: Life, long-term care
• Retirement funds
• Any preliminary estate planning information: Wills, trusts, social security information, etc.

Another step in the processes of starting your estate plan is to consider what you want to get out of the process and/or how you envision life after the plan is in place. Each person involved in the process, usually you and your spouse, should brainstorm a list of goals or objectives to accomplish. Your list may grow or change as you get further along in the process and that’s okay as long as you communicate those changes with everyone involved. Here are a few examples to get you started:

• Provide for living expenses for both spouses after retirement
• Retire or “reinvent yourself” at age 65
• Fully transfer farm assets to son and/or daughter
• Be able to travel in retirement
• Minimize estate and any other taxes
• Quickly pass on assets and ownership responsibilities
• Be sure farm remains a farm for future generations

There are a few important people to identify that you will be asked about as well. You will need an attorney who can help you make decisions from a legal perspective and to draw up legal documents. You may be asked if you have an executor or personal representative to see that your wishes are carried out, a trustee to manage a trust if you create one, and a guardian if you have minor children or dependents in your care. A financial adviser can help you clarify your objectives and develop alternatives to choose from when putting together a plan to bring to your attorney. He or she can also guide you through implementing the plan and monitoring progress.

Yankee Farm Credit offers business consulting services that can fulfill the role of financial advisor as you venture into this next phase of business planning. Call your local office or check out our website, YankeeFarmCredit.com, to see what we can do for you. Good luck!

Joanna Lidback

JLidback@YankeeFarmCredit.com

(802) 334-8050