Cost Control Considerations, Part 3: Specific Cost Control Strategies

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. So far we have discussed net cost of production and breakeven milk price, the starting point in managing cost control , and the usefulness of a budget . This week we will cover a few specific cost control strategies.

 

6 Specific Cost Control Strategies

Figuring out where to start might seem overwhelming when managing for costs. The first place that will get the biggest response in the bottom line is the largest expense— on most dairy farms, this is feed. Between purchased feed and growing forages and/or your own grains, this may arguably be the expense area that gets the most attention, and rightfully so. There are many ways to track feed and crop expense. Income-over-feed-cost can give you a good idea of the kind of return you are getting for your feeding investment, especially if you can incorporate component efficiency as well. Employing your nutritionist, feeder, herdsman, and financial manager in tracking this area will help you achieve optimal results.


Beyond converting feed into milk, the following are some tried-and-true strategies to consider for effective cost control. Along with each item are a few examples, but with a little brainstorming I’m sure you and your crew can think of many more:

1. Review purchasing procedures – Who should authorize purchases and how? How loose is your operation to employees purchasing supplies? Can anyone go to the local hardware store and charge purchases on account or grab stuff off the IBA truck? If ordering items by mail, stop to consider if the part is really needed overnight. Can you inventory some items, order ahead of time, and save on shipping charges?
2. Review suppliers – Is there a lower cost provider available? Will competitors match prices found elsewhere? This may be a good area to ask employees if they can find alternatives, too.
3. Negotiate, negotiate, negotiate – It’s been said that everything is up for negotiation and you may be surprised just how much is – especially with terms and contracts. One that I hear many farms working out is a contract with an A.I. company for semen purchasing and/or arm service. Usually it’s a monthly price that covers so many units of specific quality and/or so many breedings. Other possible areas are cash discounts, professional service fees, and many more.
4. Review policies and other contracts – Have your insurance premiums been going up? Is it possible to review coverage levels or shop around for a better deal? How about your cell phone contract? Is it just me or does it seem like new or higher fees keep slipping in to my bill every few months? Health insurance is another big area to investigate – there should be a “navigator” or someone at your doctor’s office who can help you wade through options or point you to the right direction on a health exchange.
5. Bulk purchasing – Are there any items that could benefit in savings by purchasing in large quantities and storing? Copper sulfate for foot baths and hoof care has been mentioned often as going up in price recently. Can you buy by the pallet and obtain a bulk discount? How about calf grain – do you buy by the bag or will a small grain bin work?
6. Repairs – Repairs is a common category that can be manipulated to reflect current cash flow. Putting off maintenance or opting for the cheap way out often happens when cash is tight; however the old adage that an ounce of prevention is worth a pound of cure can be particularly true here. How many times has something happened that you could see coming but didn’t get around to or make plans to avert? That cheap hydraulic oil on special may look like a good deal, but what does it really cost you (or your transmission) running it through your new tractor? While repairs tends to be an area to pinch in low milk price years, too much deferred maintenance can add up. 

These are just a few areas to consider for managing cost control on your dairy farm. Next week we’ll go over a few employee-specific concepts as it relates to cost control.

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

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

Tax Changes Affecting Individuals: Part 2

-Kristen Murray,  Financial Services Specialist

If you are a wage earner, by now you may have noticed a decrease in your Federal withholding and a corresponding increase in your net paycheck. This change is the result of newly published withholding charts that reflect reforms to the tax tables for years 2018-2025. Last week, I discussed major changes to credits and deductions that will affect the taxable income of individual taxpayers. The next step in the process of projecting your 2018 tax liability is to apply the new tax tables to your projected taxable income.

Below is a side-by-side comparison that serves as a simple example of the effects of the TCJA.

You will notice that this comparison includes income from a small number of sources. This is for simplicity of demonstration. One major source of income that is missing is business income. I specifically excluded this from the above example so that next week I can dedicate the majority of my post to the effects on business income and more specifically, the section 199A qualified business income (QBI) deduction. Until then, happy calculating and may the TCJA be ever in your favor.

For more information, email FinancialServices@yankeefarmcredit.com or call 1-800-370-3276.

Tax Changes Affecting Individuals: Part I

-Kristen Murray,  Financial Services Specialist

If you were following the publicity surrounding the Tax Cuts and Jobs Act (TCJA) prior to its enactment, I expect you heard mention a time or two that it was designed to provide, amongst other things, significant tax relief to middle income earners. So, if you are an individual classified as a middle income earner you are probably asking yourself, “will I benefit”? The answer, as with most things tax related is it depends. There are several factors that require consideration before an individual can determine whether the TCJA will prove adventagous for them. Such condisderations include but are not limited to eligible credits and deductions. What follows is a chart that reviews notable changes to many popular credits and deductions. Something to note, if you generally do not itemize, you may focus your review on the areas in grey.

AGI: Adjusted Gross Income

AMT: Alternative Minimum Tax

MAGI: Modified Adjusted Gross Income

Then and Now: 2017 to 2018
Deductions and Credits	2017 Single	2017 MFJ	2018 Single	2018 MFJ
Standard Deduction	$6,350.00*	$12,700.00*	$12,000.00*	$24,000.00*
Additional Standard Deduction over 65 years of age and/or blind	$1,550.00*	$1,250.00 ea.*	$1,600.00*	$1,300.00 ea.*
Personal Exemptions	$4,050.00**	$4,050.00**	$0.00	$0.00
Itemized Deductions - Medical Expenses	Excess of 7.5% AGI (tax reform retroactive change)	Excess of 7.5% AGI (tax reform retroactive change)	Subject to 7.5% AGI Returns to 10% for 2019	Subject to 7.5% AGI *Returns to 10% for 2019
Itemized Deductions - SALT (state/local property, state/local/foreign income and general sales tax)	Allowed subject to AMT phase-out rules	Allowed subject to AMT phase-out rules	Maximum deduction of $10,000.00, foreign income tax excluded, subject to AMT phase-out rules	Maximum deduction of $10,000.00, foreign income tax excluded, subject to AMT phase-out rules
Itemized Deduction - Mortgage Interest	Interest paid on maximum acquisition indebtedness of $500,000 (including home equity) subject to AMT rules	Interest paid on maximum acquisition indebtedness of $1 million (including home equity) subject to AMT rules	Home equity interest disallowed and maximum acquisition indebtedness reduced to $375,000 for post 12/31/2017 acquisitions, subject to AMT rules	Home equity interest disallowed and maximum acquisition indebtedness reduced to $750, 000 for post 12/31/2017 acquisitions, subject to AMT rules
Itemized Deduction - Miscellaneous subject to 2% AGI	Qualifying expenses allowed	Qualifying expenses allowed	Previously qualified expenses disallowed	Previously qualified expenses disallowed
Child Tax Credit	$1000/qualifying child, subject to income phase-out beginning at MAGI of $75,000	$1000/qualifying child, subject to income phase-out beginning at MAGI of $110,000	$2000/qualifying child, subject to income phase-out beginning at MAGI of $200,000	$2000/qualifying child, subject to income phase-out beginning at MAGI of $400,000
Refundable Portion of Child Tax Credit	Refundable up to $1,000, subject to earned income and other qualifying factors	Refundable up to $1,000, subject to earned income and other qualifying factors	Refundable up to $1,400, subject to earned income and other qualifying factors	Refundable up to $1,400, subject to earned income and other qualifying factors
* Not Subject to AGI Phase Out		** Subject to AGI Phase Out

Stayed tuned, as next Wednesday I will review the interaction between such changes and the 2018-2025 tax tables.  It is a lot of information to take in, and (borrowing a line from my Yankee colleague Dan Shepard), “you will require a seat but only use the edge”. Exciting stuff folks!

For more information, email FinancialServices@yankeefarmcredit.com

Tax Reform and Health Care – What You Need to Know

-Kristen Murray,  Financial Services Specialist

Based on several recent conversations with both members and non-members, it is my impression that most individuals are unclear as to whether or not they will be subject to the shared responsibility payment in 2017 and subsequent years. There are many areas of the Tax Reform and Jobs Act (TRJA) that are not explicit, the Affordable Care Act (ACA) is not one of them. Here is what you need to know.

2017 tax year – The ACA remains in effect and all individuals must indicate, whether they had minimum essential coverage, qualified for an exemption from the coverage requirement or will make a shared responsibility payment (IRS.gov). If subject to the “penalty”, the calculated payment will be due with the tax return. If taxpayers omit this information, electronically filed returns will be rejected and paper filed returns suspended. In short, you can no longer file without disclosing this information and taxpayers are obligated to follow the law as written in 2010.

2018 tax year – Contrary to popular opinion, for 2018 the ACA remains in effect. Taxpayers will still need to account for the ACA shared responsibility payment when making health care decisions in 2018. Filing requirements will remain the same as the preceding tax year.

2019 tax year and beyond – This is when it happens folks; there is no longer a shared responsibility payment (penalty) for failure to obtain minimum essential health coverage. The ACA remains in effect, but the penalty now calculates as $0.00, rendering it null and void.

Please email FinancialServices@yankeefarmcredit to learn more.

Tax Reform and Depreciation – "A Balancing Act"

-An update on current tax reform from our Financial Services Department

The Tax Cuts and Jobs Act (TCJA) modified several categories of depreciation. What follows is a list of the most significant changes. While the act provides taxpayers increased latitude in regards to depreciation and direct expensing (writing off a current year equipment/machinery purchase i.e. tractor), it requires that taxpayers recognize gain/income when trading certain previously depreciated property (“pay back” depreciation previously taken on the traded equipment/machinery). The TCJA giveth and it taketh away.

Like-Kind Exchanges – Historically, the exchange of depreciable real and personal property of a like-kind class did not result in recognition of gain or loss provided both pieces of property were “held for use in a trade or business”. The TCJA limits like-kind exchanges to real property and as such, exchanges of personal property (machinery etc.) no longer qualify for non-recognition of gain or loss. Essentially, trade-ins of equipment and other personal property will be treated as sales and result in a taxable event.

Cars and Listed Property – Passenger automobile depreciation limits have increased significantly and may be increased further through the use of bonus depreciation. Computers are no longer required to be treated as listed property and as a result no longer subject to the listed property rules that may limit depreciation benefits.

(MACRS) Modified Accelerated Cost Recovery System – The MACRS recovery period for farm machinery and equipment has changed from 7-years to 5-years (excluding grain bins, fencing, or other land improvement) and the 200% depreciation method of MACRS made available when previously farmers had been limited to the 150% MACRS method.

Bonus Depreciation – Bonus depreciation has increased from 50% to 100% (“full expensing”) and has been expanded to include both new and used property of qualifying recovery periods. A word of caution, many states do not recognize (disallow) bonus depreciation and excessive use of such a tool may result in unexpected state tax liabilities.

Section 179 Expensing – Pre-inflation adjustments for Section 179 limits have been increased to $1 million on expensing and the phase-down threshold increased to $2.5 million annually.

For more details and any questions or concerns, please contact us at:

FinancialServices@yankeefarmcredit.com or visit yankeefarmcredit.com

Data Backups are Critical

-Danielle Tierney, Financial Services Assistant

 Have you ever experienced a computer failure or lost your data somehow? If you have, you know how frustrating it can be and how important backing up your data is. If you haven’t experienced a data loss, backing up is a great way to avoid it happening.

Having both onsite and offsite backup is the best way to ensure data safety. Backups can be used to restore you to a point in the past. So when or if something goes wrong with your computer, whether it be data corruption or a catastrophic failure you have a restore point to go back to so you won’t have to re-enter all of your data. Think of it as insurance. Restoring to the last known backup saves time and ensures business continuity.

We can safely provide offsite backup for your accounting software. Simply send us a backup monthly or quarterly and we will provide you with assurance that you can restore your data in the event of data loss or computer failure.

Furthermore, we can restore your database in our office and review your records to assist you with making any corrections or adjustments needed, providing your operation with accurate financial reporting to use in the management of your business. Our team is here to assist you with whatever financial record services you need. For more information visit us at Yankeeaca.com.

Spring is Here!

Now is a great time to do a little spring cleaning of your financial records. You are likely either going through the data for your 2016 tax return, or have recently completed it, so all of the information should be fresh in your mind. What a perfect time to review those things that took a little longer to figure out and fine-tune your system to make it easier for next year. For example:

• Maybe it’s a change to your chart of accounts where you have similar accounts and you now realize they could be combined into one account.

o   Did you know there is a function in most accounting software that will combine one or more accounts and all of the history?

• Maybe it’s providing more detail to your accountant, loan officer or other third party by breaking out certain accounts such as:

o   Raised vs. purchased livestock

o   Family living and personal allocations

o   Allocate principal and interest

• Maybe it’s a matter of the way you enter your data.

o   Enter quantities such as lbs., number of head

o   Detail in capital assets changes

o   Coop patronage retained

In any event, we at Yankee Farm Credit are here to help with the knowledge and experience to make those records squeaky clean!

We'd love to help with your Spring Cleaning, click here so we can get started.

FINANCIAL RECORDS PAINT THE PICTURE

We recently shared the #1 reason for having an 
accounting software program –

“For viewing information that allows you to make informed management decisions.”

In addition, there are times it may be necessary to provide financial information about your farm to third parties such as loan officers, consultants and others. Accounting software gives you the ability to track information about your farm, making it easy to provide third parties the detailed information they require. Whether it is for your management team, loan officer, tax preparer or workman's comp auditor, with a good agriculturally oriented accounting software system in place, financial management should be the easiest part of running your business.

If you are interested in discovering how your accounting software can help you manage your business, need help setting up your accounting system or are thinking maybe now is a good time to hire an outside professional to process the financial accounting data for you, we want to hear from you. Comment below or send your questions to our team at Yankee Farm Credit.

Is your Financial Management System as efficient as it can be?

While accounting software may be easy to find and purchase, what really matters most is the ability to enter your data into the program in a way that is meaningful. The system you use should allow you to enter transactions easily and intuitively so the data will be accumulated into the correct ‘income or expense bucket’. If your business accounting software system is not intuitive or is just plain difficult, you will find mistakes being made, and this will make the analysis of the data extremely difficult, if not impossible.

The number one reason for having an accounting software program is for viewing information that allows you to make important management decisions. Are you able to pull out the information you have entered in such a way you can make good management decisions for your business? Taking a bigger picture view of the business using reports to analyze where the business is, where it has been and where it should go? By using your accounting software and data in the correct way, you are ensured of making better, more informed decisions, thereby improving your business’s profitability in the short term and for years to come.

Are you:

• Interested in discovering how your accounting software can help you manage your business. 
• In need of help setting up your accounting system. 
• Thinking maybe now is a good time to hire an outside professional to process the financial accounting data for you.

Our team at Yankee Farm Credit is here to assist you!
 Click here to request more information, or visit us at 
yankeeaca.com