The dairy industry continues to see massive changes in areas of financing, financial management, employee retention, compliance and expectations in operating efficiencies.
At this juncture we no longer discuss change as a surprise or a short-lived industry burden, but more as a constant that needs to be expected and planned for. Planning to be “future ready” is no longer a luxury, but a necessity.
Producers who continue to make long-term commitments to the industry need to continue to be conscious of major factors that have a significant influence on their survival and profitability.
Factors most dairies currently track and manage:
- Cost control
- Production efficiencies
- Debt load
- Nutrient management
- Animal comfort and health
- Milk quality
New factors to consider:
1. Financial risk management
2. Labor – the cost of turnover vs. the cost of consistent good labor
3. Facility consolidation and updating costs vs. savings
You can measure many of these factors with budgets, financial statements, key performance indicators and operational benchmarks. These will help give you a picture of “lagging indicators.”
For the best proactive decision making, you’ll want to balance those “lagging indicators” with “leading indicators.”
“Leading indicators” are available through sensor technology, robotic equipment and innovative software systems that collect hundreds of data points on a daily basis that identify patterns and allow the earliest possible predictions of future performances. Problems can be identified and corrected before they happen instead of after.
None of these measurements will help if you don’t have the right management team looking at the data and making big-picture decisions for your organization. The change from a one-person management team to a multiple-person management team is a function of current markets’ rapid changes and the availability of massive amounts of data available.
As industries consolidate into fewer, but larger producers, just as the dairy industry has over the past couple decades, experts are becoming a necessary part of the management team.
Once you have your management team assembled and they are assisting you using a balanced “indicator” approach to manage your dairy to be more profitable, keep in mind that in your operations, not all experts will continually be a part of the team. You might identify situations where an expert is part of the team for a certain time period or for a certain project.
And once the desired outcomes are achieved, they are done. Members of this team may consist of nutritionists, engineers, lawyers, accountants, financial planners, construction managers, your equipment sales reps, bankers, etc. Each expert is invaluable as a resource within their area of expertise and each brings a huge amount of value to the team.
Let’s explore some of the newer factors your team could be tracking and assessing – financial risk management, labor, and facility consolidation and updating.
Financial risk management
To manage this, experts you may need on your team include your banker, your financial planner, your accountant (who may serve you better here if they are a CFE, Certified Fraud Examiner, or has CFEs on their accounting team) and possibly your lawyer. Are you heading into a difficult year? How do you mitigate the financial risk of a bad period?
How are you protecting your cash flow and assets through downturns? On the flipside, how are you protecting your cash flow during prosperous times? Financial risk issues also involve the protection of assets, including excess cash flows necessitating the avoidance of embezzlement.
When operations are able to use excess positive cash flows to catch up on debt and vendor payments, it is rarely left lying around in bank accounts or excess inventory levels. Since cash flows create the ability to catch up with liability payments, some operations start to see some growth in their cash balances or reductions in their lines of credit. This positive cash flow takes on additional risks including potential embezzlement.
Labor
To manage this, experts you need on your team include your operations manager, your accountant and sometimes, outside efficiency and human resource consultants. Do you know how much money you’re losing to turnover compared to how much money it would cost to hire more carefully vetted, higher-paid, and more stable employees?
Do you know how much your benefit package is costing you and what pieces would be most valuable to retaining your current employees or recruiting good future employees? Often, the cheapest labor with higher turnover rates does not serve your operation well and is losing you money and causing you and your operation more stress than it’s worth.
As a first step, take a look at all of the W-2s you’re issuing for the year. How many of those employees left the organization over the last year?
(Total W-2s minus current employees tells you how many employees exited over the year.)
How many are still with you? If you break out different kinds of employees, such as general labor, administrative, management, etc., how do each of these segments fare individually? How long has your longest-standing employee been with your organization? What’s the average length of employment among your team?
(Employment length of Employee A + employment length of Employee B, etc. divided by number of employees)
Facility consolidation and updating
To manage this, experts you need on your team include your operations manager and your accountant. Depending on what you need done, you may also include sales reps for equipment you intend to upgrade or sell, your banker to finance changes, real estate professionals to buy and sell land and buildings, and construction professionals to renovate or construct new facilities.
Engineers or efficiency experts may help calculate how much you’re losing to inefficient layouts or multiple facilities that would function better as one consolidated operation.
In summary, there are many factors you can track and manage to help keep your operation running well, including, but not limited to, the 9 key factors outlined above. Keeping track of both “lagging indicators” and “leading indicators” will help give you and your team a balanced approach that allows you to be proactive and ready for changes as they arise within the industry. PD
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Mark A. Brady
- CPA, Partner
- Cooper Norman
- Email Mark A. Brady
