“That which is measured improves. That which is measured and reported improves exponentially.”
—Karl Pearson

Amber Hewett
Farm Consultant / Lakeshore Dairy Services
Amber Hewett, M.Sc., is the CFO and founding partner, with her husband, of Lakeshore Dairy Servic...

Monitoring numbers is nothing new for most dairy farmers. Many have had key performance indicators (KPIs) in place for years.

Herd health, reproduction, feed intake and production numbers are monitored daily, weekly and monthly on most dairy farms. These KPIs are quantitative, practical and are used to evaluate the success of the day-to-day operational management of the dairy. Most dairies use these KPIs to define, track and evaluate the operational goals of the dairy.

The world of farming, dairy or otherwise, is a constantly changing landscape. What has worked in the past may not work today, and what works today may not work in the future. In order for your dairy to continue to be successful and thrive, the need for monitoring and measuring the business and financial side is as important as the cow and field side of your dairy.

By using herd and production KPIs, you have a good handle on the day-to-day operations of the dairy. You know what must be done daily, and you know how to get it done. Now is the time to start putting that same philosophy to work on the business and financial side and start monitoring financial KPIs.

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Financial KPIs, just like those for herd and production, must be collected regularly and constantly to start seeing trends in the data. Financial KPIs will be able to alert you if a business decision had a positive or negative effect on your dairy’s financial statements. Operating your dairy with this knowledge is extremely important. It allows you to base your business decisions on facts and data about the current condition and not on gut feelings.

Dairy farming is a tricky and finicky business to be in. There are often razor-tight margins – if any margins at all. Making the wrong business decision can hamstring your dairy, making it difficult to be profitable. Taking risks is scary enough without the added stress of not knowing your current situation.

Developing your dairy’s financial KPIs

There are several steps to identify and monitor your dairy’s financial KPIs:

1. Define financial goals. Make goals clear and specific, measurable, attainable, realistic and timely (SMART). By knowing your dairy’s financial goals, you will be able to determine which financial KPIs will track your progress and success (or failure). Do not forget to factor in your personal financial goals as well, especially if your dairy is your only source of income.

2. Develop your strategies for success. Create a road map to follow to achieve your financial goals. When creating your strategies, keep the following questions in mind:

  • Why is this goal relevant?
  • What variables will influence the outcome of this goal?
  • How will you know you have achieved your goal?
  • What timeframe would you like to use for measuring your goal?

3. Define your KPI metrics. When identifying which KPI metrics to monitor, you should keep in mind that you need to not only measure today’s performance but also select KPIs which will look at long-term success. The metrics you choose to monitor should do the following:

  • Determine whether or not you are on track in reaching your dairy’s goals
  • Evaluate the success of your strategy based on these key metrics
  • Pinpoint areas on your dairy that may need improvement
  • Identify any opportunities or challenges

Keep in mind not to let your financial KPIs get too cluttered. It is easy to keep calculating financial KPIs – but if they are not helping you manage your dairy’s financial and business side, it is not an efficient use of your time to continue with them. Only monitor the financial KPIs that matter to your dairy.

4. Monitor the financial KPIs. After you have successfully determined which KPIs are going to assist you in achieving your dairy’s financial goals, start comparing them to your plan. Your financial KPIs should be monitored monthly, although depending on the size of your dairy and the goals you are monitoring, quarterly reviews may be sufficient.

It is also a good practice to share your financial KPIs with key individuals on your dairy. Just like the herd and production KPIs your dairy monitors, your financial KPIs will do no good if they are stored on a shelf and never looked at.

As you gain more confidence in your financial KPIs, they will become a powerful and valuable tool for your dairy. They will provide meaningful and timely feedback on the business decisions and financial performance of your dairy.

Bottom line

If you are not monitoring your dairy’s financial KPIs on a regular basis, you may be missing signs of troubled waters ahead or the opportunities for improvement and growth.

By collecting your dairy’s financial data and monitoring established KPIs, you will have the knowledge and confidence to make business decisions and take the calculated risks to improve and grow your dairy.

Examples of financial KPIs

  • Operating profit margin
  • Net farm income
  • Cost of production – both per hundredweight and per cow
  • Cost of labor – both per hundredweight and per cow
  • Cost to raise a replacement heifer
  • Working capital
  • Ratio metrics
  • Working capital-to-gross-revenue ratio
  • Debt-to-asset ratio
  • Equity-to-asset ratio
  • Debt-to-equity ratio