The past year has confirmed one lesson for many of us in the dairy business: Not one of us holds a crystal ball to see the future. However, for many farming operations, a golden ticket is within reach.
The golden ticket to dairy farm profitability is an accurate documentation of cash going into and out of the business: a cash flow statement. With this information in hand, a dairy holds the keys to its own future and can make sound, informed decisions. This foundational document is the primary piece of paper I look at as a dairy farm consultant, and it’s the tool I use to determine what changes need to be made to improve profitability.
A cash flow statement can be the difference between making money or losing money. For it to truly be a “golden ticket,” the statement must first be vetted for accuracy, then used to run cost scenarios, revisited regularly and stress tested.
1. Review for accuracy
A true cash flow statement must include real, correctly coded numbers to be a practical tool for driving dairy farm profits. Errors and hidden numbers are common. Some are unintentional; for example, a hoof-trimming expense accidentally coded in the bookkeeping system as a feed expense. Others may be on purpose – if a partner or owner is hiding payouts or payments. Inaccurate numbers will only produce misleading projections.
2. Run scenarios
With accurate data inputted, a cash flow statement can then become the basis for uncovering true costs and discovering opportunities to make profitable changes. There are two common areas where running scenarios with the cash flow statement can clarify decision making:
- Replacement heifers – While many dairies are actively tightening heifer inventory, I encourage my clients to go one step further and question if raising their own heifers is a financially sustainable venture, or if they may be better off simply purchasing replacements. A pretty accurate estimate to raise a calf from birth to freshening is $2,000 but, looking back over the past five years, a dairy could easily have purchased a fresh cow at peak milk for $1,500. That’s a $500 savings with the bonus of immediate milk in the tank.
Running this scenario can paint the picture of a viable solution for some dairies to capture profits; however, it does require discipline. The dairy must budget ahead for the replacement purchases every month and earmark cash for this purpose.
- Cropping – Running scenarios on the cropping side may also uncover profit opportunities. Look at corn silage, for instance. Are you able to put corn silage in the bunker for $40 per ton? If it’s costing more than that, it’s time to dig into the costs. Evaluate expenditures for inputs, land rent and equipment. Along with cropping, evaluate nutrient management plans and manure-handling costs.
3. Revisit regularly
Come back to the cash flow statement regularly, but look beyond the numbers on the paper. In my role, I spend time getting in the trenches with employees such as the feeder or the herd manager. This gives me a clear picture of how they work on a daily basis; in turn, that helps to verify the accuracy of the data going into the cash flow statement and look for places to gain efficiencies at the same time. Some line items can be revisited annually or semiannually while others, such as feed ingredients that change on a regular basis, should be reviewed monthly.
4. Put the numbers to the test
With true numbers in hand, dairies can accurately determine their cost to produce each 100 pounds of milk. Looking ahead to the coming year, it’s important to set goals for where that cost needs to be and then put a plan in place to address each area of expense.
Perform a stress test by answering the following questions:
- What will it take for the dairy to produce milk for $15 per hundredweight (cwt) or $17 per cwt?
- Is that attainable for your dairy?
- What changes must be made to reach those costs?
- Are you comfortable doing what it takes to get there?
- If not, what will an exit plan look like?
Reducing cost of production to $15 per cwt is an expectation some dairies are facing from their lending institutions right now. It is attainable – but only with a solid, truthful and accurate set of numbers to work from and the right team members to walk you through it. A cash flow statement very well could be the golden ticket for making money in 2021.
