The year has certainly flown by. After a drawn-out spring gave way to summer, fall is now here. We hope extended warm temperatures allow corn to continue to mature, allowing dairy producers to build adequate inventories of good-quality feed for the year ahead.
But while harvest dominates our thoughts, it’s never too early to start focusing on year-end financials.
Top producers in today’s dairy environment do an excellent job of monitoring profit and loss statements throughout the year. It allows them to be more prepared at year-end to estimate any potential tax liability while also having the necessary funds in place for either prepaid expenses or capital replacement items.
Shortly after year-end it will be necessary to update balance sheets for an accurate assessment of all assets and liabilities of the operation. It is important to compare these figures to previous years. This will help establish an accurate assessment of the year.
With the improvement in milk prices to date, paired with a more favorable outlook as the year ends, dairy farms should be able to begin repairing some of the balance sheet deterioration seen over the last several years. While 2020 may seem far off, it’s good management strategy to begin thinking about the year ahead and what the outlook may hold.
More of today’s dairy producers are spending increased amounts of time preparing budgets for the upcoming year. It allows them to manage their business proactively versus being reactive to market changes. It also provides an indication of the overall direction of the business. It grants the ability to focus on the critical management areas to increase profitability.
High-performing dairy operations tend to look at benchmark information to see how they compare to their industry peers. Benchmarking data can be a good source of information to rate the performance of your operation.
Budgets important
Preparing a budget every year and then monitoring the performance of the operation to that budget is equally as important, if not more so. A well-defined budget will incorporate the results of the previous year; provide estimates on revenue, expenses and attainable margins for the upcoming year; and the projected profitability based on the accuracy of those assumptions.
This allows dairy producers to look at the tools available for risk mitigation, efficiency enhancements, capital needs and returns to the operation for those investments. In addition, it offers an understanding of potential changes to their business model under consideration for the upcoming year.
Changing heifer strategies
One example of this has been producers changing management practices related to their heifer inventories. Several years ago, it wasn’t uncommon for dairy producers to strive to keep every possible heifer they could, either for a future expansion or when they had a stronger market for cattle sold for dairy purposes. This brought a positive rate of return to the farm and enhanced the operation’s profitability.
As industry dynamics deteriorated, however, the value of these cattle dropped, and fewer producers were able to sell heifers at a favorable price. Astute managers realized that what was once a complement to their overall business became a liability.
The cost to raise an unneeded replacement began to negatively affect the bottom line. Dairy producers began to target the number of replacements needed to sustain their herd and employed new management tactics, including breeding lower-genetic-value animals to beef, extending the voluntary waiting period for first services and aggressively culling poorer-performing animals at a younger age.
Over a short time, these managers increased the efficiency and profitability of their operations because they were able to identify an area of their business that had changed. By adjusting their management practices, they were effective in reducing their costs, positively impacting their bottom line.
Creating a detailed and accurate budget – looking at revenues, expenses, capital investments and managing risk – will increase the probability to enhance your operation’s performance as you begin to “manage by the numbers.”
For operations who haven’t historically done this, it’s imperative to understand the importance this has to your success as the dairy industry continues to evolve. While it may seem overwhelming to tackle this on your own, utilize the resources available to you, including an accountant, business adviser and your lender.
It’s important to keep in mind this is your business’s budget. Your advisory team can give input or advice to help put the budget and strategy together, but execution is critical.
One of the biggest factors we’ve seen over time is when the operation takes ownership of the budget they develop and are proactive in monitoring results and making adjustments as needed. It is no different or less important than the decisions you make regarding your cattle, crops, equipment, labor or land.
