Are You Always Running Out of Time?

This article is based upon the teaching of author Steve Chandler, whose work I admire and follow closely. However, the story is also based upon an actual Client relationship of mine.

On our way to an important bank meeting, my client turned to me and said, “I wish I had more time to prepare for this – I’ve been so busy I didn’t do a thing for the meeting.” “Are you kidding?” I asked. Busy? Doing what? So we analyzed it: 84 hours per week at the dairy, 21 hours firefighting, and 18 hours in meetings!

In a typical week, the rest of his time was spent playing defense – filling out numerous forms, answering many “urgent” requests, and returning calls. He was spending about 6 of the 18 hours in meetings, listening to others talk about what they’re going to do or have recently done. He spent about 45 minutes actually doing work on new projects he’s currently involved in. And he spent exactly 15 minutes a week on inventing his next breakthrough steps.

WOW!!! This is frightening! Is this why this client entered the dairy business? Hardly. What’s the solution?

*    Better Time Management – Perhaps

*    Better Prioritization – Probably

*    More Delegation of Decision Making – Definitely

*    More Outsourcing – No Question! Especially in the areas of government and environmental reporting.

The reason it’s scary is because if you do the math of what his business actually gets paid for, it’s precisely the opposite of the way my Client was spending his time. When he goes on vacation, those minutes of “urgent emergencies” just sit there, and nothing particularly horrible happens. And in the rare weeks when he doubles his big-thinking time, he’s likely to come up with an insight that will pay the bills for the next six months or even a year.

As author Seth Godin says: “So, do you really think you’re too busy to work on something remarkable? In fact, you’re actually too busy to do all that (non-urgent) emergency stuff.” Think about it!

Ahead of the Game!

I love the following quote from General Eric Shinseki of the U.S. Army: “If you don’t like change, you’re going to like irrelevance even less.” What is he saying? We’ve got to keep up with change! Be like the Boy Scouts, who are always ready to – “Improvise, Adapt, & Overcome!” Every producer has lots of new challenges: Higher Feed Expenses, Rising Insurance Costs, and more Government Regulations. We are in a constantly changing industry environment where decisions we made five years ago are not necessarily as effective as they previously were. It is time for each of us to take back the reins of the decision-making process and adopt a more proactive approach moving forward. Management consultant Peter Drucker stated that, “The best way to predict your future is to create it.” Yes, you’re saying, but how can I do that, since I’m a “Price Taker” when it comes to my milk price, and under the present circumstances? I’ll tell you how – get out from under those circumstances. Change your thinking. Alter your approach. It has been said that if you keep on doing what you’ve been doing, you’re going to keep getting what you’ve been getting…I contend that simply may not be true. In some cases, your results could be worse! So, what do we need to do?

  • Embrace change as you encounter it. Of course, we all like the familiarity of our normal day-to-day processes. At times, I am guilty of this, too. However, when things are changing as rapidly as they are in the dairy industry today, we run the risk of getting “run over” if we simply stand still.
  • You are thinking that you just finished restructuring your bank debt and have most of your vendor payables caught up (hopefully). You’re asking: “Can’t I stop and take a break?” My advice: Do so at your own risk.

Take the time to check all of your efficiency measures, and I do not mean just your costs/cwt. These are important, but be sure to look closely at other measures such as cows milked/hour, pounds of milk shipped/full time worker, the average age of your first lactation females at calving, and feed efficiency (pounds of energy corrected milk/pounds of dry matter fed). Improving these items could save your business. Think about it!

How Does He Do It?

In this blog, I thought I’d share some thoughts on efficiency.  The efficiency measure I want to discuss, though, is one tied to the conversion of assets into bottom line profits. Dairymen often ask, “I’m milking 600 cows and netted about $800 per cow last year.  This year I’m not even breaking even.  How does that young guy down the road with 3,000 cows and $6,000,000 of debt make it?”  After I ask them to clarify how they know that he has $6,000,000 of debt, I usually explain that the answer lies within the realm of productivity per unit or efficiency.  Another way to explain it is to look at their costs per hundredweight (cwt.) as measured by the leading accounting firms in our industry. The dairy industry is a volume business, marked by the need for efficient conversion of assets into bottom line profits.  Whether we like it or not, producers are “Price Takers” not “Price Makers.”  Dairymen ship their product to their cooperative or other processing company without knowing what they will get for their milk.  Unlike a “Price Maker,” such as an auto dealer who might be able to hold his inventory until he gets the price that he wants from a buyer, a dairyman sells a highly perishable product and thus needs to ship it for processing as soon as possible.  Unless he has the ability to process it into a storable form, such as cheese, and then sell it later, he must take what the market offers him on any given day.  That makes him a “Price Taker.” Thus, a dairy operation has two primary ways to influence its profit levels, either by increasing its volume of milk sold or by lowering its costs of production.  The following equation is one that I like to use to explain dairy profitability: Profit = ((Revenue/cwt. – Variable Costs/cwt.) X Number of cwt.) – Fixed Costs

  • Primarily the volume of milk sold per cow determines revenue.
  • Variable Costs include expenses that vary with the number of cows milked such as feed, some labor, supplies, repairs & maintenance, veterinary & breeding costs.
  • Fixed Costs include rent, debt repayment, most insurance, and professional fees.

What’s the message?  Spread your fixed costs (and some of your variable costs) over a larger number of hundredweights or cows and watch your profits increase. Perhaps a numerical example would help:                         >> Year 1 <<                                    >> Year 2 <<                                     600 Cows        3,000 Cows           600 Cows     3,000 Cows Milk Revenue/cwt.      $14.00             $14.00                         $11.50             $11.50 Less: Variable Costs   <10.75>           <10.05>                       <10.75>           <10.05> Less: Fixed Costs          <1.25>             <1.15>                         <1.25>             <1.15> Net Income/cwt.         $  2.00             $  2.80                         $ <.50>            $  0.30 X  200 cwt./cow         X  200             X  200                         X  200             X  200 X  Number of cows    X  600             X 3000                        X  600             X 3000 Net Income                 $240,000         $1,680,000              $(60,000)      $180,000 As you can see in the previous example, the larger operation does a fairly good job of spreading their fixed costs as well as reducing some variable costs per hundredweight.  Thus, it is apparent why the larger operation has the ability to service substantially more debt in a given time period.  Of course, in our current industry environment, dairies of all sizes will find it more difficult to make ends meet.  Regardless of herd size, all producers should keep a close watch on their costs per hundredweight.  These should be monitored on a regular basis both internally and via the accounting numbers from your CPA. To summarize, however, former General Electric CEO Jack Welch said it best when he advised:

  1. “Face reality as it is, not as it was or as you wish it were.” In essence, do the right things in your management system for the right reasons, but don’t waste time on those tasks over which you have no control.
  2. “Change before you have to.” This will assist you to stay ahead of the curve of change and position you to compete at a higher level. No doubt about it – You’ll be glad you did!

The realization is now – Written by Marketing Expert Seth Godin

*** I wanted to share a copy of Seth’s article with you, simply because I believe it has a fantastic message, one that could serve as a sound directive to get our country back on track in so many ways. I hope you enjoy his thoughts, which fit almost every industry: “New polling out this week shows that Americans are frustrated with the world and pessimistic about the future. They’re losing patience with the economy, with their prospects, with their leaders (of both parties). What’s actually happening is this: we’re realizing that the industrial revolution is fading. The 80 year long run that brought ever-increasing productivity (and along with it, well-paying jobs for an ever-expanding middle class) is ending. It’s one thing to read about the changes the internet brought, it’s another to experience them. People who thought they had a valuable skill or degree have discovered that being an anonymous middleman doesn’t guarantee job security. Individuals who were trained to comply and follow instructions have discovered that the deal is over… and it isn’t their fault, because they’ve always done what they were told. This isn’t fair of course. It’s not fair to train for years, to pay your dues, to invest in a house or a career and then suddenly see it fade. For a while, politicians and organizations promised that things would get back to normal. Those promises aren’t enough, though, and it’s clear to many that this might be the new normal. In fact, it is the new normal. I regularly hear from people who say, “enough with this conceptual stuff, tell me how to get my factory moving, my day job replaced, my consistent paycheck restored…” There’s an idea that somehow, if we just do things with more effort or skill, we can go back to the Brady Bunch and mass markets and mediocre products that pay off for years. It’s not an idea, though, it’s a myth. Some people insist that if we focus on “business fundamentals” and get “back to basics,” all will return. Not so. The promise that you can get paid really well to do precisely what your boss instructs you to do is now a dream, no longer a reality. It takes a long time for a generation to come around to significant revolutionary change. The newspaper business, the steel business, law firms, the car business, the record business, even computers… one by one, our industries are being turned upside down, and so quickly that it requires us to change faster than we’d like. It’s unpleasant, it’s not fair, but it’s all we’ve got. The sooner we realize that the world has changed, the sooner we can accept it and make something of what we’ve got. Whining isn’t a scalable solution.” I urge you to join me in making the changes we need to in order to succeed and prosper!

Developing a Future Course for Your Business

You’ve probably heard about the Harvard Business School study regarding the value of having clearly defined goals and a written plan designed to achieve them. 3% of the study’s respondents had a “written, specific plan” for what they wanted to achieve. 10% of them had a “general set of goals” with no definite plan. 60% of those surveyed had only “survival goals” that would allow them to live day to day. The final 27% had “no goals”. When the study was completed 20 years later, people in the 3% group with definite written goals had out produced the 10% group by over ten times. In fact, this 3% group had amassed greater wealth in those 20 years than the entire other 97% of those surveyed! Am I advocating that you should simply do this planning to obtain more money? No. Maybe your goal is to give more money to charity. Whatever it is, write it down. A written plan will provide you with a tool against which you can compare your actual results! Please allow me to outline several other good reasons to consider developing a written strategic plan for your dairy business. First, the process of developing your plan forces you to focus on what you and your team want for your business. I am confident that you will be much more pleased with the results you obtain if they are in line with what you desire: Think it through and write it down. Second, a written plan will help to keep you on track because it will serve as a guide for you to purchase everything you need to meet your business objectives and it can keep you from buying anything you don’t need to succeed. This is important in the area of large capital expenditures. Invest only in the expenditures you truly need. Let someone else purchase items not necessary to you meeting your goals. Having a written plan doesn’t mean you can never deviate form it. Like any good system of guidance, it is intended to keep you on track. It must also be flexible, allowing you to adjust to rapidly changing business environments, milk markets, or feed prices. This is particularly true as we enjoy ever improving technology, which gives us more accurate, up to date information, equipping us to make better decisions. One final reason to include a written plan in your quest to reach the objectives you’ve set for your dairy business is that you are busy. You need a plan to stay on track. Your written plan will provide you with the guidance system you need to ask, “How will this impact us getting closer to our goals?”  Being prepared to answer a question like this one will allow you to save time, save money, and avoid headaches!

Should You Be Committed?

Not long ago, I was approached by a Client who said he wanted to own more land. With his 3,000 cow herd, we agreed that it made a lot of sense. He could grow more of his own feed and probably decrease his overall feed costs.

“What about the down payment?” I asked. He had no excess equity in his land base to borrow against, so I explained that he would need 30-35% of his purchase price as a down payment. His lender would then provide the rest of the money. Buying 100 acres at $10,000/acre would cost $1,000,000. This would require $300,000 to $350,000 for the down payment. “Where am I going to get that?” he asked.

Actually, I was glad he asked. I suggested that he start putting all odd amounts of income, e.g. USDA funds, bull calf money and at least part of his cull cow money into a separate savings account. My intent was not to draw that fabulous 0.01% interest we currently receive on any savings, but rather it was designed to segregate these funds from his checking account, with the sole intent of protecting the money from being spent. I call it AGS – Acute Goal Savings.

This went fine for about two months, after which I asked how much had been put away. “Well, I just recently quit doing that!” Of course, I asked why… His reply was, “It’s just too much of a hassle. Besides, the bull calf money is my ‘fun money.’” Wow, I thought, this should represent worlds of fun in 2014!

I tried to rationalize with him, “Well, if you get the additional 100 acres, won’t your profits go up and provide you with even more ‘Fun Money’?” His reply: “Nah. That’s crazy.” It made me wonder if I should be “committed” for suggesting such crazy things…

Now, contrast that with another Client who milked 600 cows. I suggested the same AGS concept to these two brothers. They started it two months later and, after just 18 months, now have $50,000 in their AGS account. Within the next several months, they will have enough saved for the down payment on their goal of building a new fresh cow & maternity barn! This should reduce their over-crowding, boost their fresh cow management, and increase their herd’s milk production.

What was the primary difference in these two examples? In total dollars, the 3,000 cow herd owner’s dream was considerably bigger, but he lacked the “commitment” to the objective. In contrast, the 600 cow herd owners needed fewer dollars. However, the real difference was in their level of commitment, that necessary ingredient needed to convert their dream or goal into reality!

It takes both a Goal and a Burning Desire, also known as commitment, to reach your goal. With that in mind, I will leave you with a simple question: “Should you be committed?”

Knowing Your “Why”

Many of us understand the benefit of establishing a solid set of Goals. These can be for your business, your personal life or any number of other items. I believe they represent one of the most important tasks that you can undertake. Yet, many people set goals every year, but then fail to accomplish them. New Year’s resolutions are an excellent example of this. Why is it that these so often fail to come to fruition?

Actually, I am glad you asked! The reason is that setting your goals is only part of the process. Of equal importance is of knowing your “Why.” Why is this goal important to you? Why does it matter to you? Why do you want to accomplish this specific item?

Let’s look at one example. First, you may have the goal of having your dairy herd average 90 pounds of milk per cow per day. That’s nice, but why does that really matter? Well, you contend that this production level will make you more efficient. Then, I might ask, why do you want to be more efficient?

Somewhat frustrated, you claim that if you can operate more efficiently, you will be more profitable. So, I then ask why you would want to be more profitable. Is it just to acquire more money? Finally, you reply (somewhat out of exasperation at this point) that being more profitable will allow you to take your family on a vacation occasionally, have money set aside for your two children to go to college, and also get you financially prepared to retire sometime in the future.

Aha! I finally got you to focus on what really matters most with your Goal Setting. Of course, the Goals, themselves, are significant. Without them, you will meander, at best, in making any progress. In addition to setting your goals, though, it is essential to understand “Why” you are pursuing this goal.

Without understanding why, it is so easy to get frustrated and give up your pursuit of any goal. However, if you take the time to understand and write out your “Why,” you will be better positioned to “stay the course” and ultimately reach your objective. For example, if the weather turns extremely hot or your feed supply gets damaged due to rain or other weather issues, you may get easily frustrated and give up your goal of hitting the 90 pounds per cow per day goal we discussed above, settling for less. 

On the contrary, though, if you understand why you are pursuing this goal and the long term implications of actually reaching it, you are far more likely to do whatever it takes to reach your long term objectives. Knowing your “Why” will provide you with the motivation necessary, as the Boy Scouts state, to “Improvise, adapt and overcome!”

Build a solid foundation under your Goals, by knowing your “Why!” I think you will be glad you did. To learn more about Goal Setting and related topics for your business, check out the articles on the home page of my website at www.success-strategies.com. I hope you find them helpful!

The Trial of the Century!

I realize that, given the solid margins of 2014, it is easy to forget about how difficult the prior eight years had been in the dairy industry. Recall the challenges of high feed costs for most of 2008 to 2013 and the calamity of $10 milk prices in 2006 and 2009? These years represented the trial of the century! I know that we would all like to forget these years, but, given our participation in a “world market,” some of them could occur again. Would you be prepared if these events happened again?

Over the next several blogs that I produce, I plan to talk about what to do if these events recur and, more importantly, how to prepare for them ahead of time. Think they cannot happen again? The September 2, 2014 issue of the Daily Dairy Report stated that we have seen similar times when ourU.S. prices are well above prices in the world market: “Similar price levels in September 2012 led toU.S. cheese imports (primarily fromNew Zealand) of more than 40 million pounds in November and December. CME spot Cheddar cheese prices that year traded above $2/lb. in early November but closed 2012 near $1.70.” Could this happen again? Possibly…

Would that impact your dairy operation? I know it would affect my Clients! In a moment, I will explain how I know. What has been different for the survivors historically? I believe it boils down to two primary factors. The first of these is having a plan on every major decision they make in their business. Now, please understand. No one really wants a “plan.” What they desire is what having a solid plan can provide them: the ability to make better decisions and, thus, achieve more profitable results!

The second major factor to success is knowing where you are financially at all times. I’m sure you have heard the expression: “What gets measured gets improved,” but please remember that “What gets measured and recorded gets improved measurably.” The reason for that lies with the fact that these steps will lead you to take action and make improvements in your business. The reason for this is that you know what needs to change to move forward successfully. We can’t do that if we are “flying by the seat of our pants!”

We have to know our current financial position at all times. Whether you are facing your banker or just facing the future, you simply have to know. It’s your choice and your responsibility. Next time, I will introduce you to a new system that some of my colleagues and I have been developing for making these very measurements within your business. Until then, start to review your marginal costs and returns. I think you’ll be glad you did. 

“No Excuses!”

Previously, I have used the following quote from General Eric Shinseki of the U.S. Army to make an important point: 

“If you don’t like change, you’re going to like irrelevance even less.”                                             

We are in a constantly changing industry environment where decisions we made five years ago are not necessarily as effective as they previously were. It is time for each of us to take back the reins of the decision making process and adopt a more proactive approach moving forward. Management consultant Peter Drucker stated that, “The best way to predict your future is to create it.”

Yes, you’re saying, but how can I do that, given the dairy industry’s severe downturn the past five years, and “under the present circumstances?” I’ll tell you how – Get out from under those circumstances. Change your thinking. Alter your approach. It has been said that if you keep on doing what you have been doing, you’re going to keep getting what you’ve been getting… I contend that is just simply not true. In some cases, it can cause you to go backward! So, what do we need to do?

Embrace change as you encounter it. Of course, we all like the familiarity of our normal day-to-day processes. At times, I am guilty of this, too. However, when things are changing as rapidly as they are in the dairy industry today, we run the risk of getting “run over” if we simply stand still. Yet, you are thinking that you just finished restructuring your bank debt and are getting most of your Vendor Payables caught up (hopefully). Can’t you stop and take a break? Do so at your own risk. Here is a list of items that I’d like you to think about: 

1.)    Where do you really want to be in five years? In ten years? How can you get there? What will it take to succeed in reaching those goals?

2.)    Who will take over your business when you are gone? Do you have a plan already in place? If not, why not develop one? Several years ago, I witnessed a sad but true situation where one person controlled all aspects of his business operation and, frankly, made all of the decisions. One day, at the ripe old age of 42, this person was killed in an unfortunate auto accident. The result was absolute chaos around his business. No one else was trained to make effective decisions, and there was no succession plan in place. It was a financial nightmare for his family. It all could have been avoided with a minimal amount of planning.

3.)    Have you implemented a “Milk Marketing Plan” yet? Are you using Put Options to establish a floor under your milk price? Likewise, are you working closely with your Nutritionist and others to lock in the best prices on feed at all times, not just now because they have been so high? Do you truly know your Break-even Points on milk price and feed cost? You need to know these!

4.)    As outlined above, have a plan on everything you do. Can you be assured of always making the correct decisions? Of course not. However, your odds of success will be greatly improved if you think about and develop your own plan for your business, particularly in comparison to letting the industry or others decide for you.

Former Notre Dame football coach Charlie Weis, upon being hired to lead a team that had win-loss records of 5-7 and 6-6 the prior two seasons and hearing the players complain about the school’s administration, replied as follows:

“Quit blaming everyone but yourselves for the reason there was a coaching change. There was a coaching change because you’re 6-6 and last year you were 5-7. There was a coaching change because you guys didn’t live up to the expectations around Notre Dame… Why don’t you just look in the mirror? Maybe the reason why you were 5-7 and 6-6 is that you’ve played crummy. Just maybe.”

“He certainly got their full attention. He claimed that you could have heard a pin drop. His message had come through loud and clear: ‘No excuses!’”

                        Charlie Weis in his book No Excuses

Let’s follow Charlie’s advice and realize that, as an industry and as individual participants, we have not always played by the best laid game plan. Reset your course today and join me in accepting “No excuses!”

Are you “Fine Tuned” or “Wandering?”

In my last blog, I stated (for the benefit of dairy producers, as well as those who sell to them) that:

“We have to know our current financial position at all times. Whether you are facing your banker or just facing the future, you simply have to know. It’s your choice and your responsibility. Next time, I will introduce you to a new system that some of my colleagues and I have been developing for making these very measurements within your business. Until then, start to review your marginal costs and returns. I think you’ll be glad you did.”

This blog is being written from the perspective of producers. However, this is important for those of you who sell to these same producers, too, since dairymen will be better positioned to pay for your product or service as their cash flow improves. I hope that, after reading my last blog, you actually took some time to look at what your various production costs have been. Did they seem reasonable? Have they increased over the last two years? This happens a lot when milk prices are high, simply because producers are under less pressure to control costs than they are when prices are depressed.

What should we measure? Obviously Cash Flow should be monitored, but, more importantly, the specific items that derive Cash Flow, i.e. all of our costs. This includes Labor, Supplies, Repairs & Maintenance, Vet & Breeding and numerous other expenses. How about the “grand-daddy” of all our production costs — Feed Expense? This represents anywhere from 50-65% of our total costs. If you are using a feed program such as Feed Watch or EZ Feed, you can measure Income over Feed Costs (IOFC) as often as daily. You can also do this manually, too, if you know your actual feed costs, but these programs can assist you to be more “automated” in measuring your feed costs. Your accuracy will hinge completely upon the level of precision with which you measure & input your costs. You can also complete this measurement of IOFC manually if you make an accurate measurement of your feed inventory each month. By the end of this article, I will explain how you can do this.

Why does this matter? Simply stated, if you want banks to loan you money in the future for operating needs or expansion, you will definitely need to illustrate that you have your costs under control. Would you loan money to someone who had no idea what his future cash flows and profitability will be? Of course not! Your lenders will always want to know what you expect to achieve in terms of Revenue & Expense. You won’t hit these target projections to the penny, but knowing what you expect to achieve will provide you with targets against which you can measure your actual results! It will also provide your banker with a notion of what your Debt Service Coverage will be. This is the ratio of your Net Cash Flow divided by the sum of your Principal and Interest Payments. Most bankers want this to be 1.25X or greater. It tells them whether their loans will be repaid as projected, and, of course, this is good to know. Even if you are “self financed,” you will want to know what your potential returns will be!

Knowing all of this information will show you what your Break-even levels are. If these are out of sync, you will need to make adjustments in order to boost your cash flow. Want to impress your banker? Be prepared to tell her that, even though milk prices are currently above $20/cwt, you can still break even at levels as low as $16/cwt!

In the next few weeks, my colleagues and I will be introducing a web-based tool designed to measure your cash flow and make comparisons against your budget. Would this be valuable to you as a producer? I believe so. It will also allow you to measure your feed costs as accurately as possible, using the information that you can input as often as you want. In measuring your IOFC, especially if you don’t have a program like Feed Watch or EZ Feed, being armed with this information will be huge! Even if you have a feed software program, it will equip you to do a “physical measure” periodically, just to check for accuracy. You can also use the worksheet in our program to measure your actual feed costs in a very straightforward manner.

Next time, I will be explaining the benefit of knowing your “Why” and how this all fits in with measuring your Cash Flow and Income over Feed Costs. All three of these items are instrumental to “Finding Your Profit.”