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.”

“How can I get past this challenge?”

Do you ever find yourself having difficulty being optimistic? I think we all do at times. Of course, not when we are getting in excess of $20 per cwt for our milk, but how about when milk prices are far less positive, as they were from 2009-2012? You might want to save this article for those times… What is the real problem with this? Don’t you have a right to be pessimistic during those times? 

Author Steve Chandler, in his book entitled 100 Ways to Motivate Yourself, states: “Motivation comes from thought. Every act we take is preceded by a thought that inspires that act. And when we quit thinking, we lose the motivation to act. We eventually slip into pessimism, and the pessimism leads to even less thinking.” The real problem lies with our inability to snap out of this mode and thus focus on the challenge we are facing.

Chandler gives an excellent example that we all can probably relate to. A pessimist decided to clean his garage one Saturday morning. However, when he looked into the garage, he was immediately overwhelmed and cried, “’No one could clean this garage in one day!’ At that point the pessimist slams the garage door shut and goes back inside to do something else.” For a pessimist, it is either perfection or nothing.

The optimist, however, after looking at his garage, continues his thinking. “’Okay, so I can’t clean the whole garage,’ he says. ‘What could I do that would make a difference?’ He looks for awhile, and thinks things over. Finally, it occurs to him that he could break the garage down into four sections and do just one section today.” Over a period of four weeks he will get the entire task completed. Sounds like a solid plan!

Don’t we all have a neighbor for whom everything always seems to go right? Could it be his thinking process? Consider one decision that you are presently being faced with. Be sure to remind yourself that there is, indeed, an answer to your challenges. Perhaps you are concerned about finding the financing you need to expand your business. Can you break it down into sections, just like cleaning the garage? Here is an example for you.

1.)    Establish an outline of your particular business plans and what you want to do.

2.)    What do you think you will need in terms of financing for capital expenditures and/or working capital for your operational needs?

3.)    Does this project have a positive payback in your specific operation or is it just “what everyone’s doing?” Run some cash flow projections on the idea. Just as three times milking does not work at every dairy, the same may be true for the idea you are considering.

4.)    Are you prepared to go to one or more banks and present your ideas? Have you fully outlined all aspects of your plan and made certain that your financial reports are up to date? If not, talk to your accountant about getting updated accrual financial statements for your business. Lenders love to see them because it provides them with a much clearer picture of what is actually taking place in your business. You should want these, too, to make sure your costs are in line with the rest of the industry.

These four steps should serve as a guideline of how to approach your business hurdles, whatever they are. Remember, when you face a business challenge, stay optimistic so you remain open to all possibilities. The primary reason to remain optimistic, as I said earlier, is that there is an answer. You just haven’t discovered it yet. Author Steve Chandler adds the following advice:

“If you catch yourself brooding, worrying and thinking pessimistically about an issue, the first step is to recognize your thoughts as being pessimistic. Not wrong or untrue – just pessimistic. And if you are going to get the most out of your bio-computer (the brain), you must acknowledge that pessimistic thoughts are less effective… If you really want to open your life and motivate yourself to succeed, become an optimistic thinker.”

The next time you are faced with an important decision within your business, why not give this process a try?

What Would Croesus Actually Do?

Several years ago, I wrote an article entitled “What would Croesus do?” and received extensive feedback regarding that text. The story of Croesus begins with the following characteristics. First, he is a King and is surrounded by some brilliant people. Additionally, while his kingdom has occasional problems, he has unlimited funds to solve them, so, as you can imagine, Croesus and his court are always capable of finding solutions. They have no financial limitations to overcome. 

In their book Why Not? How to Use Everyday Ingenuity to Solve Problems Big and Small, authors Barry Nalebuff and Ian Ayres tell the story of Croesus and his ability to successfully overcome any problem. However, they go one step further by answering the question about what you can do to solve challenges when you do not have unlimited funds, like most of us.

Their process, while simple, is two fold. First, come up with the solution to a problem as if you had unlimited funds, and write it down. Next, since we do not have unlimited funds, think of less costly solutions to this same issue. Now, that is the challenging part, but Nalebuff and Ayres also point out that after you have followed the King Croesus approach, as if you had unlimited monetary resources, you are definitely better equipped to come up with a less expensive solution. In fact, it has been their experience that you may even discover a solution to another challenge you are facing simultaneously.

Here is an example of this happening with a prospect recently. They had a problem. Their “Supplies” cost had been going through the roof, but they couldn’t figure out why. After reviewing their numbers more closely, we discovered that they were using a new product that insured cleaner teat ends and better overall sanitation in the milk barn. This new product had, in fact, improved udder health and had lowered their Somatic Cell Count to 125,000, but they were wondering if they could afford to continue its use…

It was supposed to be a replacement for another previously used product. Yet, they had neglected to discontinue their prior product. Was the new one effective? Absolutely! Was it free? No. In fact, while it clearly worked, it was quite expensive. Fortunately, using it was less expensive than utilizing both it and the item that it was supposed to replace. Thus, as you can imagine, we had found the Supplies cost problem, because using both was like wearing a belt and suspenders. While either of these can be effective alone, you will not need both to keep your pants up.

Recall that the Why Not? authors had suggested we can often find an unexpected solution to another challenge when we use their process. In the case of the producer above, we also learned that several feed additives should have been eliminated after they started a vastly improved job of covering their silages and harvesting their crops at the most optimal time. Guess what? Some of these items, while they were expected to be discontinued, had in fact still been purchased. This is a good example of finding another solution while you are focusing on an entirely different problem.

Both problems were solved by studying their numbers very closely, and, in comparison to the budget and the goals for their operation, determining what they actually had to spend. You can use QuickBooks, Excel or some other program, but, most important, make sure you review all of your costs, closely and often. While we are in good times now, that could change. Besides, your objective should always be to maximize your bottom line profits, not make sure that you spend it all. I know most producers don’t like to pay tax, but please remember that the tax man doesn’t take it all in taxes, just a portion.

Finally, I know that everyone wants to boost their efficiencies, but don’t forget to drop the prior “solutions.” Just use your best judgment, and remember that none of us are King Croesus with unlimited funds. Study your marginal costs and returns. I think you’ll be glad you did.