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. 

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. 

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.”

Where Did All the Cash Flow Go?

Has your operation returned to a state of positive cash flow yet? As I watch my Clients’ cash flows in 2013, I am observing that most of them have started to achieve positive cash flows in their business at this point. For the few who have not, they are getting closer to a breakeven level.

Once again, I ask you to consider if you have hit your breakeven point yet. Perhaps, more significantly, if not, what is keeping you from getting there? With feed costs dropping by 30% or more these past two months and milk prices at relatively sound levels, you should be seeing some progress. If you aren’t, take a closer look at two major cost areas.

First, make certain that your non-feed costs have not become out of line. Some key areas to look at include Supplies and Labor. For some reason, these two items can often get out of alignment whenever milk prices increase. Here is my theory: When milk prices climb, some producers begin to think that they can probably afford to get that “one extra guy” their employees have been asking for. Unfortunately, along with an extra employee comes additional Workers’ Compensation, Taxes, Benefits, and possibly Health Insurance!

On the supplies front, it always seems that when milk prices climb, the cost of these items also jumps dramatically. I am not blaming the companies selling you these supplies. It simply becomes more important than ever to watch these costs in an effort to keep them from getting out of control.

The best way to keep these items under control is to complete an annual budget and then compare your year-to-date results against the budget to see how you are actually doing. Then, as a follow-up, look closely at what is either helping or hurting your bottom line. Is it something you can change? If so, just do it!

The second item to check is your cost of servicing debt in your business. If you are spending over $1.00/cwt on Interest Expense, take a close look at why that is the case. Is your herd or feed debt too high because you have too many heifers in your herd? Are there other assets you could sell to reduce the debt load on your lines of credit or other short term loans?

Occasionally, I see people who know they have an issue with their cash flows but who seem unwilling to change anything. Don’t worry about offending your salesmen. They will be happier with slightly less of your business than having none of it because you were forced to sell out. And, remember, your bankers are watching your performance more than ever today. Why not leave them with a positive impression? Think about it.

When Should I be Worried about my Business?

I often hear Clients say that they are worried. It sometimes makes sense to express concern about items in your business and personal life. However, does it pay to literally worry? I don’t believe so. Mark Twain described worry as the interest paid on a debt you never owed…

While we should all be studying various facets of our business, I see little benefit in worrying. Will it make things better? I doubt it. Will it add any time to your life? I don’t think so. It will be more likely to accomplish just the opposite.

Will worrying add any clarity to your business thinking and acumen? I doubt it…

Napoleon Hill suggested that we should, “Kill the habit of worry, in all its forms, by reaching a general, blanket decision that nothing is worth the price of worry. With this decision will come poise, peace of mind, and calmness of thought which will bring happiness.”

A lifelong friend of mine stated that he considers all of the possible outcomes of any decision, and then, if he feels he can live with what he believes is the worst possible outcome, he moves forward without worrying further about it. Sounds like good advice!

My advice: Quit worrying, focus clearly on the decision at hand and the options available, and based upon what you and your advisors know, make your best choice. None of us gets every decision right, but I believe you will be well on your way to achieving higher levels of success as a result!

A Unique Approach to Boost Your Interest Earnings

Ever wonder how to boost your interest earnings, especially with rates that banks pay you being so low? Granted, you may earn about 0.10% on any balances left in your account. Why not earn it another way by saving some money on interest expenses? There is still a way to do this. 

 When your milk check comes twice per month, why not pay down your revolving lines of credit for a couple days, while you are deciding specifically what invoices you will be paying? While these earnings are not huge, they are far greater than anyone can earn on any funds sitting in a checking or savings account today. If your lines are at a rate of 4.25%, you can save over 40 times what the bank will pay you on any unused balances. Sounds like a good trade to me…

 When your milk check arrives, assuming you have a revolving line of credit, you simply pay down the line, especially if it comes on a Friday or before a three day weekend, and then save the loan interest until you send out checks to your vendors. Just be certain that you have the funds back in your checking account before your checks written start to clear the bank. Otherwise, the overdraft fees will wipe out any savings you have had on your line interest.

 You may also want to check with your bank to see if they have an automatic “Sweep Account.” A sweep account will do the same thing for you every banking day, ensuring that you minimize your interest expenses, while ensuring that your checks are always covered. This sweep process is done completely via a computer program, designed to save you money, just like the manual process I described above. 

That, my friends, is good for your bottom line. It is a great example of Next Level Thinking!

Getting Yourself on the Right Team!

“I don’t ask the players if they want to win. I ask them if they can live with losing, because if they can, that is exactly what they’ll get since it’s so much easier to have.”

I love this quote from former Notre Dame head football coach Lou Holtz because it succinctly says so very much. Which team do you want to be on with your dairy operation?

Here is an excerpt from an article I recently wrote for the October 2013 issue of the Western Dairy Business:

Please allow me provide you with some points of comparison for two teams, because there are consequences involved with both:

1.)   ” The managers on the A Team have a definite plan that they follow very closely. Of course, they adjust their path occasionally, but for the most part they stick to their plan. Why? They do so simply because they spent a lot of valuable time with their key advisers developing this plan that will take them closer to their desired objectives. Does the B Team have a plan? Certainly. They have even considered getting it out of the file drawer to review it once in a while. They just haven’t found the time to check it again, so sometimes they get off course…

2.)    The A Team knows precisely where they are on a day to day basis in terms of herd health, milk production and reproduction. The B Team has considered collecting this information and maybe even putting together a daily summary report for their entire team, but they barely have enough time to keep the bills paid and meet with their banker regularly. One Nutritionist had suggested this, but they decided he just represented another cost that they could not afford…

3.)    Members of the A Team seem to have a solid handle on their costs. They get surprised sometimes, but it’s not because they are asleep at the wheel. They adjust course and may substitute one product for another. However, this is never done blindly. They simply discuss it with the appropriate advisers. The B Team, on the other hand, keeps a close watch on their more successful neighbors. If they are trying something, it might be worthy of consideration, no?

4.)    The A Team makes a lot of money farming, especially with the high feed costs we have seen the past several years. They invest farming funds carefully, and, as a result, achieve solid yields, which leads to stronger profitability. The B Team? Well, it’s not really their fault, and they would have hit better yields, but they couldn’t get their Crop Adviser or the fertilizer company to come out because their account balance was large and past due 120 days. However, as I mentioned earlier, they don’t feel it is their fault…

5.)    Finally, members of the A Team are very teachable. They have been in business for a number of years, but they realize that the industry has changed. They realize that they must change, too. The B Team? Their leader exclaimed to one young adviser that, “If he followed every recommendation he had received over the prior 20 years and they had all worked as planned, his cows would be producing 120 pounds day.” Sounds like it may have been worthy of consideration, in comparison to the 62 pounds per cow per day he was currently hitting…

What’s the message for us as managers? First, we need a solid plan. Second, we need to follow it and adjust course as needed, because none of us has a crystal ball into the future. We also need to realize that all of our decisions (or lack of them) have consequences. They can also impact our credibility with vendors, bankers, our business partners, and other key players, all of which will have consequences.

Which Team do you want your operation to represent?” I’m going with the A Team! To learn more about the points mentioned above, get a copy of my latest book, The Five Factors Guaranteed to Impact Your Future, at: https://www.createspace.com/4336264

Who Has Time to Develop a Plan?

We live in such a busy world, don’t we? While we are all trying to be more successful, every one of us still needs to take some time to “plan our work, before we work our plan.” 

I recently had a Client who said, “Are you kidding me? I barely have time to get everything done as it is. Now you think I should allocate some time to planning?” As soon as he completed his statement, I think it actually occurred to him what he had just said. He had realized that he needed a better plan to get things completed correctly and on time. I know you have heard the old adage: If you don’t have time to do it right, where will you find the time to do it over?

Doesn’t that same rule apply here? I am sometimes guilty of the same thing, that is, not planning the detailed steps of my work and then being disappointed when everything does not turn out quite like I had hoped. What can we do? I am glad you asked. 

There is never a bad time to plan tasks we wish to accomplish, but this is particularly true as we approach a new year. It has been said that the best time to plant an Oak tree is 20 years ago. However, the second best time is today! As you approach the end of this year and start planning for the upcoming one: 

–         Set some positive Goals for you and your Team.

–         Decide what Achievements you really want to accomplish.

–         Lay out the Steps necessary to reach these.

–         Determine what your intended Time Table will be for each step.

–         Decide Who will be involved. Do you need additional people or is it something you can hire an outside contractor for?

–         Establish some solid Measurements to track your level of progress.

–         Outline what Specific Activities you will use to monitor this progress and review them with your Team.

–         Finally, Celebrate Your Success and share the achievements with the rest of your Team!

Follow these eight steps, and I believe you will be well on your way to achieving higher levels of success!

Planning for Success

In my last blog, I discussed how we each need to have a plan for the success of our business. Guess what? Now is the time! It is late in the year, and I personally find that this is the most optimal time of year to complete this process.

There are several reasons for this. First, you have a fairly good feel for what the current year’s results will be. This will provide you with insight into the areas you want to improve. It will also guide you to set new objectives for next year.

Second, it is nearing year end, and your banker will be pleased to know that you are planning for next year. Why not share a copy of your plan with him or her? This is especially important if there may be new financing required…

Finally, any expense involved will be deductible for taxes this year. With that in mind, let me provide you with several ground rules:

1.)    Establish what planning tasks you want to accomplish while you are doing this process. What is most important to you for next year?

2.)    Know “Why” you want to accomplish a certain objective next year. If you know your why, the how will become much more evident!

3.)    Get offsite to do this planning.

4.)    Yes, I did say offsite! This will minimize your distractions and interruptions. Besides, you don’t work for “Corporate America,” so you don’t need permission to do this. In fact, I believe your expenses should be deductible. Ask your Accountant.

5.)    Stay focused (another advantage to being offsite). Stay on task and push yourself to set higher and more challenging goals.

6.)    Plan an agenda before you go, and follow it closely.

7.)    I suggest that any business owner do this at least once per year. Having a mid-year checkup is not a bad idea either.

8.)    Best wishes for a successful planning session.

Follow these steps, and I believe you will be well on your way to achieving higher levels of success, your reward for Next Level Thinking!

What Was He Thinking?

Recently, I was talking to a colleague of mine who does nutrition work for many of my Clients. He pointed out that my Clients were operating at such low levels of debt, it must be easier for them.

After thanking him for his compliment about how I had helped them achieve these lower debt levels (and, believe me, this is not true for all of them), I started to think about some of the objectives we had set and accomplished with these Clients during the past ten years. He was correct in his statement, but I believe that everything we achieved could be done at any dairy or, for that matter, any business at all.

Before you tell me that this cannot be done on your operation, allow me to explain that I cannot remember any case where this was completed with ease. Every one of these Clients had challenges to overcome and required a solid game plan! We became focused after the dramatic downturn in 2006. I recall getting to the end of 2006 and saying to my wife, “Man, I hope we never have another year like this one. I am exhausted!”

Little did I know what was waiting around the corner in 2009 with its rock bottom milk prices or in 2008, 2012 and 2013 with record high feed prices… So, clearly we lost some ground (or made progress at a slower rate) in those years, but we still pushed forward.

 I believe the keys include:

1.)    Develop a plan and have clearly established Goals to shoot for in terms of profitability and debt reduction.

2.)    Make sure your debt structure allows you maximize your cash flows and still reduces your overall debt levels each year.

3.)    Don’t borrow for anything unless you need to, but when you do, shop for the best rates and repayment plan.

4.)    Monitor your results every month. This is the only way you can stay on track and ensure that you reach your objectives.

5.)    Push yourself and increase your goal levels every year, whether it is on profitability, debt reduction or both.

6.)    Never give up. As Winston Churchill stated, “Never, never, never give up.” That, my friends, is a definite!

7.)    When you reach your Goals, as I am confident you will, celebrate with your Team. Remember, they helped you get there.

8.)    Finally, if you get off track, get some qualified assistance. You gain absolutely nothing by claiming that you never needed anyone’s help to get where you are but then “hit the wall,” as so many businesses have the last five years. If you need some guidance, get some. Why wait?

This will allow you to re-focus on Steps 1-7, after which I believe you will be well on your way to achieving higher levels of success, your reward for Next Level Thinking!