Following my last article, I was asked by several producers what they could use as a measuring device for reaching their objective of achieving greater profitability. After reminding them about what my Business Coach Dan Sullivan stated, “All progress begins with telling the truth,” I added that they absolutely have to know their Break-Even levels. Break-Evens, as they are called, represent the levels of milk production, cost/cwt or milk price per cwt that must be achieved to at least break even, or, in other words, not lose money…
This is fairly straightforward, but some people have a challenge with this concept. More definitively, your Break-Even Cost per cwt, is the level of costs that will keep you from losing money, based upon the current level of milk production you are achieving and upon the current milk prices you are receiving.
This is relatively easy to calculate. You take your current costs for a given time period and divide those by the number of hundred-weights of milk you are producing in the same time period. For example, if you are producing 10,000 cwts and your costs to do so are $155,000, your costs per cwt are $15.50. However, if you are losing $5,000 during the same time period, your loss per cwt is $0.50, meaning you need a $16.00/cwt milk price to “Break Even.”
Why is this important to know?
- Your bank will not finance continued losses. Ask anyone who has tried this during the past four years. It doesn’t work anymore to just “bank on the future…”
- You need to know your Break-Even Cost of Production, just so you understand what the impact might be of any costs changing. Need an example? If your feed costs will be increasing next year (your Nutritionist should be able to project this, based upon your contracts), you will be able to clearly see what its impact will be.
- What if interest rates increase in the future? You can only run various “What If” scenarios if you know what your current costs & break-even levels actually are.
- Finally, knowing your Break-Even levels will allow you to plan for future changes. Can you milk 50 more cows with your current labor force and your current Fixed Costs? If so, this will definitely change your Break-Even levels.
In all of these examples, this is powerful information for you to have a firm grasp on. If I can assist with this calculation, please let me know. Additionally, as you think about how to overcome this business challenge, ask what action you need to undertake this week!What will you do differently, going forward?
Here’s a suggestion for you. Sign up for our new Success Strategies Business Navigator Program. If you are open to learning new concepts and discussing them with other producers, you should take a look at this new program that will start in early 2020. It’s completely online, freeing you from travel but offering you an opportunity to learn from industry experts in the areas of milk marketing, management, financial analysis & banking/finance. For the value of the milk production of one 85 lb cow for a month, you can enroll in this quarterly workshop program for one year. What have you got to lose? Check it out at:
You won’t regret it. I wish you the very best for a success-filled year!