Planning for the year ahead with cash flow projections is a powerful business tool when done correctly. It is management’s blueprint on how to operate the business in the coming year based on what is known today. It is an opportunity to plan for improvements on operating efficiencies and methods due to new technology, new knowledge and the impact of different price and cost. Furthermore, with more dairy producers using price risk strategies such as forward contracting or pricing, it is even more important to not guess at your breakeven milk price. Guessing a dollar too low on your breakeven price and then locking in that price is a good way to invite a cash flow disaster.
There are two ways to answer the question “What is it going to cost this year for ... (fill in the blank for feed, labor, fuel, repairs, etc.)?”
The first is “guess and hope” and the second is “plan and project.”
Guess and hope
To “guess and hope,” all one needs to say is: “About the same as last year, only probably higher.” Soon, a $10,000 line item for teat dip becomes $12,000 and a $100,000 line item for facility repairs becomes $120,000 and a $500,000 line item for labor becomes $550,000.
Your guessing increased costs by $72,000 and now, all you need do is “hope” that increased milk production or a better milk price will make up for the difference. It is a simple way to make a cash flow projection but a terrible way to manage a business. It is an admission that you have no control over your business and that everything good or bad that happens is due to chance.
Plan and project
The more effective method of budgeting is to “plan and project,” which requires additional answers to the question, why? Why do we believe parlor supplies are going up by 10 percent this year?
OK, so there is an iodine shortage and the company representative said so. Is that specific product your only option? Can you get more efficient at applying teat dip? Can you buy in bulk to keep the price lower?
Why are facility repairs budgeted $20,000 higher? What exactly keeps breaking and why? Is it due to poor maintenance, neglect or employee abuse? Instead of paying more for gates, maybe we stop breaking them so frequently with better training and stricter compliance to protocols.
Most dairy farms know precisely what has been done to each cow on the farm over her entire life, but have no clue as to how much each $100,000-plus piece of equipment costs to maintain. Perhaps something expensive needs to be replaced with a newer, more efficient model.
One of the most common areas of guessing is on labor costs. A proper budget should list each employee or position, the rate per hour or salary and the number of hours a week or month.
Line items for payroll taxes, workers compensation, health and life insurance, employee benefits, employee housing and employee utilities should all be separated and scrutinized. You might discover that your employees are enjoying 80ºF living rooms in their T-shirts.
Once you know how much of something you plan on using at the best price, and when you will be using it, you can project its cost in the budget. This level of budgeting will embody your production plan. All that’s left to do is either follow the plan or make sure you have a good reason for deviating from it.
Overwhelmed? I don’t blame you. Truly planning and projecting each line item can be a daunting task. My suggestion for those who want to move away from guessing and hoping is to start with one line item at a time and develop methods to measure and improve efficiency and cost on a regular basis before moving on to the next one. PD
Bruce Dehm is a farm business adviser in Geneseo, New York. His company provides a family of reports called the Dairy Dashboard to help dairy producers improve management of their businesses.