Low milk prices, high feed cost and high general input cost pose a triple threat to your operation in 2009. What actions should you take to survive these troubled times? Try these:
1. Analyze your balance sheet.
How much short-term operating debt can your operation support? Lenders like to see a 2:1 current ratio on financial statements. A 2:1 ratio means you have $2 of current assets (assets normally converted to cash in the next 12 months) to $1 of current liabilities (debt that must be paid within the next 12 months).
If you are not comfortable with your current ratio and have equity in real estate, consider refinancing your short-term debt to improve cash flow. Chances are you can get a better interest rate on long-term debt because your lender is more secure by having a lien against real estate rather than relying on milk checks or crop sales.
2. Examine production records.
Which cows are making money for your operation? Culling aggressively will not only provide you with some short-term income from cull cows, but will improve your net income per animal unit. 2009 is no time for freeloaders. You may want to cut the lowest 10 percent of your herd to improve efficiency.
3. Print out your entire general ledger.
Do this for each expense account for the past two years. Or, pull out your written records and practice zero-based budgeting. Zero-based budgeting is a concept where you start at zero and build the budget for each expense category each year from scratch, justifying every purchase.
Just be careful that you don’t “drop a quarter while attempting to save a nickel.” It takes good-quality inputs to produce a good-quality product.
4. Analyze purchasing procedures.
Shop around and buy in bulk when you can to lower your cost. Is your current vendor providing you with the “best” price? Establish a procedure to secure bids for repetitive purchases, specifying quantity to be purchased, quality of input and payment and delivery terms. The lowest price may not always be the “best” price, especially if there is an element of service in the product.
5. Watch capital purchases.
When should you trade equipment? A good rule-of-thumb is to replace equipment when the projected decrease in value and the expected repairs for the next year exceed the payment on a newer piece of equipment.
6. Review rations.
Secure the services of a good nutrition consultant and carefully examine your current rations. Feed is one of the largest costs for your operation. Make sure that you have the most efficient ration at the best cost for each group of animals.
Just do it
Practice peer-review to compare your cost-of-operation with the cost of dairies of the same size. Many states have farm-management associations that help producers analyze the financial side of the dairy operation. Some accounting and consulting firms also have good data to help you examine the financial strengths and weaknesses of your operation. Talk to your local extension farm-management specialist or seek out industry consultants.
Create a cash-flow report to help you identify issues before they become a major problem. An excellent free cash-flow planning tool may be downloaded at: www.dairyherd.com/management
Finally, communicate with your lender. Keep him informed so he is aware of your financial position. A good lender can help you spot trouble and provide solutions before a situation becomes critical.
Darrell L. Dunteman is a partner in Bonnett and Dunteman, LLC, Certified Public Accountants and Consultants with offices in Havana and Bushnell, Ill. Contact Dunteman at: firstname.lastname@example.org.