Every business has its secrets. these are the secrets of business strategy that we really don’t like sharing with our colleagues when we discuss our financial and management structure.
I bring up the topic of secrets as a caution to owners or managers who are looking for more cost-effective ways to run their businesses. Whenever you evaluate new management strategies, always look for the secrets that may or may not be openly visible.
Consider the financial plan
When visiting another farm to gain insight to its financial success, be sure to look at the entire financial plan — not just part of it. Take, for example, a dairy farm that is expanding facilities and has its entire debt structure on a 20-year note. This level of funding is not typical in the dairy industry, and is often only available from large-scale insurance companies. A 20-year note provides a much smaller monthly payment and lends itself to better cash flow. When sharing financial information with another dairy, be sure to examine and understand the debt portfolio of that farm and how it compares to yours.
Outside income, other business ventures, multiple cropping enterprises, inheritance, or the absence of debt are other secrets that impact the success of a dairy business. It’s all about cash flow. When one dairy has access to funds beyond the dairy enterprise, it often allows a greater portion of the milk check to be reinvested back into the business.
Learn about the dairy’s revenue sources. Never assume a level playing field.
Chase your own goals
Chasing someone else’s goal is often risky, maybe even foolhardy. Successful dairy producers use management and planning to meet their goals. Many times, the secret to how a dairy attains its goals is buried in the farm’s business plan. Expansion, consolidation, or exiting the business is often determined by the owner’s desire to achieve a certain goal. Don’t overlook where the farm has been and where it is going. The farm’s financial success my not be in the present, but rather in the future.
Case in point: A dairy is leased for five years with a five-year option to renew, thereby allowing for maximum debt repayment on cattle. At the end of the initial five-year term, the lease is converted to a purchase with owner financing. And the lease money is applied as the down payment. Two years later, inflation causes land values to soar and the farm borrows on the increased equity, plus cash flow from an expanded herd, to add more facilities and cattle. The producer did not have to make an initial down payment to get in the dairy business, and the increased land equity helped fund the building project.
Compare cost of production
When comparing your farm to another operation, it’s very important to know the cost-of-production benchmarks for your geographical location. Establish your own cost-of-production benchmark for each line item on your profit-and- loss statement.
If you visit an operation that appears to be more profitable than yours, compare cost-of-production benchmarks between your farms. The secret may not be in cost of production, but rather debt structure. A dairy with new equipment will have a lower maintenance cost than one with older equipment, and the cost of this debt will only show up in the interest column of the profit-and-loss statement.
Don’t confuse productivity with profitability. I recently visited a large dairy that is known to be highly profitable. Yet, most visitors fail to see that the true secret of this operation lies in the owners’ desire to make their operation successful. After many years of conventional and unprofitable dairying, they set forth a business plan that was unconventional, but matched their financial capabilities, environmental requirements and, most importantly, their lifestyle requirements. The secret here is that the energy and drive required to make the plan successful lies in the hearts of the owners.
Always remember to look for secrets -— and every dairy has them. To fully understand a successful dairy, one must look at all aspects of the business, including finance, management, cost of production, and the human effort required for success.
Paul Johnson is a veterinarian and dairy producer in Climax,