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Control Your Success: Best Practices to Help Manage Sinkholes on Your Dairy Operation

Featured Guest Writers: Kenneth Nearhoof, Senior Accounting Officer, and Michael Hosterman, Executive Ag Business Consultant

All of us in the dairy industry have probably said, “Low milk price is the problem.” Low or moderate milk price usually is not what brings dairy operations to the brink of liquidating, but can be the straw that breaks the camel’s back. We have seen firsthand what leads to operational success, and the most successful operations run as a business. Successful operations, small or large, spend time on management.

But what does this mean? There is no way to narrow down the most important ways to avoid financial hardship or cash flow strain. We say that to manage the dairy farm, producers should spend more time analyzing these four areas in addition to focusing on cows and forage quality.

Are you wasteful?

All operations can be wasteful of resources such as time, money and talent. Are you holding back employees or yourself by being too set in your ways? Analyze your cost of production at least quarterly to identify leaks in your pipeline. (They exist, don’t lie to yourself.) The best managed operations analyze regularly and challenge their costs. Establishing standard operating procedures and completing budgets within proper parameters is a good time investment, not a waste. It keeps us focused, on track and proactive in managing costs.

Are you present?

To be a good manager, you need to be present, involved, communicative and caring. Be proactive and “in the game” at all times. Know if your employees, partners or family members are actively involved and valuable to the farm operation, or if they are better suited to another job on or off the farm.

You need to communicate the goals and protocols of the business. Do you think about the business and the people as much as you think about the crops and cows? Spending time communicating, caring and being present will yield the best results from everyone, including yourself.

Networking is also an important part of being present, and we need to balance it with managing the business. It is okay to have gone “golfin’,” “politicin’” or just “hob-knobbin’.” Fellowship and having fun are part of the manager’s balancing act, but of course, it cannot come at the expense of the business.

What lifestyle do you have?

Money is not everything, but a dire lack of it can become your every thought. Many farms don’t know their cost of living or personal draws. For years, we’ve heard that a family of four needs approximately the cost of a new Corvette to meet their living needs. For farms or small family businesses, this may seem high, but if you factor in a rent or mortgage payment, it’s accurate. What about school fees, tuition, family celebrations or life events? Balancing the living needs with what the business can afford is a common dilemma for family operations. The first step is knowing or determining the family draw. Next, determine if the business can afford it, grow to afford it or if off-farm wages or other supplemental income is needed.

Table 1 below summarizes how family living and income taxes have changed in the past 10 years for Northeast dairy farms. The table also shows the percent change in living expenses from the prior year. When you compare these changes with the Social Security Cost-of-Living Adjustments (COLA), you will see that they are similar over time. Living costs for your dairy operation may not always be the same as COLA, but over time they increase at a similar rate; thus business growth is usually needed to allow living draws to increase.

Growing the business is something all good managers consider. Growth is a key concept of successful operations, but it does not always mean getting larger. It could mean increased efficiency or output, and it does mean we need to grow the top line (income) of our business. This top line growth helps the business afford cost of living increases coming from input costs, employees and/or family living needs. Table 1 below summarizes some key growth trends over time on northeast dairy operations.

Data comes from Farm Credit East’s Northeast Dairy Farm Summaries. All % changes are the change from the prior year.

Are your debt levels too high?

The simple answer may be “yes;” however, debt is usually not the core problem. Borrowed funds are the cheapest capital you can use. Debt levels are too high due to other problems. The biggest causes of high debt can be:
•Low earnings, which we could blame on milk prices, but may actually be low production levels or poor output (substandard culling, low milk per cow, weak component levels, etc.) that producers haven’t focused on improving.
•Lack of growth, whereas costs go up naturally, the farm is not growing revenue to keep up.
•Over-capitalization, which means the farm purchased newer equipment or land that pressures cash flow.

Managers can manage debt, and what is considered “high” is up for interpretation. Each farm has a different situation to sort out. Matching debt to the proper terms is key to successful management. More important is a capital spending budget, as well as cash flow budget to be sure your business is growing and the farm can support the related debt.

It is important to know that management is more than just the cows and crops. Managing like a business is a key concept that can steer you away from sinkholes and toward success. It takes time, discipline and practice to do it well. If you address the four areas discussed above, you can make a big difference starting today. Be honest in these areas. Reassess often. Use and revisit this proactive approach to keep your dairy farm business viable and provide the quality of life you want.

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