Dairy farm businesses are under extreme pressure. Producers everywhere are looking to boost their profitability wherever possible. When it comes to growing profitability, the goal is to use simple, common-sense tactics for cost savings that go directly to your dairy bottom line.
Forget the TOP Line – YOUR Profitability starts on the BOTTOM Line
Too often we mistakenly focus on the topline (gross revenue, sales, even wins in the showring). That is costly and pays attention to the wrong end. Start by looking to the bottom line. The bottom line focuses on expenses. Not just the cost paid out but the benefits gained. And remember it’s the little things that count – a ten percent increase in profit is more likely to come from twenty things that contribute one-half percent each than from one thing that gives you the full 10 percent.
Here are 12 tips to start you on your way to a better bottom line and more profitability.
- Bottom-up budgeting. The first thing to think about is the net that your dairy enterprise must earn. Everyone involved in the dairy needs to contribute to this investigation of what is absolutely required to sustain a profitable operation. Communication of successes, challenges and future potential must be openly communicated. One of the primary advantages of bottom-up budgeting is that it is traditionally very accurate. As long as everyone takes care to look responsibly at their area of the operation, it will generally come out with an accurate estimate of costs. It is important that all input be received – without padding. Accuracy gives the foundation to build on. Padding could defeat the whole purpose!
- Set targets and achieve You need to be looking at key performance indicators (aka KPIs) and measuring your dairy against them. It is essential to know what you are comparing to so you can work towards it. . When possible, try to quantify the results you are aiming for with quantities, percentages, dollars or time. This will allow you to measure what you have achieved and readjust accordingly. Ideally, you should set goals for the long-term, and then mini goals that are short-term and ultimately tie in with the bigger picture. Differentiating between the two will help you from becoming overwhelmed or discouraged, and will also assist in always keeping the long-term perspective in mind when the day to day threatens to make you lose sight of it.
- Make sure the goal is in the right hands. This means the goal must be achievable as a result of your own hard work and determination, or with the willing assistance of someone already in your network. If you have no control over the outcome, it does not make for a realistic goal. Everyone has a role in meeting goals. Each individual, each team and every dairy animal will contribute to the bottom line profitability if they are assigned measurable goals that are linked to that outcome. In order to increase motivation, employees need to be allowed to participate in the goal-setting process. With agreed upon actions and measurable outcomes everyone can identify how their contribution contributes to the success of the dairy operation. Most importantly, when approaching completion of a goal, set a new one.
- Beware of false savings. When times get tough, it is tempting to cut back on expensive inputs. Fertiliser or other soil treatments might go on the chopping block. Grazed pasture is the cheapest feed for dairy cows. When ensiled for the winter it is the lowest cost feed. Saving on crop input costs could indeed be false saving. A better way of saving money would be testing soils tri-yearly and applying the right quantities of slurry, farmyard manure and fertiliser. False economies are everywhere, and the way to avoid them, as much as possible, is to take a strategic approach to thinking through them. Economies of taking away feed additives; doing without automation or adding more free labor (i.e. family) could actually cost more in the long term.
- Shop around. Make sure you get three quotes for everything that is purchased for the farm. Don’t forget to look at electricity, labour and even borrowing money. Getting quotes from power companies is easy, or you can use a broker. If you use self-employed labour or a contractor getting quotes can be appropriate or comparing other affordable options. Quotes for money means, simply, talking to other banks than your own. It’s in your profitability’s best interests to compare all suppliers on the basis of price, capabilities and performance. It’s false saving to have a cheap price that doesn’t provide results (see #4).
- Milk your milk check. Depending on particular countries, provinces and states .. there are many different rules to meet in order to receive your milk check. It is in your profitability’s best interest to increase the milk price in whatever ways are available to you. Take advantage of all the bonuses available. That could be for butterfat, protein, quality or pattern of supply. Seasonal incentive pricing exists in many areas so take advantage of it also!
- Make good on your grazing. Some advisers suggest that now is the time to intervene if your grass is not at its best. With half the season left you could still fix it. Mow and either feed the grass or bale Fertilise the field and get it back in the grazing rotation within 30 days. Also reconsider those late cuts. They are always more expensive to harvest as silage, so graze it or make dry bales to reduce costs.
- Manage the short term AND always make sure you have a plan B in every scenario. A plan is the one which has been put on the piece of paper. If it is not on the piece of paper, if it is not in black and white then it is just some random set of ideas and not a If you are really serious about creating a profitability plan, you will make efforts to write it down somewhere and share it with others. Of course, just writing your plan down on paper won’t make it “profitable”. But it is a good start.
- Always be better. In many countries, dairying is definitely seeing difficult times but that doesn’t mean there aren’t opportunities for improvement.Set some goals for changes that you want to make to your dairy
- Continuous improvement should be the number one “VALUE” of the profitable dairy operation.
- Continuous improvement is linked with rewards and recognition.
- Continuous improvement should be supported by continuous training that is measured for effectiveness.
- Calculate the ROI of everything you do. ROI is a more important metric than any conversion rate simply because it takes ‘COST’ into account. As long as you take ‘Cost’ into consideration, you can’t go wrong with improving your business bottom-line. Calculate ‘cost per acquisition’ for all of your dairy (show string; advertising; genetics). Even calculate ROI of all of your meetings, business travel and lunches. What about the days it takes for you to do all your accounting? Equipment repair? Building maintenance? Does your milk production suffer when you have to wear one of your other hats? Vet? Office manager? Field manager?
- Hire an Expert. There is always an opportunity – lost or gained – when you choose to do things yourself in which you are not an expert or when you hire someone who is not an expert.
While you may gain by not writing a check to someone else, you could still be putting money down the drain. When your bookkeeping, animal health protocols, feed supplies or equipment maintenance are sub-par, any one of them could be substantially reducing your bottom line and be costing you your time, your health, mediocre results and even complete failure.
Hiring an expert may not be profitable at first but, in the long run, can be the best bang for your buck. Not only will you recover your entire hiring cost sooner but you will also make a lot of money on top of that, and you will continue to do so for an extended period. However, all of this can happen only when you first understand that you can’t be an expert in everything and that you need someone who is really an expert in their field.
- Manage for Improvement. Efficiency is gained when revenue per cow grows. Technology, genomics, robotics all are tools, so your herd can become more productive and you don’t have to add new headcount to grow. What if you could replace your lowest 10% of performers with new cattle that matched your top 10%? This would result in an enormous productivity boost at virtually no incremental cost. There are many techniques to improve productivity, but the point is that constantly growing headcount certainly will result in overhead growth but won’t necessarily lead to profitable revenue growth. Focus on acquiring or raising only the best animals. Your best milk producers are your most profitable producers. If you don’t know your best producers yet then get to know them ASAP. If you don’t know which animals are driving up expenses …. Find out ASAP. According to the Pareto Principle (also known as the 80–20 rule), 80% of your costs come from 20% of your herd. These 20% of your herd are hurting your bottom line. The other 80% are your high-value You need more of these best producers to improve your business bottom line. So gradually start reducing your herd of those high expense producers. Aim to breed more cattle targeted at reducing your most limiting genetic factor or factors (reproduction, feet and legs, calving ease). It is not really rocket science, but some dairy business owners and managers just don’t get it. They remain busy in acquiring low-value animals because they have never made the effort to identify and target their best producers. Low-value producers — still produce milk — but all milk isn’t equal. Even though it’s all the same once it’s in the milk tank, there can be quite a difference in the cost that got it that far. The lowest producing cow in the milk line may already have run up extra costs because she was sick as a calf.
The Bullvine Bottom Line
A dollar gained in revenue is an excellent thing assuming it builds profitability. However, remember, only a small portion reaches net earnings. A dollar saved from cost, however, goes directly to the bottom line. So move your focus away from the top-line and engage in a systematic approach for improving the bottom line. It’s the best way to ensure long-term dairy profitability and sustainability.