Taking care of the animals, tending crops, and living the farm life is the easy part. It requires a great deal of work, yet it is the easy part. Most of us do not enjoy focusing on the financial side of our operation as it can be extremely overwhelming and a scary part of doing business. Most of us enjoy looking at production metrics (how well animals or crops are doing) while accounting (looking at the cash flow) can make a producer feel like they swallowed a bunch of nails.
While accounting is not necessarily the most “fun” thing to do on the farm, it is important to understand how the operation is managing. What are the operational costs? Where are you making money? What changes can be made to operate more efficiently/cost-effectively? What options do you have that will help reduce your stress load? Without a solid understanding of how your operation is functioning, determining the success of your options is difficult. An example could be going bankrupt and being forced to sell everything at low prices, instead of understanding the timing of your financial needs and knowing what pieces you could sell individually to provide the cash you need when you need it in order to return to solid financial ground.
To evaluate the financial end of your operation, ask yourself these questions on a routine basis:
- What are your future goals and plans?
- How do you plan on achieving those goals?
- Is more actually better? $7 corn was a blessing for some and a curse for others.
- Understanding and clarity about your operation help you avoid making rash decisions.
- What are your cost centers? Where are you spending money?
Two places that many producers fail to plan for are:
o Cost of replacements (what is your total cost when raising replacements?)
o What is your time worth? Your time should been given a value.
When gauging the cost of production, feed and animal health expenses are easy to remember. Yet what about all the other operational costs? How much is it costing you to hit those high production metrics?
Cost Center Examples and items under each:
- Utilities – Electricity, Water, Propane, Internet, Phone
- Building Repair
- Farm Insurance
- Taxes – Personal Property
- Lease/Rent Payments
- Equipment Repair
- Power Washing
- Other fees: cost to store corn
- Health Insurance
- Workers Comp Insurance
- How is your personal time valued? Your personal wages should be included
- Brokerage Fees
- Extra supplies like toilet paper, clothing, etc
- Accounting fees
- Consulting Fees (i.e. scanning sows, farming out vaccinations, etc)
- DNR Fees
- What is the actual cost of your manure program?
Cost to sell pigs
- Brokerage fees
- Options Contracts
Cost of Raising Replacements
Remember, every operation is unique, and the purpose of this article is to help you take control of your operational costs. Very few people enjoy delving into the financial side of a farming operation yet developing an understanding of the cost efficiency and profitability of your operation can provide peace of mind and the freedom of additional choices. Do not be surprised if you see more “cost of production” articles in future magazines. Remember, we are here to help and have experts on staff whenever you need an objective review of your operation’s financials!