profits and profitability for goat dairies
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Profits and Profitability: Profits and Profitability: Explaining Financial Concepts to Explaining Financial Concepts to
Beginning FarmersBeginning Farmers
Paul DietmannPaul DietmannDirector, WI Farm CenterDirector, WI Farm Center
Understanding Goat Farming ConferenceUnderstanding Goat Farming ConferenceOctober 17, 2007October 17, 2007
Randolph, WIRandolph, WI
Business Plan OverviewBusiness Plan Overview Who are you? Who are you? Background, education, Background, education,
experienceexperience What are you planning to do? What are you planning to do? Project Project
description, goalsdescription, goals
Business Plan OverviewBusiness Plan Overview What are the risks? What are the risks? Honest opinion of Honest opinion of
potential problemspotential problems What is your track record? What is your track record? Historical Historical
financialsfinancials How successful are you likely to be? How successful are you likely to be?
Pro-forma financial statementsPro-forma financial statements
The banker wants to see…The banker wants to see…
CharacterCharacter CapacityCapacity CapitalCapital CollateralCollateral ConditionsConditions You lose money You lose money
before they dobefore they do
Business Plan—Narrative Business Plan—Narrative SectionsSections
Executive summary. Executive summary. Appears first, Appears first, written lastwritten last
Your farm. Your farm. History, current description, History, current description, vision, goals, business strategyvision, goals, business strategy
The project. The project. Detailed outline, $ needed, Detailed outline, $ needed, how it will be usedhow it will be used
Management. Management. Who you are & why you Who you are & why you will succeedwill succeed
Critical risks. Critical risks. What could go wrongWhat could go wrong
Don’t Gloss Over the RisksDon’t Gloss Over the Risks
Price decreases for productionPrice decreases for production Price increases for inputsPrice increases for inputs Loss of productionLoss of production DroughtDrought Personal injuryPersonal injury Problems with livestock healthProblems with livestock health Machinery breakdownsMachinery breakdowns FireFire FloodFlood Loss of market for productLoss of market for product Divorce Divorce
Business Plan—Financial Business Plan—Financial SectionsSections
Historical financialsHistorical financials Tax records okay, financial statements Tax records okay, financial statements
betterbetter Typically three years backTypically three years back
Pro forma financial statementsPro forma financial statements Annual projections three years aheadAnnual projections three years ahead Detailed underlying assumptionsDetailed underlying assumptions
Understanding, Using the 3 Understanding, Using the 3 Financial StatementsFinancial Statements
Balance sheet—What the farm is Balance sheet—What the farm is worth, how it’s financedworth, how it’s financed
Income statement—How effectively Income statement—How effectively the farm generates profitsthe farm generates profits
Statement of cash flows—Where $$ Statement of cash flows—Where $$ come from, where they go, how come from, where they go, how many stick aroundmany stick around
Four Measures to ConsiderFour Measures to Consider
Liquidity
Solvency
Profitability
Repayment capacity
Balance sheet
Income statementStatement of cash
flows
The Balance SheetThe Balance Sheet
A snapshot of the investment in the farm business (assets) and the
financing methods used (a combination of liabilities and owner’s equity).
The Balance SheetThe Balance Sheet•Assets – Everything that is owned by or payable to the business on the date the balance sheet is prepared•Liabilities – All obligations owed by the business on the balance sheet date•Owner’s Equity or Net Worth – Total assets minus total liabilities
Current AssetsCurrent AssetsCash $100Cash $100
Checking $2,000Checking $2,000
Accounts Rec. $500Accounts Rec. $500
Feed inventory $10,000Feed inventory $10,000
TOTAL $12,600TOTAL $12,600
Current LiabilitiesCurrent LiabilitiesCoop bill $1,000Coop bill $1,000
Principal due $3,162Principal due $3,162
TOTAL $4,162TOTAL $4,162
Intermediate AssetsIntermediate AssetsBreeding livestock $40,000Breeding livestock $40,000
Machinery $75,000Machinery $75,000
TOTAL $115,000TOTAL $115,000
Int. LiabilitiesInt. LiabilitiesLivestock loan bal. Livestock loan bal. $20,000$20,000
Machinery loan $30,000Machinery loan $30,000
TOTAL $50,000TOTAL $50,000
Long Term AssetsLong Term AssetsFarm $350,000Farm $350,000
TOTAL $350,000TOTAL $350,000
Long Term Long Term LiabilitiesLiabilitiesFarm loan bal. $246,838Farm loan bal. $246,838
TOTAL $246,838TOTAL $246,838
Total Assets Total Assets $477,600$477,600
Total Liabilities Total Liabilities $301,000$301,000
Net worth $176,600Net worth $176,600
Information From Balance Information From Balance SheetSheet
Liquidity – Ability of the business to Liquidity – Ability of the business to meet its current (short term) meet its current (short term) liabilities with current assetsliabilities with current assets
Solvency - Ability of the business to Solvency - Ability of the business to pay off all of its debts if it were to be pay off all of its debts if it were to be sold tomorrowsold tomorrow
8 more buckets of
liquid assets!
Poorly structured debt - Paying for long-term assets as if they are current liabilities
High current liabilities forcing sales at unprofitable prices
Large, unplanned expenses
Common Liquidity ProblemsCommon Liquidity Problems
Capital investments too high relative to potential income
Assets depreciating faster than principal balances are paid down—Fancy vehicle syndrome
Common Solvency ProblemsCommon Solvency Problems
The Income StatementThe Income Statement
One year’s income and expenses, and how much revenue was retained by the
business.
It’s not a cash flow statement…it includes non-cash items.
The Income StatementThe Income StatementIncome – Includes cash sales of farm products, government payments, custom work income. Also includes changes in the inventory of feed, crops, and livestock.
Expenses – Includes all cash operating expenses including interest (but not principal) payments. It also includes depreciation.
Income
Milk sales $70,000
Livestock sales $9,000
Change in feed inventory $2,000
GROSS FARM INCOME $81,000
Expenses
Feed $40,000
Vet $2,000
Supplies $8,000
Interest on farm loans $15,000
RE taxes $4,000
Misc. $500
TOTAL CASH FARM EXPENSE $69,500
Net CASH Farm Income $11,500
Depreciation $5,000
NET FARM INCOME $6,500
Information From Income Information From Income StatementStatement
Profitability measures
•Net farm income –Return for your unpaid labor, management, and financial investment in the farm
Information From Income Information From Income StatementStatement
Profitability ratios
•Rate of return on farm assets – The “interest rate” being earned on all of the investments in the farm
•Rate of return on farm equity – The “interest rate” being earned on YOUR investment in the farm
•Operating profit margin – The operating efficiency of the business
Operating expenses too high
Overhead costs too high
Common Profitability Common Profitability ProblemsProblems
Preaching to the choir here
Challenge with Small FarmsChallenge with Small Farms
How do we allocate overhead?How do we allocate overhead? Split house from “farm?”Split house from “farm?” Machinery use for dairy vs. other Machinery use for dairy vs. other
enterprises?enterprises? Costs associated with unproductive Costs associated with unproductive
lands?lands?
Statement of Cash FlowsStatement of Cash FlowsAll cash flowing into the operation (including loan proceeds) and all cash flowing out (including family living expenses, taxes, principal and interest payments).
Anything left over is considered “capital replacement margin”
Cash Flow Statement
Net cash farm income $11,500
Nonfarm income $30,000
Net cash available $41,500
Family living draw $25,000
Income taxes & SS $5,000
Cash avail for principal paymts $11,500
+ Farm interest paid $15,000
Cash available for P & I $26,500
Scheduled P & I payments $35,822
Cash surplus or deficit ($9,322)
Common Cash Flow Common Cash Flow ProblemsProblems
Poorly structured debtPoorly structured debt Too much debt relative to incomeToo much debt relative to income Rarely is family living expense the Rarely is family living expense the
problem!problem!
Completing the FinancialsCompleting the Financials Detailed notes of assumptions used Detailed notes of assumptions used
in pro formasin pro formas Expected changes in production level, Expected changes in production level,
product prices, operating expensesproduct prices, operating expenses Schedule of additional investments, Schedule of additional investments,
borrowingborrowing Other rationale used in developing Other rationale used in developing
projectionsprojections
Completing the FinancialsCompleting the Financials The assumptions should be positive but The assumptions should be positive but
realisticrealistic Assumptions establish credibility of the Assumptions establish credibility of the
whole planwhole plan
Profitability and Cash FlowProfitability and Cash Flow
Related but very differentRelated but very different Can be profitable with negative cash Can be profitable with negative cash
flowflow Can have strong cash flow and be Can have strong cash flow and be
unprofitableunprofitable Cash flow is critical in short runCash flow is critical in short run Profitability Profitability andand cash flow critical in cash flow critical in
long runlong run
Profitability and Cash FlowProfitability and Cash Flow
A number of ways to improve cash A number of ways to improve cash flowflow
Three ways to improve profitabilityThree ways to improve profitability
Business Planning- CostsBusiness Planning- Costs
Overhead CostsOverhead Costs Costs that exist on Costs that exist on
the farm whether or the farm whether or not anything is not anything is being producedbeing produced
Can include Can include mortgage, taxes, mortgage, taxes, depreciation, depreciation, maybe labormaybe labor
Variable CostsVariable Costs Costs that increase Costs that increase
as farm production as farm production increasesincreases
Can includes seed, Can includes seed, plants, feed, plants, feed, fertilizer, vet fertilizer, vet expenses, utilities, expenses, utilities, laborlabor
$
Production0
Total gross value of farm production
Variable costs
Profit ter
ritory
Breakeven
Overhead costs
Loss
How overhead and variable costs relate to breakeven point
Total costs
Adapted from Breakeven Method of Investment Analysis, Gutierrez & Dalsted, Colorado State University, 2004.
$
Production0
Total gross value of farm production
Total costs
Profit
Original Breakeven
Overhead costs
Loss
One way to increase profitability: Reduce overhead costs
New Breakeven
$
Production0
Total gross value of farm production
Total costs
Profit
Original Breakeven
Loss
A second way to increase profitability: Reduce variable costs
New Breakeven
Variable costs
$
Production 0
Total gross value of farm production
total costsProfit
Number of acres needed to break-even
Overhead costsLoss
A third way to increase profitability: Increase production, keep all costs the same
New production level
Some Causes of Train Some Causes of Train WrecksWrecks
Not enough cash Not enough cash Communication breakdownsCommunication breakdowns Vague operating agreementsVague operating agreements Buying toys instead of paying billsBuying toys instead of paying bills Equipment, buildings need more Equipment, buildings need more
work than plannedwork than planned
More Causes of Train More Causes of Train WrecksWrecks
High livestock illness/death ratesHigh livestock illness/death rates Lower production than plannedLower production than planned Sales, prices lower than plannedSales, prices lower than planned Poor record-keepingPoor record-keeping Poor work habits—watching cartoons Poor work habits—watching cartoons
instead of workinginstead of working Not enough cashNot enough cash
Factors That SuccessFactors That Success Family close byFamily close by Good communication skillsGood communication skills FrugalityFrugality Ability to keep production expenses lowAbility to keep production expenses low Paying down principal asapPaying down principal asap Curious mindCurious mind Good record-keepingGood record-keeping Multiple sources of capital Multiple sources of capital
Some Bottom LinesSome Bottom Lines
A good business will generate increasing levels A good business will generate increasing levels of profitability and cash flow going forwardof profitability and cash flow going forward Profitability without cash flow is recipe for disasterProfitability without cash flow is recipe for disaster Cash flow without profitability is a terminal Cash flow without profitability is a terminal
conditioncondition Doesn’t make sense to borrow at 7% to earn Doesn’t make sense to borrow at 7% to earn
6%6% If a bank won’t invest based on your business If a bank won’t invest based on your business
plan, maybe you shouldn’t eitherplan, maybe you shouldn’t either
Thank You!Thank You!
Paul Dietmann
WI Department of Agriculture, Trade and Consumer Protection
(608) 224-5038