Unleashing the Power In Your Clients Numbers A Financial Toolbox To Business Success April 13 & 15, 2010 Rick Hermonot Farm Business Consultant Farm Credit East, ACA
Mar 26, 2015
Unleashing the PowerIn Your Clients Numbers
A Financial ToolboxTo Business Success
April 13 & 15, 2010Rick Hermonot
Farm Business ConsultantFarm Credit East, ACA
The Five FivesThe Five Fives
Five Keys to Effective FocusFive Line Income StatementFive Year AveragesFive Keys to Profit“DIRTI 5”
Five Keys to Effective FocusFive Keys to Effective Focus
VisionPrioritiesHard WorkDisciplinePassion
Five Keys to Effective FocusFive Keys to Effective Focus
Vision: (lifestyle focus)
“Our mission is to supply the high quality of life to our family that we
believe a farm can offer”
Five Keys to Effective FocusFive Keys to Effective Focus
Vision: (entrepreneurial focus)
“Our mission is
to develop our farm
into our primary product”
Five Keys to Effective FocusFive Keys to Effective Focus
Priorities:
“We will develop a continuously improved systems approach that
maximizes the efficiency
of our farm”
Five Keys to Effective FocusFive Keys to Effective Focus
Priorities:
“We will maintain an organizational chart that defines our strong future
through management continuity and succession”
Five Keys to Effective FocusFive Keys to Effective Focus
Once you have your “destination” and “rules of the road” defined….
Focus on getting there with:
Hard Work (we do this too well)
Passion (burnout?)
Discipline (toughest part)
Five Line Income StatementFive Line Income Statement
Gross Sales 100%Less COGS 50%Equals Gross Margin 50%Less Overhead 35%Equals Net Margin 15%
Five Year AveragesFive Year Averages
2005 - $16.132006 - $13.812007 - $20.522008 - $19.592009 - $13.75 (estimated)
Five Year Average = $16.76/CWT(source: Northeast Dairy Farm Summary)
Northeast Dairy Farm SummaryNortheast Dairy Farm Summary
Milk Sales
COGS
Gross Margin
Overhead
Net Margin
NCOP
Per CWT
$17.48
$ 8.57
$ 8.91
$ 5.13
$ 3.78
$13.71
% of Sales
100%
49%
51%
29%
22%
78%
Per CWT
$17.34
$ 11.81
$ 5.53
$ 6.41
($ .87)
$18.22
% of Sales
100%
68%
32%
37%
(5%)
105%
Five-Year Averages (2004-2008)
Top 25% Bottom 25%
Five Keys to ProfitFive Keys to Profit
Gross SalesEfficiencyCapacityDairy HusbandryCost Control
Gross SalesGross Sales
Production X PriceMeasured by milk sales per cow
EfficiencyEfficiency
Effectiveness at converting raw materials into finished product
Measured by your Gross Margin–Per Cow–Per CWT–% of Milk Sales
CapacityCapacity
Effectiveness of your use of facilities and equipment
Measured by Overhead–Per Cow–Per CWT–% of Milk Sales
Dairy HusbandryDairy Husbandry
Industry SkillsMeasured by Internal Herd Growth
–Cull rate–AAC–DOA–Heifer Non-Completion–Calving Interval
Cost ControlCost Control
Per Unit Comparisons to Benchmarks
Measured by Net Cost of Production
““DIRTI” FiveDIRTI” Five
DepreciationInterestRepairsTaxesInsurance
Percent “DIRTI” FivePercent “DIRTI” Five
For example: $400,000 Whopper ChopperDepreciation = 20% Interest = 6%Repairs = 5%Taxes = 2% Insurance = 2%Total = 35%
$400,000 X 35% = $140,000 per year OH
FOR EXAMPLE:FOR EXAMPLE:How much is a cow worth to me?How much is a cow worth to me?
Dairy husbandry performance (production & cull rate) impacts your investment value.
Level of efficiency (Gross Margin) impacts your investment value.
The more efficiently you are able to convert variable inputs into milk, the more you can justify paying for a cow.
Will we use this year’s toolbox stats or multi-year stats and what is the difference?
Step 1:Step 1:Overhead (“DIRTI 5”) and profit?Overhead (“DIRTI 5”) and profit?
Top 25 Bottom 25 Depreciation (Cull Rate) 32% 36% Interest Rate 6% 7% Repairs 0% 0% Taxes 0% 0% Insurance 1% 1%
TOTAL OVERHEAD 39% 44%
Profit Expectation (as %ROA) 33% 33%
Total 72% 77%
Step 2: Calculate her Maximum Step 2: Calculate her Maximum Investment Value on Your FarmInvestment Value on Your Farm
Milk Sold/Cow
Milk Price (2009)
Sales/Cow
% Gross Margin (5-yr avg.)
Gross Margin
Divided by % “DIRTI 5” & Profit
Equals Max. Investment Value
Top 25%
23,000
13.85
$3,186
31%
$978
72%
$1,358
Bottom 25%
20,000
13.60
$2,720
17%
$462
77%
$600
Using the toolbox, we can quickly determine a farm’s “investment value” of a cow. How does that compare to the current market price of a cow?
As service providers, As service providers, what can we do?what can we do?
Ask Questions:– What vision and priorities do you have for your farm? – What is your percent gross margin?– What is your net cost of production?– What are these numbers using five year averages?– What needs to happen to make that investment be
profitable on your farm? (Use the
As service providers, As service providers, what can we do?what can we do?
Encourage use of “advisory teams” and offer to participate
More and more farms are willing to share at least the numbers used in this toolbox with all members of their advisory team.
SummarySummary
Do you have vision and priorities?
What strategic destination are you focusing on:– With Hard work
– With Passion
– With Discipline
Use the financial toolbox to help with building the roadmap that directs your business to it’s destination
SummarySummary
Look at your five-line income statementConsider five-year averages in volatile marketsConsider the five keys to profitabilityUnderstand the “DIRTI Five”
SummarySummary
As service providers we can all help
to lead our customers to:
Become proactive profit makers
rather than reactive profit takers!
DiscussionDiscussion
Rick HermonotRick HermonotFarm Business ConsultantFarm Business Consultant
Farm Credit East, ACAFarm Credit East, ACA800-327-6785800-327-6785