Source: Compeer Financial
Understanding your numbers is essential for your business, and not just for your lender. If you know your numbers, you can make more informed decisions that ensure the longevity of your dairy farm.
Start with simple, back-of-the-napkin calculations and maintain a detailed balance sheet updated at least annually, ideally at your fiscal year-end. Ensure you have:
- A completed balance sheet
- An earnings statement or tax return
- The total number of cows
- The total CWTs of milk shipped
These financials enable you to calculate key financial ratios, offering valuable insights into your farm’s financial standing.
Key Financial Metrics for Your Dairy Operation
1. Working Capital Per Cow
Formula: (Current Assets – Current Liabilities) ÷ Total Number of Cows
- Current assets: Cash or anything that can be converted into cash within one year or less.
- Current liabilities: All unpaid bills and obligations due within the next year.
Ask yourself:
- Can you meet your financial obligations over the next 12 months?
- Do you have sufficient cash or assets to cover bills and manage risk?
A strong working capital position helps you weather market volatility and seize unexpected opportunities.
Management Goal: >$450 per cow
2. Operating Expense Ratio
Formula: (Total Operating Expenses – Depreciation – Interest) ÷ Total Revenues
Think of this ratio as: How many cents does it take to make a dollar on your dairy operation?
- Monitor this ratio over time—one year alone may not reveal trends.
- If the ratio is increasing, evaluate where you can cut costs or sustainably boost revenue.
Management Goal: <65%
3. Debt Repayment Per CWT
Formula: (Total Annual Principal + Interest Payments) ÷ Total Annual CWTs of Milk Sold
Debt isn’t necessarily a bad thing in a dairy farm operation. It can drive efficiency and profitability. However, understanding how much of your milk check goes toward debt servicing is essential for sustainability.
- Align repayment lengths with the lifespan of assets.
- Discuss debt structure with your lender to ensure it matches your business strategy.
- This number varies depending on whether you own or lease equipment or use custom cropping services.
Management Goal: <$2.50 per CWT
Improving Your Financial Health
If these metrics highlight areas for improvement, develop a plan to boost profitability and competitiveness.
For example, create a financial management dashboard to track key ratios. Like a production dashboard, keep it simple and update it at least annually.
The Power of Financial Planning
Developing a financial plan helps you navigate fluctuations and identify high-impact months.
Two Types of Planning:
- Strategic Planning: Long-term, broad decisions shaping your business’s future.
- Operational Planning: Day-to-day steps that implement your strategic vision.
Even the best plans don’t always go as expected, but the act of planning itself demonstrates foresight and commitment to your goals.
Your lender doesn’t have a crystal ball, but by proactively communicating your vision and tracking key financials, you can make more confident decisions and preserve your dairy operation’s legacy.
Take the Next Step
At Compeer Financial, we’re here to support you and your dairy farm. Reach out to our team of dairy industry experts for more financial management resources today.
