November 17, 2014 -
With fall comes the buttoning up of dairy barns and sheds, bringing young stock home from summer pastures, and finishing up any remaining field work before the frost sets in.
Understanding Cash Flow and Cost of Production
For many dairy producers, 2014 is stacking up to be a very successful year and now is the time to start planning for 2015 and working with your advisors to understand cost of production and cash flow breakeven.
Cash Flow Breakeven
Simply put, cash flow breakeven is the value that keeps your check book balance the same at the end of a period of time as it was at the beginning. It includes:
cash input costs
cash labor costs
principal and interest payments
cash capital expenditures.
Cost of production
Cost of production is the value that keeps your equity at the same value over time and includes:
production expenses (cash or use of inventories)
cash labor as well as family labor
Dairy Feed Inventory vs. Prepaid Feed
Feed that is already in bins, bunkers and silos is a form of prepaid feed. By combining your own feed inventories and prepaying for purchased feeds, you have effectively locked in your feed costs for period of time. Vendors may be offering additional cash discounts for prepayment of purchased feeds that can further reduce feed costs.
Determining Capital Purchase Needs
Evaluate capital purchases that could be made in 2015. Assess the difference between purchases that are a “need” for your operation from those that you may “want”. For the best tax treatment, work with your tax advisor to understand whether they should be purchased or leased. In addition, work with your lender to understand your cash flow needs, you can then decide if it makes sense for these purchases to be made by cash or through a new loan. It’s important that sufficient working capital remains before making future capital expenditures out of cash.
By Tim Swenson, Sr Business Consultant