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December 2011 Archive for Ask a Margins Expert

RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

"Holiday Season" on the Farm

Dec 23, 2011

 

In farming the seasons of “Spring” and “Fall” are where we typically capture profit opportunities. They are seasons of planning, dedication, and hard work; where the fruits of our labor are produced and harvested.  The “Holiday Season” on the other hand, is a time for reflecting on what's truly important for your family, employees, and business partners?
During the holidays many of us renew our priorities. It's the realization that our individual success and happiness comes only from our willingness to help others reach their goals for happiness and success.
Throughout this entire year I've written about techniques to achieve improved profitability, business growth, and financial success. Most of my topics center on numbers, facts, solutions, and results. These are critical topics to discuss for sure, but always be mindful that nothing else matters without people. “Take care of those who take care of you!”
One way to document, appreciate, and give back to those who are important in your operation is through pictures. We document production and financial numbers, why not document the heartbeat of the farming operation? After all, it’s people who created the results. Over time albums can be assembled which tell the story and build the legacy of your operation. With today's technology, pictures can also be easily put into video format to capture the personality and character of your farm.
Here is a video which I produced for 2011 to document the faces of family, employees, and partners of our farming business.   
The holiday season brings us all closer together with a spirit of giving. If we could keep that same mindset year-round; how much is that worth to the bottom line? 
On behalf of my family to yours; I'd like to wish you a   Merry Christmas and Happy New Year!

Determine the Profit Centers on Your Farm

Dec 19, 2011

After a busy harvest, most producers are now compiling, reviewing, and organizing the needed information to analyze this year's financial results. Structuring new operating lines for 2012, tax planning, and cash flow projections are at the top of the priority list for many producers.

As you begin to complete your analysis to the satisfaction of lenders and the CPA, consider another step for the benefit of your business. Breaking out “profit centers” and charting your trends is an effective way to paint a clear picture of your financial condition and future direction.
 
“Profit center” analysis involves breaking out individual income and expenses, which are specific to a particular division of your business. For example, every operation has several different divisions which need to be analyzed separately such as machinery and equipment, trucking, livestock, or any other internal source of income and expense.
 
By breaking each of these into separate profit centers, it will allow you to more effectively analyze the profitability of each portion of your business. This detailed information will then allow you to determine which areas may require better management.
 
Once you've identified each specific “profit center”, begin the process of assigning each profit center its income and expenses. Generally the income side is easy to identify and assign to a specific profit center. The challenge is breaking out the appropriate expenses for each profit center. For example, breaking out labor costs and assigning them the correct percentage takes some thought and/or recordkeeping.
 
Another challenge is with machinery. When particular pieces of machinery are used with both livestock and crops, there needs to be an allocation of expenses accurately split between the two different profit centers. Other areas that take particular attention to detail include parts, supplies, utilities, repairs, taxes, insurance, and other miscellaneous expenses. The easiest way to break these expenses out is by using a percentage of cost.
 
You know your business best, so by critical thinking through each individual line item you'll be able to come up with a relatively accurate percentage of expense. Obviously there are some estimates involved but going through this process requires you to take a much closer look at each individual expense. The more you work with this information over time, the more accurate your estimates will become. If you learn that the estimates are not accurate enough you'll probably begin keeping track of some things that you previously overlooked. The value of breaking information into specific enterprise “profit centers” comes from the detailed analysis of each specific component of your business.
 
Step two: “Charting your margins” this process simply involves taking the numbers you've assembled within each profit center and charting this information. By charting your margin you can begin to see the trend and direction you are headed. This also provides you a visual on performance; from one portion of your business to another. A chart for each profit center can give you a clearer picture of how your business structure really looks.
 
Here is an example chart used for measuring income and expense trends over time:
income and expense trends over time
 
 
This chart will allow you to analyze margin opportunities, draw trend lines, and paint a clear picture of performance. Having this type of chart for each profit center will help you to determine which areas of your business are truly generating the profits. Sometimes you may not like what you see, but if you can't see where you're going - how will you ever get to your destination?
 
If you're interested in these types of charts or have questions on breaking out your overall operation into specific profit centers, send me your questions: cbarron@cb-farms.com

2012 Crop Acreage Plans

Dec 12, 2011

 

Deciding on which crop/acre mix will be most profitable can be a challenge in volatile times. Grain markets, cost of production, and yield prospects together create a moving target for making the best decisions. Planting the right balance of each crop is dependent upon your ability to manage these three variables.
How do you make decisions for your acre mix and crop rotations? There has been a big swing to more corn on corn production in many areas over the past few years. Some operations have gone 100% corn while others have increased by planting one or two additional farms to corn. When considering acreage plans and crop rotation management decisions should be specific to your individual needs, goals, and objectives.
There are a number of influencing factors which have led to the increase in corn acres. One of the most obvious reasons has been the price relationship between corn and soybeans. In visiting with many producers across the Corn Belt many tell me, “It would take an additional $2-$3 per bushel on soybeans relative to current corn prices to convince me to plant more soybeans.” 
Another factor influencing more corn on corn acres comes from numerous agronomic challenges with soybeans over the past few years. Insect pressure, disease, weather challenges, and the lack of consistency in yields have been challenging enough to sway farmers toward planting more corn. When there's a question, farmers seem to prefer planting corn.
Ask yourself the following questions: What is the right acre mix for my situation? Should I plant more corn acres or more soybean acres? Should I just keep doing what I've been doing??
Try not to be influenced by outside factors. Evaluate your own specific challenges and needs.
Here is an analysis tool which may help you create a better perspective. Simply plug in your cost of production, projected yield, and market price for both crops. This tool gives you a side-by-side comparison in order to help you easily manipulate your numbers as conditions change.

                                   Complete the Tan boxes
 
Plan #1
Crop
Corn
 
 
Soybeans
Income / Ac.
$980.50
 
Income / Ac.
$640.80
Expense / Ac
$855.00
 
Expense / Ac
$587.00
Revenue / Ac.
$125.50
 
Revenue / Ac.
$53.80
Margin / Ac.
14.68%
 
Margin / Ac.
9.17%
 
Corn
`
 
Soybeans
Yield
185
 
Yield
60
Price
$5.30
 
Price
$10.68
 
 
 
 
 
                                   Complete the Tan boxes
 
Plan #2
Crop
Corn
 
 
Soybeans
Income / Ac.
$1,110.00
 
Income / Ac.
$682.80
Expense / Ac
$855.00
 
Expense / Ac
$587.00
Revenue / Ac.
$255.00
 
Revenue / Ac.
$95.80
Margin / Ac.
29.82%
 
Margin / Ac.
16.32%
 
Corn
`
 
Soybeans
Yield
185
 
Yield
60
Price
$6.00
 
Price
$11.38
 
 
 
 
 

 
Tracking your opportunities instead of following a general trend will help you to make more effective decisions. Cropping decisions are definitely a moving target! Doing what's best for your operation always comes from evaluating your own numbers, not others!
If you'd like a copy of this worksheet or have any specific questions, please let me know.

Ag Education Opportunities

Dec 04, 2011

 

One of the most effective ways to improve the bottom line can come through networking, new ideas, and new technology. This past week I attended the Integrated Crop Management Conference at Iowa State University. The conference provided layers of research and information geared toward helping producers and crop consultants tackle the many challenges of crop production. As with any conference there are high and low points, some information may be review while other information is exciting with tremendous profit opportunities.
Today's busy schedules offer little time to attend seminars and conferences. It takes extra effort and motivation in order to be away from the farming operation and family for several days. On the other hand, investing time into some of these events can generate tremendous monetary rewards. University extension, agricultural companies, commodity groups, and media such as “Farm Journal Media” provide information opportunities which can lead to direct profits on the farm.
Here are two important questions to ask: How much time should I invest in education? What value do conferences and seminars return to my bottom line?
Let's first consider the value of networking. Networking in many cases is the most effective component of attending a seminar. A simple conversation with other farmers during a conference can lead to unique ideas or applications for your farm. These conversations may also lead to ongoing relationships which mutually benefit both parties over long periods of time. Meeting new people is a great way to improve creativity and open your mind to new concepts and ideas.
Getting a first-hand look at new technology is another benefit of attending seminars or conferences. Obviously these technologies can be viewed and studied through various types of media rather than having to attend a conference. Conversely, by attending you're able to get the “touch and feel” experience. You can look at a new combine on the computer, but if you can “touch and feel” you have a much better idea of how the product might fit your specific needs. At a marketing conference you may be able to ask questions which apply directly to your situation. It's one thing to read advice; it's another thing to have a conversation with an expert about your specific challenge or opportunity in person.
Finally, let's put some numbers down in order to estimate the value of continuing education through conferences and seminars.
Let's assume a conference attended this coming summer provides a technique which would improve yield by just “1” bushel per acre! If you had 500 acres of corn production at a price of $6.00 per/bu. you would generate an additional $3000 each year. If you spend two days learning this technique it’s made you $1500 each day! 10 years of using this technique provides you an additional $30,000! Imagine the improvement of your productivity each year.
If you improved your marketing by $.10 cents per bushel on 500 acres of production, you could receive an additional $10,000 each year! Two days of learning could equate to a $5000 payback each day!
Not every conference or seminar will produce big returns. Keep in mind, it's not the big opportunities that create results - it's all of the little things that add up - which make the Big Returns!
There are numerous educational opportunities on AgWeb, check them out!
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