Everybody wishes they had extra money in their pockets.
Sometimes, you do not need to do more to get more.
Doing things differently and even doing less is sometimes the answer.
Last week, my friend quit one of his jobs. He has many. He works long hours and most of the time, it’s seven days a week. Unusual way to make more money. In fact, more money was the primary factor in his decision. After taking the time to calculate all the expenses and revenues related to the job, it became obvious to him that the expenses were surpassing the revenues. Of course, being a meticulous business man, he had all the required information to make his decision. My friend is a dairy producer. Ask him about his cost of production. He knows. He knows the cost of producing a bale of hay, a hectoliter of milk, a ton of corn and he knows the cost of plowing a hectare of land.
Cost of production is a simple concept: total cost involved in a particular activity. Usually, we like to have a simple unit such as $ per hectoliter, $ per ton, $ per heifer. That way, you can easily compare your cost from year to year both on your farm and with other farms.
Most of the time, the retail price of a product will be calculated based on the cost of production.
Retail price: cost of production + markup.
Let’s take a heifer for example. Let’s say I raise more than I need. So I keep what I need and sell the rest to make a profit. I am a moderate producer and I will be happy with a 10% markup. The heifer costs me $2,000 (provincial average) add 10% ($200), so the retail price is: $2,200. However, there could be one problem...no buyers necessarily at that price!
Therefore, my cost of production for one heifer is too high and each time I sell one for example at $1,700 -- I lose money. Bottom line: lower that cost of production or quit this job.
When it comes to milk, we like to calculate the cost of production on a per hectoliter basis. The cost of production varies from farm to farm depending on many factors such as feeding systems, types and prices of feed, building repairs, labor, machinery, electricity, and so on. These expenses fall in what we call variable expenses, meaning that they usually vary according to the number of cows in the barn, and the level of production. For some of these variable expenses, little can be done to reduce them. Milk transportation is a good example.
However, some variable costs can be greatly affected by management. Did you know that feeding a cow is the greatest variable expense? In fact, on average, about 55 % of all variable expenses are related to feeding. This is where a little management can do a lot. Looking for alternatives to expensive feed, harvesting high quality forages and keeping herd sizes to a minimum can boost profits substantially.
Ways to make more money :
* Know your cost of production !
By being able to pinpoint areas where you are efficient and areas that need improvements is the starting point of a successful (and money making) business. If you want to quit less profitable jobs and put the emphasis on productive ones, you need to know which is which. Start with the main source of farm income. The Ontario Farm Analysis Program (OFMAP) is an excellent way to obtain the needed information. Joining a farm management club can help too.
* Harvest top quality forages
High quality forages means less grain and protein supplements are required per hectoliter.
* Keep herd size to a minimum
The less cows to feed, the cheaper. Also, evaluate the requirements for heifer and do not raise more than required unless you can sell them and make a profit. This is not frequent.
* Raise top quality animals
Raise heifers from your best cows. Avoid a low producing dam. You are better off buying a first calf heifer (and having the choice) which is starting lactation, than being stuck with a low producing heifer that costs you $2,000.
* Invest wisely
Evaluate the impact of an investment. Investing is supposed to be a money-making decision, otherwise it may just be another expense.
* Ask for advice
A lot of people can help you in the decision making process. Phone and ask for advice. Great businessmen have a pile of advisors in the room when a big decision needs to be made.
* Take the time to think
Taking the time to think is not a waste of time. You are better off postponing a project or a decision until you are more prepared and informed. It is easier (and cheaper) to change you mind than to re-do a project.
From the Archives:
OMAFRA Update 1, May 2009
