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Employees: An asset or a cost?

Bruce J. Vande Steeg for Progressive Dairy Published on 06 May 2020

How you view employees probably requires a mindset shift. Why? Traditional accounting has taught us that labor is a cost item on a profit and loss statement and not an asset on a balance sheet.

We often see a line that looks like the one in Table 1.

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Operating costs and expenses

This is a line item straight from a dairy profit and loss statement. (Thank you to Jeff Bushey, CPA, Nietzke & Faupel). As owners and managers, labor is seen as a cost: $1.79 per cwt. Often, owners will get together and compare costs to see where they stack up against their friends or neighbors. One cost they compare is the cost of labor.

If a neighbor’s cost is lower, the natural question to ask is: “How come theirs is lower than mine? How can I lower my cost?” These are very valid questions. The problem with just asking those two questions is several-fold. First, people are not inanimate objects. You cannot send a bid into a supplier and get a cost quote to acquire them. They get a choice in whether they choose to work for you.

Next, while it’s true employees come at a cost that impacts your payroll, their performance is not uniform. Employees can perform at a low level, mid-level or high level. You as the owner do not have a simple switch you can flip to get the level you are expecting. Flipping this “switch” takes effort on the part of the owner, manager and the employee.

Unfortunately, most dairy accounting systems are based in cost and tax accounting. They do not look at managerial accounting, which focuses on margin analysis (the increased benefit of incremental production) or constraint analysis (identifying bottlenecks and the inefficiencies of those bottlenecks). We also don’t look at people as an asset; they just do not show up on the balance sheet. Because they are not on the balance sheet, we tend to not treat them as assets but rather as costs.

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What follows is a summary profit and loss statement for a dairy group in the Upper Midwest (Table 2).

Nine months ended September 30, 2019

From it we can draw several conclusions. You’ll be tempted to compare these numbers with your own numbers. That’s what is so enticing about looking at numbers in this way. However, the actual numbers are not what I am driving at. I am interested in the relationships between certain numbers.

The green highlighted areas are line items in the revenue-generating portion of a profit and loss statement. These green items are areas that people – your employees – can affect. They are the outputs of the things they touch every day. The first relationship to look at is this one: 97% of the revenue of this farm is impacted by employees. (This assumes that the other income reported is not something employees have much to do with.

That may or may not be the case for your farm.) Those outputs are worth over $11 million dollars. Employees and managers touch in some shape or form just about all the revenue produced. That is the “top line.” What about the bottom line? See the highlighted red line items? From this we see that 85% of all expenses ($9.9 million), are impacted by employees. The bottom line: There is not much from an income or an expense standpoint that your employees are not touching or impacting in either a positive or negative fashion.

It is not just the cost per hundredweight of labor that employees cost an operation. Their performance puts at risk 97% of this operation’s revenue and 85% of its expenses. If you do this same exercise, I would venture to guess your percentages would look similar. In my opinion, we as an industry, as dairy business owners and managers, need to take a different look at employees and their impact on our businesses.

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Let’s take a momentary pause and address robots. One current and progressively popular solution to labor issues is to look at using robots. The allure is to move management of 90-plus percent of your milk revenue to something requiring much fewer to no employees. Robots are a viable solution to some labor challenges; however, an operation will still need people. They will just be working in different roles.

Robots will need maintenance and repair. Moving the employee equation to a robotic milking vendor may seem like a great move, but if that vendor doesn’t also recognize that some key situational employment will be necessary, you will still very much be dealing with their employee problems impacting your milk production and its effect on your bottom line.

Let’s look at an example of the impact of employees to both your revenue and expenses. Here’s the situation: You spend time hunting and wrangling a good deal on feed for your farm, acquiring feed at a competitive advantage. When the feed shows up on your farm, your employees push it into a bin and drive over some of it. They “knock” down some silage and don’t feed all of it. This feed gets lost or thrown away. Then they load some of it into a feed wagon. Occasionally, they overfill the wagon and the spillage gets lost.

Then when they drive the feed wagon and deliver feed to the cows, some of the feed gets placed in an area the cows cannot reach, and it doesn’t get eaten. Later, a feed pusher goes by and blades the feed up to the bunk. But at the end of the feed lane, they do not raise the blade soon enough, and the feed goes past where a cow can reach it. It goes to waste. Some of the feed that was fed lands on top of the stanchion line, and it does not get eaten. Get the point?

Feed was purchased, some portion of the feed never reached a cow. Therefore, that feed never had the opportunity to be turned into milk. This results in a decrease in potential milk and a cost that is born by the operation. Effectively, in this hypothetical situation, management of the farm has increased cost and decreased revenue, and the margin just got squeezed. You never see these actions on your profit and loss statement.

Here are some other examples. You’ve probably thought or said out loud some of these before: Why do employees not see how wasteful that is? Why do they not see the effect of inattention? Why do they leave the loader running while they are out delivering feed? Why do they not say something when the check engine light comes on? Why do they walk by a calf with scours or pneumonia and wait to treat it so that it becomes a chronic, ill-thrift heifer, which is eventually culled?

The “why” is most likely because they are not engaged and therefore their productivity is lacking. Employee engagement as measured by Gallup shows that 13% of employees are actively disengaged. This means they are miserable and spread unhappiness to their colleagues. Another 52% are not engaged. They are just putting in their time with minimum effort and they are looking to leave when the next best opportunity presents itself.

Therefore, 65% of the average workforce doesn’t really care if they do a good job or a poor one. This is two-thirds of your staff, who daily, simply do not care. This is alarming and expensive. Gallup has shown, however, that organizations that make a strategic investment in employee engagement report 11% greater profitability. Management’s role in employee engagement is crucial to employee performance and profitability.

What is employee engagement? What does one do about employee engagement?

Employee engagement can be summed up by the following five key areas:

  1. Clarity about the role
  2. Opportunity to do what you do best
  3. Opportunity to develop at work
  4. Enjoying strong co-worker relationships
  5. Work with a common mission or purpose

What are the results if the above-mentioned five key areas are in place and in practice? Expect these four results.

  1. Employees produce substantially better outcomes (11% greater profitability)

  2. They treat cows, facilities and equipment better

  3. They are more likely to stay (two times more likely)

  4. They have better personal health

What are the critical areas to focus on?

1. Leaders (owners and managers) need to own employee engagement and culture development. They need to live the mission and core values of the organization. Walk the talk. Do not just post your core values in the barn; live them, talk about them. Impactful leaders know that their attitudes, behaviors and beliefs impact their staff and their business. Therefore, they initiate and drive their organization’s purpose, mission and engagement.

2. Train managers to lead and coach their direct reports. Managers need to be trained and empowered by ownership and/or their supervisors to handle challenges locally, to deal with people problems, to manage difficult situations and to develop the skills of the staff who reports to them.

3. Improve communication up and down the chain. What are the best practices? Share details with employees. Answer questions efficiently and quickly. Develop a picture for them of what a highly engaged employee looks like.

4. Practice accountability. Praise and recognize outstanding leaders and the best practices they use. Have a no-tolerance-for-mediocrity policy. Define what your high-performance culture looks like; paint the picture. Define what the consequences for lack of engagement are. Set clear expectations; communicate them consistently and regularly. Hold yourself and staff to them.

Employees want to do well, stay long-term and thrive at a job when they have a sense of purpose at work and when they receive training and development to grow their skills. The four areas previously mentioned serve to connect and involve them in their workplace.

What is first needed is a shift in mindset. A shift from asking your employees to invest their time and energy into your business to a mindset of leadership and management investing in the growth and development of employees. Then, in return, employees will be engaged, providing higher performance and not having reason to leave. This is how you capture loyalty. You cannot demand or expect it. You can’t order it or buy it. You earn it from your employees. You earn their loyalty by investing in them and as seeing them as an appreciable asset and no longer as a cost.  end mark

Bruce’s mission statement is to improve people’s lives one business at a time. He consults with dairies and agri-businesses interested in enhancing their workplace culture and improving employee engagement.

Bruce J. Vande Steeg, DVM

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