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Why you need to think like a CFO

Kristyn Kapetanovic and Megan Sheridan Published on 19 January 2010

The combination of low milk prices and high feed costs have put the industry under a great deal of stress, making it important for herd managers to begin thinking like a chief financial officer (CFO) – someone who is fully invested in the long-term financial health of the company.

By understanding how everyday decisions impact the operation’s bottom line and thinking strategically about profitability and growth, managers can begin to navigate the current economic climate while using the company’s profits in a way that will lessen its risk in the future.

Seeing the big picture
With the current state of the industry, it’s more important than ever for managers and employees throughout the operation to have a better understanding of how their decisions impact the farm’s financial performance.

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“We’re moving away from a business climate where productivity, efficiency, and cost control are the most important factors of an operation,” says Mike Boehlje, professor of agricultural economics at Purdue University. “Though these factors are still important, they’re no longer the lynchpins to success like they once were.”

Instead, Boehlje explains that implementing careful financial management, maintaining safe debt loads for the operation, analyzing the risk associated with borrowing money, and managing operating risks through forward pricing of feed or contracting of milk, in some cases, are much more important than they were in the past.

“You can have the highest herd productivity and be doing a good job in terms of herd health management, but it maybe still isn’t converted into profitability because more debt is being used than the business can support or because prices aren’t high enough to generate a profit margin,” he says. “A CFO mentality worries not just about productivity and efficiency, but also about managing the business’ risk, enabling the operation to better weather more difficult times.”

Understanding profitability and growth
To begin thinking like a CFO, managers should first understand what it costs to produce a hundredweight of milk. They can do this by converting their physical production records into a profitability measure. In many cases, someone on the farm may already be making these calculations. If not, there are a number of resources available.

Most Extension offices offer enterprise budgeting worksheets or profit-and-loss analysis templates that managers can use to do the computational work. Feed company consultants can also help managers determine the feed cost per hundredweight of milk. In addition to the physical performance information, it’s not unusual for DHIA records to include cost computations that managers can analyze.

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After seeing – by the numbers – how their everyday decisions affect the farm’s profitability, managers can then start thinking about strategies to improve the bottom line, such as lowering feed costs through more aggressive nutrition management or modifying the herd health program to reduce vet charges.

“Herdsmen understand how their job impacts milk output per cow, but it’s sometimes difficult to understand how that then is translated into financial performance and therefore impacts the profitability of the business,” Boehlje says. “When they see the numbers, they’ll say, ‘Whoa, we need to do something different here than we’ve been doing in the past.’”

Having a CFO-like understanding of the farm’s financial position can also help managers reduce the chances of vulnerability during tough economic times by taking profits in good years and determining whether they should be used to aggressively grow the business or to build up reserves for the future. For example, instead of borrowing additional money to grow faster, farmers may decide to maintain a stronger liquidity and working capital position.

Many dairy farmers aren’t currently thinking about growth opportunities, according to Boehlje. Instead, they are using their income to recover from the significant losses of the last 12 months and strengthen their position.

“Thinking like a CFO might have resulted in a dairy farmer being more cautious about the growth strategy he implemented when milk prices were high,” Boehlje says. “Asking ‘What would a CFO do?’ is as important, if not more, in good economic times, so as to be even better positioned to handle situations like the current low-price/high-cost scenario.” PD

Kristyn Kapetanovic

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