Every business needs capital to operate successfully and dairy farming is no exception, writes Tony Evans, head of business consultancy at The Andersons Centre.
Recent business training courses I have delivered indicate the range per litre of capital employed is between 20p and 72p.
How can this be when the range in milk price received is probably only 10p?
In many cases the level of capital employed occurs over a long period of time and it is not until one stands back and adds it all up that the total is known and realised.
Every business needs to generate both a return on the capital as well as a realistic depreciation charge to maintain the business and encourage the capital owner to continue their investment.
With the exception of land, which has been increasing in value, most other assets either only maintain their value or depreciate (for example, cows and plant/machinery respectively).
There is a need for true depreciation to give you the money back for these investments.
See also: Diversification options for dairy farms
Returns on investment in dairying must relate to the risk of that investment and the rate for both livestock and machinery must be quite high, because animals may die and machinery rusts.
Even in the current business environment it is not unreasonable to expect and achieve a 5-10% return.
Simple rules on investment in machinery/plant and livestock are:
- Do not entertain any investment that gives less than 10% annually
- Be careful when investing in producing the marginal litre – often the rate of return is very low
- Remember high rates of return on your investments are wonderful because you don’t have to invest as much capital to reach your goals.
- Invest in what you know will work, not what you are told will work.
- Only invest when you have seen someone else get the required return and make them show you the numbers first.
In an environment of lower milk prices, investment must continue, but cash is also king so essential capital is probably the key question and the priority still remains for the good of the cow and our people, not the local machinery dealer.
Too often on farms the investments are wrong – shiny tractors must not dominate the investment plans on a dairy farm compared to efficient milk harvesting facilities and a great environment for the animals and people.
The largest single identified cost now on many dairy businesses is labour. How many people treat it as real investment? It is essential to do so because they are often the jewels in the crown.
- Investing in our people must come in many different ways including:
- Investing in them directly – on- and off-farm coaching and development, training courses, seminars and study trips
- Investing in the facilities that they are asked to use in milking and stock handling, providing the highest level of stockmanship throughout the year
- Investing in their home environment to ensure they are happy, motivated and appreciated
- Investing in their future – consideration of additional reward beyond salary for the delivery of excellence and responsibility.
And the benefits of investing in our people will result in:
- Improved staff retention
- Lower costs of production because they will manage the farm inputs on your behalf
- Motivated and happy people.
Tony Evans is head of business consultancy at The Andersons Centre