busines $ ense

Busines$enseManagement Training for Dairy CFO’s

Bradley J.Hilty Information Management Specialist Penn State Dairy Alliance

Busines$enseWhat is Busines$ense?

• Best Management Practices in BM & IM

• Standardization of IM Practices

• A systematic approach to business analysis– Identifying bottlenecks with benchmarks

A Dairy Alliance program to train Chief Financial Officers of dairy businesses in:

Busines$enseProgram Objectives

• Enhance participants’ understanding of BMP in IM & BM

• Implement standards for data management• Provide benchmarks for evaluating business• Provide a systematic approach to evaluate

business• Provide tools for ongoing business evaluation• Improve information for decision making

Busines$enseHow did we do this?

• Established a Baseline– Collect data for Dairy Farm Business Analysis

• Implement standards for IM– Short term– Long term

• Evaluate Cost of Production-DairyCOP$• Evaluated Business Performance-DFBS• Develop Strategies to Address Weaknesses

Busines$enseHow did we do this?

• Hands On Experience– Data Collection for DFBS– Systems analysis using benchmarks– Calculating Production Costs with DairyCOP$

• Group Discussion– The Key to Busines$ense (10-15 dairies)

Busines$enseFeatures of Busines$ense

• Lecture – Topics– Characteristics of successful businesses– Standardization of IM practices– Benchmarks for measuring business

performance– Managing investments for profitability– Cost control & net margin analysis

• Analyzing incremental costs and returns

Data CollectionObservation, measuring & recording of data

Data OrganizationProvides structure to the data set

Data ProcessingData entry & calculations

Data ReportingPresents data for interpretation

Data Integration1

Data Utilization2

The Six Steps of Information Management

Bradley J. Hilty, Information Management Specialist, Penn State Dairy Alliance

Busines$ense

• If you don’t measure it,

you can’t control it.

• GIGO

• Provide Accurate Feedback to Others

• Benchmarks Comparisons

• Standardizing the Process

Importance of Sound IM Practices

Busines$ense

• Maximize profits• Maintain adequate cash flow• Build equity• Quality of Life

– Family

– Employees

• Others??

Goals of Successful Business Owners

Busines$ense

Goals of Successful Business Owners: Achieve Balance

Maximize profitsMaintain adequate cash flowBuild equity

Quality of Life

Busines$ense

Goals of Successful Business Owners: Achieve Balance Maximize profits

Maintain adequate cash flowBuild equity

Quality of Life

Busines$ense

Goals of Successful Business Owners: Achieve Balance

Maximize profitsMaintain adequate cash flowBuild equity

Quality of Life

Busines$ense

• Very Profitable

• Generate Abundant Cash Flow

• Sound Financial Base

• Efficient in the Use of Inputs

• Capital Efficient

Characteristics of the Successful Businesses

BUSINESS ANALYSIS- Five “Star” Financial Benchmarks

Profitability 

Return on Assets(ROA) >10%

Liquidity 

Term Debt & Lease Coverage Ratio (TDLCR) > 1.20

Solvency 

% Equity% Equity > 60%

Financial EfficiencyOperating Expense Ratio

OER< 75%-Corp OER<65% -SP/P

Capital EfficiencyAsset Turnover Ratio

 ATR >.6 Dairy & Crops

ATR> 1.0 Dairy$

Bradley J. Hilty Information Management Specialist Penn State Dairy Alliance Program

Evaluating Herd Performance with Benchmarks

ProductionMilk/Cow/Day

Herd Status DIM

Cow ManagementCull Rate

ReproductionPregnancy Rate

Udder HealthSCC

Diagnostic Benchmarks

Diagnostic Benchmarks

Diagnostic Benchmarks

Bradley J. Hilty Information Management Specialist Penn State Dairy Alliance Program

Benchmarks –Evaluating Business PerformanceCriteria Ratio Average Leaders Goal

Profitable ROA 4-4.5% 15-20% 8-10%

Cash Flow TDLCR 1.15 2.00 1.25

Financial Base % Equity 50-55% 50-55% 50-60%

Financial Efficient OER 72-76% < 65% 65%

Capital Efficient ATR .40-.45 >.65 .65 (>1.00)

Busines$ense

Key Performance Indicators

• Key Herd Performance Benchmarks– Milk/Cow/Day – Production (>70 lbs)

– Cull Rate – Total Cow Management (<30%)

– Days In Milk –Herd Status (170-175 days)

– Pregnancy Rate – 22-24%

• Heat Detection - 60%

• Conception Rate – 40%

– SCC - Milk Quality (< 200,000)

Reproduction

Busines$ense

Cost of Production System

Busines$enseHands-On:

Analyzing Business

Performance

Busines$enseHands-On:

Busines$enseUnderstanding Bottlenecks?

PRODUCTS

Production Systems Are Pipelines

INPUTS

Bradley J. Hilty Information Management Specialist Penn State Dairy Alliance Program

Busines$enseUnderstanding Bottlenecks?

INPUTS PRODUCTS

A restriction in the product pipeline

It is important to detect & correct the most restrictive bottleneck first.

Fixing the wrong bottleneck is of no benefit.

Bradley J. Hilty Information Management Specialist Penn State Dairy Alliance Program

Evaluate investment strategies;

Consider liquidation or reallocation of assets

Is the business profitable?

ROA

Is the business financially efficient?

OER

Is the business capital efficient?

ATR

Is the production a problem?

Milk/Cow/Day

Examine

Investment per cow

Land Values

Why is production a problem?

Examine production record KPI’s

Evaluate

Forage Quality;

Cow Comfort;

Ventilation;

Water;

Management SOP’s

Examine Key Expenses

Feed

Labor

Others

Busines$ense

A systematic approach to analyzing business performance. Bradley J. Hilty – Information Management Specialist; Penn State Dairy Alliance

Busines$enseBusiness Analysis Results:

Busines$ense

0

2

4

6

8

10

12

14

16

18

<0 0-5 5-10 10-15 <15

ROA Range

Distribution of ROA

Busines$ense

Indicator Average SD Min Max BST No BST

Herd Size 191 151 37 530 228 112

Cull Rate 27.1 11.7 4.0 47.5 30.2 20.5

Milk/Cow 20405 3821 11280 25621 22622 16286

Acres/Cow 2.85 .94 1.23 4.32 2.85 2.86

Milk Price $13.49 $0.95 $11.74 $15.19 $13.56 $13.36

Mail Box $ $12.84 $0.83 $11.43 $14.61 $12.85 $12.81

Busines$ense

Indicator Average SD Min Max BST No BST

ROA 1.15 % 5.7 % -12.20 % 16.4 % 2.15 % -0.72 %

OER 74.5 % 11.5% 53.0 % 95.0 % 77.5 % 68.9 %

ATR .55 .18 .33 1.08 .59 .47

% Equity 56.4 23.9 20.0 99.5 51.6 65.4

TDLCR 1.16 .66 .20 3.22 1.08 1.30

Cost $/cwt $10.12 $2.00 $6.46 $13.75 $10.49 $9.44

Busines$ense

Indicator Average SD Min Max BST No BST

Cows/FTE 34.3 8.5 22.0 49.0 33.3 36.0

Milk/FTE 683419 203344 464802 1058740 752472 555177

Labor $/cwt $1.27 $0.82 $0.00 $3.14 $1.53 $0.78

Feed/Cwt $4.04 $1.01 $1.70 $6.04 $4.19 $3.78

Feed+Crop/Cwt

$5.00 $1.08 $2.62 $6.67 $5.07 $4.85

Feed %-Milk 27.8 % 9.4 % 10.0% 37.0% 30.9 % 22.2 %

Busines$ense

Indicator Average SD Min Max BST No BST

Invst/Cow $7138 $1773 $3571 $10907 $7500 $6466

Debt/Cow $3266 $2003 $171 $8705 $3732 $2401

Machine $/Ac $205 $113 $79.00 $504 $193 $226

Busines$ense

Herd Size vs ROA

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

0 100 200 300 400 500 600

Cows

RO

A

Busines$ense

ROA vs Milk/cow

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000

Busines$ense

ROA vs ATR

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1

ATR

RO

A

Busines$ense

Machinery Investment/Acre vs ROA

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

$0 $100 $200 $300 $400 $500 $600

Machine $/Ac

RO

A

Busines$ense

• Cost of Production Data- DairyCOP$

Busines$ense 2001 Results

..\..\Desktop\Managing Production Costs-Complete.doc

0

1

2

3

4

5

6

# H

erd

s

< $ 12.00 $12-$13 $13-$14 $14-$15 $15-$16 $16-$17 > $17.00

$/Cwt

Milk Production Costs/ CWT

Busines$ense

Indicators Identified

Financial – Pre

Financial –Post

Production - Pre

Production – Post

0/5 77.4 % 0.0 % 13.8 % 2.0% ??

1/5 12.9 % 0.0 % 27.6 % 0.00

2/5 9.7 % 7.1 % 41.4 % 0.00

3/5 0.0 % 21.5 % 13.8 % 0.00

4/5 0.0 % 28.6 % 3.4 % 38.1 %

5/5 0.0 % 42.8 % 0.0 % 59.9 %

Program Evaluation Results

Thank You!

?? Questions ??

For a copy of this presentation email..

bhilty@psu.edu