Why do I need to know my costs?

Why do I need to know my costs?

What I don't know about my farm financials can't hurt, right?

A lot of people are talking about Enterprise Accounting and the importance of knowing our costs of production. Why?

Let me share an experience or two.

I was one of those kids who put myself through college by, of all things, milking cows. I know that is not very glamorous, but that early hour in the morning kept me out of a lot of trouble.

What I don't know about my farm financials can't hurt, right?

In fact, after graduation from college I didn't like my first accounting job. So after 9 months I found myself back as herdsman for a 600-head dairy. My boss had taken over a dairy that was having troubles and needed help. We were able to turn things around in a nice fashion and make the dairy work much better than it had previously. In fact, we had the dairy to a point where we had the highest milk production per cow in the state.

Great "bragging rights."

But as we calculated our costs associated with that level of production, we decided we could not afford to produce at that level. What an eye opener for my boss and for me!

Since that time I have had a hard time with people wanting to maximize their production. I am much more comfortable reaching an optimal level of production. Knowing our costs earlier would have helped us adjust our goals sooner. We may have given up the bragging rights if we had known how expensive they were. We could have put more money in our pockets.

On the ranches I have been involved with, we have had good production and results. We looked at our pregnancy rates every year and wanted them to be higher. Wouldn't you prefer a pregnancy rate of 97% instead of a pregnancy rate of 92%? Yes. But if the cost per cow was an additional $50 to get there, would it be worth it? That would add an additional $1,000 per pregnancy over the 92% mark. Not worth it in the long run.

Related: Current ratio: Measuring your farm business' liquidity

Would it be worth it if the cost were just $10 per cow? That would only add $200 per head of additional pregnant cows. Now, that is sounding better. And at least now you could make an educated decision.

This sort of analysis can help with a lot of the snake oil salesmen that call and pester us.

As we know our costs, we can look at our goals and know if they make sense for our operation. So, armed with good information, we can make better decisions.

Sometimes, knowing those costs can keep us from making poor decisions over and over again.

Brought to you by Farm Financial Standards Council. The opinions of Stephen Severe are not necessarily those of Farm Futures or the Penton Farm Progress Group.

For more information on the Farm Financial Standards Council go to the Farm Financial Standards Council website or email Carroll Merry at [email protected].

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