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Know Your Break-Even to Improve Operation Management

Date: 
Author: 
Nicole Skroch
Educational Opportunities: 
Articles
Interests: 
Grain, Dairy, Swine, Beef, Young, Beginning Farmers, Women in Ag
Home > Education & Events > December 2018 > Know Your Break-Even to Improve Operation Management
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It’s a great time of year to reflect on the challenges and successes the past year brought.  Ask yourself if you have the parameters to identify the strengths and opportunities of your farm operation. As you begin planning for the year ahead, what drives your decision making process? Understanding your cash flow break-even price can serve as one of the greatest factors impacting the decision making process for your business. The cash flow break-even price is the price necessary for your operation to cover all operational costs and inputs. No matter the enterprise you are in, whether it is crop, livestock, or dairy, understanding your break-even will provide you with a foundation to drive your decision making. 

If you are just getting started with this concept, let’s look at a crop example. First, identify the number of acres for a crop and a realistic yield. On the expense side, identify all expenses collectively. Operating expenses should include taxes, insurance, interest, depreciation, crop insurance, cash rent, full time employees and all crop input costs. Once your operating expenses are totaled, to get to your cash flow break-even you should add back any family living drawn from the farm and all term principal payments. Depreciation and any off farm or custom income should be reduced from this number to come up with a true operating expense.

Now that you have a total operating expense, determine whether or not a weighted percentage for each crop needs to be placed to better suit the true expense to grow each crop. A question to ask yourself is, ‘does a corn acre cost your operation the same as planting a soybean acre?’ This weighted percentage is operation specific. If this is new to you, refer to industry guidelines, your financial officer or start with a 60% corn and 40% bean percentage weight. Next, take your operating expense total multiplied by the percentage you set on the specific crop. This number divided by the acres and yield will get you to your break-even price for each crop. 
  
Once you understand how to arrive at this number, you can begin to utilize your cash flow break-even to drive business decisions. What might this number impact?  Think about any purchase decision on the operation; especially purchasing inputs for the following year or setting triggers for your marketing plan. Once triggers are set, you can fine tune your plan as opportunities arise or changes necessary for increased efficiency.
 
With the economics currently facing the Ag industry, operations that know and execute decisions based on their cash flow break-even are able to capture opportunities, even in short timeframes. As increasingly difficult decisions arise, you can utilize your break-even to consider taking on new rented acres or purchasing additional land. Furthermore, knowing your break-even can assist you to making changes to your operation if your cash break-even price can’t be met to prevent operational loss. Understanding that every operation is different is important because no two cost structures are the same and they can change quickly. Once you are able to create a decision making structure using your break-even price, it will allow you to take advantage of opportunities as they arrive more quickly.  

Using financial benchmarks to measure your operation’s cash-flow breakeven against others across the industry grants you even greater power. It will help you analyze what competitive advantages or disadvantages your operation has. In addition to addressing questions like, where do you have staying power? With the potential for limited opportunities for prices above your break even, allow your break-even to drive the decision, while putting your emotions aside. If you are looking for additional resources, Compeer Financial offers a free margin manager tool on Compeer.com that can be used to help you assemble this data, and allows you in just a few clicks to be on your way to making a positive impact on your operation’s success.
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