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Twelve Key Financial Indicators for Ranches

Posted on: November 29, 2019, by Victoria

1. Dairy cow income target: $5,000 per head.
The main reason for the failure of ranch management is unfavorable sales. Most of the ranch income comes from 85% of the sale of milk, which is directly related to the price of milk. Based on the current cost, the operating income of the ranch is bound to be higher than the cost. Calculating income in cows is easy to see. The sales of milk, eliminated cows, calve, breeding cattle, financial support from government projects and patronage refunds should be included in the total income, and then divided by the average number of cows in the ranch year, the income of each cow can be obtained.

2. Operating costs account for 80% of total revenue. 
Who can believe that the operating costs of American ranches in the 1980s accounted for only 50% of the total income? That means that ranchers can dispose of the remaining 50% at will. The use of the F-type income tax table can quickly determine the proportion of the operating cost of the ranch to the total income. When calculating the total cost, we must also take into account the cost of living of the ranch family, and divide the total by the total income. The part of the advance for the coming year is not included in the total cost of the year. The part not expended in the current year (the expenditure retained for the coming year) should be included in the total cost of the year. To find out how much you spend on your ranch, first, use the income and expenditure statement of your ranch, and then use this F-type tax form. To calculate the "cash" cost of the ranch, the total cash expenditure and principal of all the above items should be added up, and then depreciation should be deducted. The cost of cash comes mainly from the figures in the checkbook.

3. Milk solid yield of 24,000 pounds/head/year (adjusting breed structure with Holstein cows).
Selecting high-quality breed bulls, feeding high-quality feed for dairy cows and improving the comfort of dairy cows can improve milk solid production of dairy cows, and the increase of milk production will offset the high debt.

4. 50% owner's rights and interests.
The owner's equity refers to the portion of your ranch that is equal to the net asset divided by the total asset. You can find these figures in the balance sheet. Many ranches are operated by a single owner, so the personal balance sheet reflects the owner's rights and interests. If the ranch is operated in the form of a joint-stock system, a limited liability company or a partnership, the owner's rights and interests will be reflected in another balance sheet. Dairy farming is a capital-intensive industry. If your owner's rights and interests are 30%, it's reasonable. But you have to optimize the loan structure to get good cash flow. It's difficult for the lender to lend to a borrower whose owner's rights and interests are less than 30%.

Twelve Key Financial Indicators for Ranches
Twelve Key Financial Indicators for Ranches

5. Current rights and interests: Current liabilities of $1 require current assets of $2.
This is the ratio of current assets to current liabilities, which reflects the solvency of enterprises. Current assets refer to assets, cash and cash equivalents that are expected to be realized, sold or consumed in a normal business cycle or an accounting year, the assets include cash, feed, prepaid expenses, etc. Current liabilities are debts that will be repaid within one year or more of an operating cycle. Including feed, veterinary, crop harvesting, late real estate taxes, principal and rental costs.

6. The cost of milk production is $17.5 per 100 pounds.
This indicator is more important now than ever. The calculation method of this index should not be oversimplified. It should be the total expenditure of Category F-type plus reasonable depreciation plus payable and deduction of advance payments and household living expenses and income tax, deducting sales income of eliminated cattle, calves and government payments, and then dividing this amount by last year's milk sales(unit: hundredweight). Milk production cost is directly affected by land area. At present, the cost of farming feed is lower than that of external purchasing.

7. Feed cost accounts for 20%-45% of total income.
This index is calculated by dividing F-type feed expenditure by total income, and all accounts payable related to cow feeding should be included. The cost of planting and purchasing high-quality roughage varies from ranch to ranch. The high feed prices in 2012 led to a high ratio of feed costs to total income. Feeding costs can be reduced by growing your feed, but additional harvesting, fuel and land costs can also be paid. External purchases of feed will increase feeding costs without additional harvesting costs.

8. Livestock costs are 4%.
The method of calculating this index is to add up the costs of reproduction and veterinary medicine and divide them by total income. Although the value of this index is small, it means that there may be problems in the ranch. Metabolic problems during the period before and after calving increase this cost. Reproduction-related problems mean that milk production will decline, and these problems will also increase livestock costs. The recombinant bovine growth hormone RBST used in the ranch should be calculated in the cost of supply.

9. Each cow is in debt of $5,000.
The higher the inflation value of the main capital invested in ranches, the higher the debt of each cow. Therefore, to have a good cash flow, the structure of loans is very important. Some ranches can afford $1,000 in debt per cow, while others are more liable. Besides, there is another way to draw lessons from it, which is to let the debt for every 100 pounds of milk not exceed $20. This approach takes into account the level of production and the debt that cash flows can bear.

Twelve Key Financial Indicators for Ranches
Twelve Key Financial Indicators for Ranches

10. Total debt should not exceed 20% of total income.
There are many ways of calculating interest and principal payments. Here we divide the amount of repayment by the total income. The cost of paying interest and principal should not exceed 15% of the total income and can reach 20% when necessary. But more than 20% makes it much harder to repay debt. Another calculation is to guarantee $1.25 for repayment of a $1 debt after paying all cash expenditures (including the cost of family life).

11. The asset turnover rate is 2.5 times.
This indicator is the ratio of assets to income. For example, if your total investment in ranch is $1 million and your total income is $400,000, then your asset turnover rate is 2.5 times. The asset turnover rate of most agricultural projects is 3.5 times, which is too long. When you consider investing in more assets, asset turnover is a key indicator. Make sure your investments make money for you. For every dollar you invest, you should generate 70 cents a year.

12. Each cow invests between $7,500 and $15,000.
This is the ratio of total assets to the cow head, which is closely related to the turnover rate of assets. For land-limited ranches, the investment per cow is roughly $7,500, while for large-scale ranches, the investment per cow is as high as $15,000, or even more. Over the past 10 years, land value, dairy cow prices and investment in cowshed have been driving factors for this indicator.

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