Knowing how much profit you’re making is like checking the vital signs of your business, and dairy farming is no exception. It might seem like plenty of money is flowing in, but if you don’t keep a close eye on the actual numbers, your business might not make it, and you won’t qualify for funding. So, since it’s so vital, how is profit calculated in dairy farming?
To calculate the cash profit on a dairy farm, you need to determine the COS (Cash Operating Surplus). The formula for that is COS = Farm Cash Income – Farm Cash Costs. When you compare the COS with your dairy farm’s assets and liabilities, you can determine the overall health of your business.
As with most businesses, dairy farms have many variables to consider in determining the annual profits or losses. Let’s look at each component of the formula, what it means, and how to accurately determine the profitability of your dairy farm.
Formula To Calculate A Dairy Farm’s Profits
Any business can determine its profits with a simple formula of deducting expenses from income. Note that the profit doesn’t directly correlate to the value of the business, which is far more dependent on the value of assets minus liabilities.
It’s also vital to note that, though profit and cash flow are related, they are not the same. Cashflow simply deals with the amount of cash entering and leaving the business, whereas profit indicates how much growth there is since the goal of any business is to make more money and spend less.
A dairy farm uses the same basic profit calculation formula as any other business:
COS (Cash Operating Surplus, or “profit”) = Farm Cash Income – Farm Cash Costs
Now let’s see what that means.
Farm Cash Income
The farm cash income (FCI) is a measure of the amount of money that flows into the dairy farm. The money can come from various sources; however, it’s vital to note the source because any income from liability does not count toward profitability. For example, the following will not apply:
The following are the primary sources of cash income on a dairy farm:
Of course, in any dairy farm, the sale of milk and dairy products should be the most significant contributor to the farm’s annual income. However, with any income, remember that it only counts when actual money comes in. Someone who buys milk on credit and pays in 90 days does not count as income for that month, only for the month when the money enters your bank account.
Now simply add the incomes from all of the above sources for each month and add them to a spreadsheet to calculate the farm’s FCI over the last year.
For example, you should have a simple table like this for every month:
You can then use a similar table to combine the income for each month into an annual total, similar to this:
Total FCI for the Year
That’s how you calculate your annual farm cash income.
Farm Cash Costs
Your farm’s cash costs (FCC) include anything you spend the farm’s money on. The most common expenses on a dairy farm are:
- Inputs for crops and livestock
- Repair and maintenance costs
- Rents and leases
- Utilities and fuel
- Feed purchases
- Labor expenses
- Various levies (licensing, bank fees, etc.)
- Capital purchases
- Family living expenses
- Repayments on principal and interest amount
Similar to the income, you can add all the expenses together in a table such as this:
Crop and Livestock
Repair and Maintenance
Rent and Leases
Utilities and fuel
Now add the monthly totals to a sheet to calculate the total farm costs for the year, as you did with the income. That’s your FCC.
Remember that this list is not necessarily complete. You might have other expenses and costs that are not on this list. The best idea is to work through your bank statements and add all of the items that you see there.
Calculating The Cash Operating Surplus
Now that we have the FCI and FCC, we can complete the formula to get our COS (cash operating surplus or profit).
To do so, we simply deduct the annual FCC from the FCI.
For example, let’s say your numbers looked like this:
Total Annual FCI
Total Annual FCC
TOTAL ANNUAL PROFIT
In this example, the cash operating surplus, or profit, is $155,500.
Why Do We Calculate The Dairy Farm’s Profit Annually?
It would be best if you do this exercise monthly. It’s a good idea to take your bank statements, checkbook, and cash slips every month to do these calculations and see how profitable each month is. It will give you valuable insights into what you can change here and now to improve profitability.
However, there are a few reasons why we mainly calculate the profit annually:
- Tax season happens every year. All businesses and individuals must submit their tax reports annually, so it makes sense to calculate the profits and losses at that time.
- Not all expenses and incomes occur every month, and this is especially true in farming. For example, you don’t buy livestock every month. Though you should sell dairy products every month, you don’t sell livestock or other products that frequently.
- You might need more laborers during certain months than others.
Hence, if you base your perception of your farm’s profitability on a particular month, your view of the dairy farm’s success will be skewed. As a result, you could think the farm is doing much better (or far worse) than it actually is.
Use the monthly income and expense calculations to see if there’s anything that you could do differently to improve the profit in that specific month, but just remember that some months will be profitable while others may not. There isn’t necessarily much you can do to change that.
Calculating the profit of your dairy farm is simple. You just have to calculate all your income and all your expenses. Deduct the costs from the revenue, and you will have your profit. It’s a good idea to do this every month, but you should only base your farm’s success on the annual totals because every month will differ from the next.