Cost Control Considerations, Part 2: Budget, Plan, and Monitor

Cost control is a major driver of profitability in any business, let alone a dairy business. While cost control may be a recent topic of conversation in relation to where milk prices are presently, it really should be considered and focused on consistently in a well-run business. The key to effective cost control is not necessarily cutting expenses, but rather spending dollars wisely. Over the next several posts, we will share a collection of advice geared toward considerations when aiming to lower your net cost of production. Last week we discussed the net cost of production and breakeven milk price, the starting point in managing cost control. This week we go over the usefulness of a budget.

 

Budget, plan, and monitor 

Creating an annual budget, reviewing, and updating it periodically can help identify trends early, make adjustments quickly, and plan accordingly. A budget is often compared to a road map that charts a course through the year or some other time period, identifying obstacles along the way. You anticipate what will be coming in as income and what will be going out as expenses, as well as any principal payments or capital replacement needs. It helps when making a plan to accomplish goals you may have, or to satisfy any needs that may arise.

 

When considering cost control, a budget helps to track expenses especially when compared to actual results. This can shine a light on areas that may need more attention. For example, perhaps you discover that insurance premiums have gone up significantly without any other material changes in the business. A call to your insurance agent can help to set things right again, or maybe it’s time to find a new insurer. Another example is bedding cost per cow is up significantly – is it a result of the supplier’s cost increasing or is usage increasing? There are many other examples.

 

A few other reasons to budget as you consider strategies for more effective cost control:

1. Evaluate performance of specific area
2. Employee management and/or engagement
3. Sharpen understanding of operations
4. Help meet goals
5. Facilitate discussions
6. Avoid surprises
7. Motivate to be creative/use resources more effectively 

“What use is a budget if I’m just going to blow it the next week with some big tractor repair?”

I sometimes hear this objection to creating a budget. Consider making your budget a work-in-progress, updating it when you have new and better information. You could update the budget and make plans for a big tractor repair, adjusting other aspects accordingly. Milk price forecast is another area that changes several times throughout the year – adjusting for these changes can help hone expectations.

 

In the next post, we will discuss several specific cost control strategies.


By: Joanna Lidback, Business Consultant
JLidback@YankeeFarmCredit.com