Increasing Profits: The Principles that Guide

While there are definitely places to cut costs in your business (and we will be looking at several candidates), a key mistake made in lean times is relying almost exclusively on cost cutting within existing processes, often damaging both short and long-term profits, alientating employees and risking increasing overall costs to eventually "reverse" these poor decisions.

So we begin our series by looking at some of the over-arching principles that should guide your approach at maintaining and improving profits during times of low returns. We will look at these things in general terms first and then get very specific about how to increase your chance at profit improvement.

1. THE FOCUS IS ALWAYS ON PROFITS--profit is the difference between gross revenue and total costs. There are lots of ways to lower costs that eventually (or sometimes immediately) decrease revenue in such a way that whatever savings you get are completely offset. The problem is that many of these revenue destroyers are insidious and are never rightly discovered to be caused by the cost cutting extravaganza that preceded them. Examples include things like eliminating cell phone use, eliminating travel (especially legitimate air travel for those employees who must go long distances), deferring key maintenance items, eliminating or reducing feed inputs that are nutritionally required by the animal, eliminating common and recommended vaccinations, delaying or eliminating treatment of disease, stopping all overtime and bonuses, failing to give properly deserved merit raises, over crowding buildings, ceasing genetic advance or breeding terminal females etc. etc. (add your own).

2. LOOK FIRST FOR LOW HANGING FRUIT--When times have been good, small, cost increasing indiscretions that seem to have no impact become established and can be easily eliminated without any new investment or "cost". These are things like failing to bid or check for the lowest cost source of any input used on the farm. This spans the horizon from grain and feed ingredients right down to the long distance or cell phone service you are using. We will be making the point that there are many, many prices in the market place today for every item you use in the production process. Are you getting the least cost price for the identical item that you purchase? This is not about choosing an offbrand, generic or cheap quality substitute. This is about getting the same thing for a lower price.

3. ELIMINATE PROCESSES RATHER THAN MAKING THEM MORE EFFICIENT--We will be looking at some examples of how to just get rid of some of the things you do rather than trying to take the cost out of how you actually do them. We have to be careful here but there are many things which are done on the farm by industry custom, by farm legacy or because someone has decided to insert them for some reason (often the reason has long since become moot) but tradition keeps them going. Now is the time to clean house on unnecessary processes instead of simply reducing their cost.

4. GET COMPETITION GOING--Ingenuity and competition are far more effective in reducing costs (reducing the RIGHT costs) and increasing revenue than edicts, demands, screaming and threats. Enlisting the energy of employees and family members in a positive and rewarded search for "egg robbers" and casting them out is a sure fire winner. We will be talking about how to do that in some detail.

5. REDUCE VARIANCE IN THE FINAL PRODUCT--We can demonstrate very convincingly that less than 5% of marketings from your farm actually hit within 2-3lbs on either side of the profit maximizing weight. A typical marketed group may exactly hit your targeted average weight but the opportunity is all in the variance. If your packer's sort loss is a fixed amount at each weight break (vs. a percentage), reducing sort loss is a huge bonus in times of lower prices and is for most farms, the single most effective means of raising profitability. There are many things to consider here and we will remind you of some we have already talked about and bring in some new ones.

6. TRACK, WRITE DOWN, RIGOROUSLY MEASURE AND WIN!--There is nothing on earth as effective as creating a realistic budget and then demanding that you and everybody else live in it. Audit key items, first to see how much should be disappearing in theory and then compare it to what is actually going out the door. Its a version of the envelope thing used very, very successfully by individuals and families that find themselves in need of gaining control over spending. When the allocated amount in the envelope is gone, thats it, until the next pay check or spending interval. By the way, "thats it" MEANS, "thats it".

7. INVEST INSTEAD OF PAYING EXPENSES--I told my kids when they went off to college and were getting started with a new family etc. that we would make large investments in them but we would not pay any of their expenses. They got it after a while. There were some pretty ingenious presentations made for funding which tried to dress up expenses to look like investments but none of them were funded. On the other hand, some unexpected and welcome investing took place when they least expected it. We will flesh this out in some detail in the days ahead. Refuse to pay expenses, only make investments.

Next time we will dig into specific strategies in these seven areas.