Previously, a financial analysis system call “DuPont” was introduced that assesses profitability through three primary levers:
- Asset Utilization
- Efficiency
- Leverage
If the analysis shows that “Asset Utilization” is not at the desired level, then the management team should look for ways to improve it. In general, asset utilization is a measure of how well managers are at putting capital assets, such as cows, tractors, land, and buildings, to work in creating gross revenues.
Asset utilization is measured by “Total Revenues” divided by “Total Assets.”
How about running diagnostics? If the ratio is too low, there are two causes.
1. Total revenues are relatively too low If management comes to the conclusion that total revenues are too low relative to assets, then that means a lack of productivity from those assets and/or poor prices. If poor productivity is the culprit, then potential causes to evaluate include anything and everything that might be holding back productivity. The list can include:
- Production metrics (total, per acre, per cow, per labor unit, and so forth)
- Mortality rates
- Feed conversion
- Timeliness of operations
- Fertility and nutrition programs
- Health protocols and cow comfort
- Days in milk
- Per unit asset levels of machinery, buildings, breeding livestock (per acre, per cow, or per full-time equivalent labor (FTE)
- Excess machinery capacity
- Leasing versus owning
- Asset sharing
- Custom hire
2. Total Assets are relatively too high If there are too many assets relative to total revenues, then those items listed below might be a place to start the evaluation. Neither lists are exhaustive, but the point is that assets are not being converted into total revenues as one would like and now you know where to spend your valuable time.
- Price and marketing
- SCC
- Price premiums and discounts
- Ability to manage assets
- Obsolete or inefficient assets
- Assets whose poor condition is impacting productivity
- Enterprises not creating “big enough” revenues per amount of assets
To comment, email your remarks to intel@hoards.com.(c) Hoard's Dairyman Intel 2017 October 30, 2017
