Production agriculture economic concepts tell us that most dairy businesses are 'price takers.' This means that dairies do not have control over the price of milk. This is certainly true given the recent BFP crash. However, more factors than just the price of milk affect the revenues of the dairy business. Revenues represent the total amount of dollars generated from business activities. Overall farm productivity plays an important role in determining how much is generated. The portion of total revenues the business holds on to is retained as profit. Therefore, anything a manager can do to increase revenues while controlling expenses improves business profitability.

In order to demonstrate the effect that farm productivity has on revenues and overall dairy profitability, some financial performance information was examined from the Dairy Business Analysis Project. Those dairies that provided complete and verifiable information were sorted on the basis of net farm income from operations per cwt. milk sold and split into two groups. Selected statistics from this sort are displayed in the adjoining table.

The first observation from the table that should be noticed is the large difference in total revenues per cwt. milk sold between groups. The high profitability group (>$0.50 net farm income from operations per cwt. milk sold) had total revenues of $18.74 per cwt. milk sold. This was $1.06 above the $17.68 of the low profitability group (<$0.50 net farm income from operations per cwt. milk sold). This factor combined with lower total expenses drove the high group's net farm income from operations $3.10 per cwt. milk sold above the low group. This revenue difference needs further explanation.

In accrual adjusted accounting, revenues and expenses are affected by inventory changes on the balance sheet. This is a more accurate way of measuring business profits because distortions present in cash-basis accounting do no affect profits measured with accrual adjusted accounting. Additionally, this feature allows revenues to be separated between cash receipts and non-cash balance sheet adjustments.

You may ask, 'Why do I need to care about balance sheet changes when managing my dairy?' 'All I care about is the balance of my bank account at the end of the month.' Addressing these questions takes another look at the table.

The high profitability group had total cash receipts of $18.41 per cwt. milk sold. This was only $0.10 above the $18.31 of the low group. On a cash basis, there was not much difference between groups. However, when accrual adjustments for changes in accounts receivable and inventories of raised assets are figured in, the high profitability group increased by $0.33 per cwt. milk sold while the low group lost $0.62. On a percentage basis, this boosted the operating profit margin 2% for the high group while decreasing it 4% for the low group.

Several factors caused these differences. The high profitability group had the lowest assets per cow ($3,282), the highest milk sold per cow (18,113 pounds), and the highest total revenues per cwt. milk sold ($19.03). All of these factors are important in determining the asset turnover ratio. 

So what is driving these revenue adjustments? First, the high group gained in milk accounts receivable (i.e. the milk check owed to the dairy for the past month's production). This was only possible due to an increase in pounds milk sold at the end of 1997 since milk prices were lower at the end of 1997 than at the beginning. Second, inventories of raised animals (i.e. heifers and cows), on average, increased during the year for the high group and decreased for the low group. Differences in raised crop inventories also figure into this difference but were less substantial for this group of dairies.

It is apparent from these numbers that cash receipts are a large part of business profitability. However, revenues and subsequent business profitability depend on how productive the business is. These results show differences in business performance that may not show up in the checkbook, yet they still affect 'bottom-line' profits. Additionally, productivity problems may jeopardize future profits and increase expenses in the long term. High productivity also boosts capital efficiency in the form of high revenues.

How well are you managing the productivity of your business? Are you achieving growth in inventories or are subtle productivity constraints diminishing business profits? A good way to tell is by regularly analyzing your business with two balance sheets linked with an income statement. This linkage ensures that business productivity is not overlooked when understanding the financial performance of your business. It will also ensure that you have more cash in your pocket.

SELECTED FINANCIAL PERFORMANCE STATISTICS BY NET FARM INCOME FROM OPERATIONS PER CWT. MILK SOLD GROUP
Category	Net farm income from operations1 per cwt. milk sold
	<$0.50	>$0.50
Number of dairies	11	16
Number of cows	1,838	1,271
Milk sold per cow (pounds)	16,487	17,376
Total revenues (per cwt. milk sold)	$17.68	$18.74
Total expenses (per cwt. milk sold)	$19.24	$17.19
Net farm income3 (per cwt. milk sold)	($1.55)	$1.55
Revenues (per cwt. milk sold)
Total cash receipts	$18.31	$18.41
Total accounts receivable/inventory changes	($0.62)	$0.33
% accounts receivable/inventory change of total revenues	- 4%	2%
Operating profit margin2	-7%	8%
1Net farm income from operations is defined as accrual adjusted revenues minus accrual adjusted expenses. This represents the return to unpaid labor, management, and capital.
2The operating profit margin is determined by adding interest expense to net farm income from operations, subtracting a $50,000 charge for unpaid management, dividing the remainder by gross revenues.

[1]Manager, Dairy Business Analysis Project and Extension Agent, Department of Dairy and Poultry Sciences, University of Florida. Contributing authors include P. Miller, M. Sowerby, B. Tervola, D. Solger, P. Joyce, T. Seawright, C. Vann, and M. DeLorenzo.  Also L. Ely, Animal and Dairy Science Department, University of Georgia.