Earlier we reviewed the value of using sound business practices when making a decision to adopt new technologies or new products in your operation.
Good risk management involves having a good understanding of how each decision will impact your bottom line. To review, the decision process involves the following steps:
Cost analysis for the new product
Alternatives for each
Net present value analysis
|Larger grain cart||$1.20||$1.57||($.37)|
In this article we'll develop cost analysis concepts. We'll emphasize the importance of putting hard numbers into the decision-making process.
The first step when deciding on machinery is to determine the right size of equipment you need for your operation. Using equipment that's either too small or too large for your needs costs money and can affect the efficiency of your operation.
Previously we emphasized getting as many hard numbers as possible to fully understand your needs. Now you have a base of facts to figure how the new equipment can improve these numbers.
Start by calculating the costs/acre, costs/hour, hours/acre and manpower/acre for the new equipment. It's important to include any added costs or other changes required in your operation that will be impacted by this new equipment. With the analysis for your existing equipment and a similar analysis of your new options, it's time to compare.
A simple spreadsheet will do the work for you. Above is an example on a new combine.
Our experience shows it's about knowing your costs, carefully analyzing changes in them and finding small incremental improvements that result in long-term positive changes to your net income.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.
Adopting new technology into your operation involves a different approach.
Our experience suggests that adopting new technology involves learning about the technology, testing the technology in your operation, then adopting it on a broad base.
Our client base has demonstrated, in most cases, early adopters of the newest technology reap the most benefits. That's why it's so important to learn about and test these new technologies quickly. The scientific method tests one factor at a time in order to make a reliable comparison.
For example, you've identified a need for insect control delivered through the seed you purchase. In order to understand the financial impact of using this new technology, you need to test it.
It's important to understand the newest technologies are carefully tested, reviewed and regulated by various government agencies. You are testing to determine only the financial impact on your farm. How do you effectively do this with minimum effort and disruption?
Using insect control as an example, pick two or three fields that have exhibited pressure from the insect of interest and plant combine-width strips of the new technology across this field. Plant the same hybrid without the technology in the same fields, at the same time, using the same equipment. You now have only one difference to compare; the yield of plants with and without the insect control.
By calculating average yields across each field you can compare yield differences between the insect-protected seed and conventional seed. Take this yield difference multiplied by the selling price of the crop and compare the financial benefit with the added cost of the technology.
Finally, you may want to consider other factors such as crop scouting costs, changes in equipment and time. When making decisions about making changes in your operation, use dollars and cents to measure differences whenever possible. Small incremental improvements result in long-term growth in net income.