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The following is from The Clemson NC Handbook. The original publication is located at http://goats.clemson.edu/NC Handbook/analysis.htm. Thanks to Holly Jentsch, e-mail jentsch@alpha1.net, for her research in finding this valuable information.
 


ENTERPRISE ANALYSIS
by
Lynn Harwell
 

Introduction

Comment in an earlier section raised a red flag about the unprofitable nature of goats kept as a hobby. To be sure, some goat owners strive to run an efficient operation, even though it may swim in a pool of red ink, created by excessive investment in champion breeding stock, massive barns, and gleaming white fences. Further, the farm manager may be overpaid, the feed bill too high, and veterinary charges greater than that required to eradicate the bubonic plague from the face of Europe.

Several years ago, the Farm Credit Banks conducted a survey to find out how farmers spend their working time. They found that 95% of the time was spent in production activities, 4% in marketing, and a scarcely noticeable 1% in financial analysis. Successful managers divide time spent among the three areas much more evenly.

When enterprise analysis is mentioned to many goat producers, they think in "yield per acre" terms which apply to the goat world. Things such as percent kid crop, weight of weanling kids, kids produced per doe, feed consumed per head, and so on. If production efficiency is the only goal, one can stop with such measures, all related to physical performance. It makes good coffee shop talk, may win a ribbon at the county fair, and requires only that substantial financial assistance come from outside sources.

An accountant looks at an enterprise in terms of costs and revenues, the difference in which is profits ­ or losses. He uses enterprise analysis to examine all factors leading to the bottom line. Many of the numbers do indeed come from physical performance measures, but with dollar values attached to them.

In financial analysis, a producer first does his goat farming on paper. If it looks inviting, then, and only then, should he jump in. A trial run on paper won't guarantee a profit, but will head off some mistakes, and will provide him with a plan for action.

In the Southeast, financial arguments encourage meat goat production. An abundance of low­cost browse coupled with nearness to eastern markets invite a close look at an investment opportunity.

Immigration rates into the United States are now running about 60,000 persons per month. The majority of immigrants come from cultures comfortable with the consumption of goat meat.

Latins and Asians make up the bulk of new immigrants, more than half of which are not as yet naturalized citizens. Many of these people will be slow to move into the American mainstream. They tend to concentrate in the major metropolitan areas along the eastern seaboard, markets readily accessible from Southeastern states. Market research is only beginning to assess the strength of this market, but it is already known to be formidable.

Enterprise analysis, in a financial sense, asks three questions: 1) Will it show a profit?. 2) Will it cash flow? 3) Is it a good place to put one's time and money? Each is discussed in turn.

Will it Show a Profit?

Projected profits come from projected costs and revenues, otherwise known as budgets. A budget is like a sharp knife; it comes in handy, but it can draw blood.

University prepared sample budgets may look impressive, but no one can sit in an ivory tower somewhere and tell an individual producer what it will cost to produce goats on his farm. That is because no one operates exactly the same. Rarely is it even close. A sample budget provides a good check list, and it does help with some expenses which are difficult to calculate, like tractor costs per hour. In short, it provides an excellent starting point.

A producer who really desires to learn whether or not his operation is profitable will begin with a sample budget. He will then use the sample to construct an estimate of costs and revenues which are uniquely his own. Sample budgets are available, but in the U.S., meat goat budgets are not all that common. Perhaps the best comprehensive budget analysis on meat goats now available was done in Ontario, Canada in 1992. Other good work comes from Australia and New Zealand.

A budget is based on a specified set of production assumptions, and is designed to cover a stated period of time, frequently one year. It is in reality a projection of what is likely to happen. The budget sets up two basic categories, one of costs and the other of revenues, the difference in which is the projected profit or loss.

A word about costs. Certain costs are incurred that relate directly to the enterprise being budgeted, such as feed, fuel, and labor. These are known as variable costs. Other costs will occur whether the enterprise is operated or not, so long as one continues to maintain the farm. Taxes, insurance, and depreciation are examples. Interest on the capital investment is another. Such unavoidable costs are called fixed costs.

The point is that if the question is whether or not to go into the goat business, and the goat enterprise pays more than the variable costs, the producer is better off financially by going in. He is at least paying part of those fixed costs. It should be obvious that he cannot continue to operate in such fashion forever. The short run operating decision, however, is based on an excess of revenues above variable costs. This difference is known as gross margin.

The longer run operating decision is based on an excess of revenues above total costs, both fixed and variable, and is called the operating profit or loss. But in the longer run, time is provided to make certain adjustments in the scheme of things.

Table 1 presents a sample budget, complete with assumptions, revenues, costs, gross margin, and operating profit:

Table 1. Meat Goats, 50 Head Unit, Costs and Returns per Doe per Year*
Per Doe Per Unit
Revenues
Sale of market animals (8 f, 27 m, @ $40) 28.00 1,400
Sale of breeding stock (20 f, 10 m, @ $65) 39.00 1,950
Sale of cull animals (8 does @ $55) 8.80 440
TOTAL REVENUES 75.80 3,790
Costs
Variable Costs:
Concentrate (0.5 lb x 100 days x $185/tn) 4.62 231
Hay (3 lb x 120 days x $80/tn) 14.40 720
Animal Health 3.00 150
Salt, minerals 1.00 50
Marketing, transportation 4.50 225
Fertilizer, lime (0.4 ac x 1200 lb x $15/tn) 3.60 180
Buck cost [($150 - $80/3) + $20) / 25 1.70 85
Supplies 5.00250
Interest on opr money ($37.82 x 8.5% / 2) 1.60 80
Overhead (8% x $39.42) 3.20 160
Total variable costs 42.62 2,131
Fixed costs:
Land (0.4 ac x $20) 8.00 400
Interest on capital expense ($5,300 x 8.5%) 9.00 450
Total fixed costs 17.00 850
TOTAL COSTS 59.60 2,980
GROSS MARGIN (Rev - var costs) 33.18 1,659
PROFIT (LOSS) (Rev - tot costs) 16.20 810
*Assumptions

Weaned kids per doe exposed, 150%

Split kid crop, 40% November­December, 60% April­May

Replacement rate, 20%

Culling rate, 15%

Death loss, 5%

Purchase prices, does $100, bucks $150

Selling prices, market kids $40, breeding stock $65, culls $55

Interest rate 8.5%

This budget may not look attractive in its present state. Certainly it's not going to make a John D. Rockefeller out of anyone. To mean very much, it must be applied to an individual farm. And even then, it should be used as a planning tool. That means making adjustments which can improve the bottom line.

We have said the appropriate short term decision is based on gross margin. In the above example, the gross margin of $33.18 per doe is positive. In addition, the $33.18 would be ample to cover fixed costs of $17. We are left with a projected annual profit of $16.20 per doe.

How soon could the investment in goats be paid back? Investment in breeding stock is estimated to be $5,300 (50 does and two bucks), or $106 per doe. Considering the gross margin, less interest on the capital investment, there would be available annually $24.18 (33.18 ­$9.00) to apply to the $106 goat investment. The investment could then be recouped in about four years.

Now to possibilities for improving the budget: 1) Improve the kidding percentage. 2) Reduce feed costs. 3) Lower land costs. Good managers can find others, but these three offer substantial opportunity, and are discussed in order below.

Note that the kid crop, estimated at 150%, under good management, and using mature does, can still be improved. This could be helped by paying close attention to herd health and breeding practices, but the big jump would come from management, and would involve moving from an annual kid crop to three crops every two years. Thus, a 150% kid crop would annualize out at 225%. Admittedly, this would be difficult to achieve, but 175%, or even 200% may not be. A 175% crop would improve revenues by nearly 15%.

Many meat goat owners receive their guidance from reading dairy goat books. They keep the road hot to the feed store. And they ignore their pastures. Young kids need creep feed, if they are to gain a premium at the market. Breeding does usually need flushing at the proper time. Lactating does may need some help if pastures are dry or dormant. The rest of the time, the goat herd needs to make a living on the farm. In the budget above, concentrate and hay make up 44% of the variable costs. If feed costs were cut by one fourth, the gross margin would increase by 14%.

Land costs in the budget are shown to be $20 per acre. This is high for goat pasture, but leaves room for other fixed costs such as taxes and insurance, and perhaps a modest amount for depreciation. Suppose the goats were run with cattle in the same pasture. Crazy? It's done all over the world, and can work in the Carolinas. Since the two animals do not generally prefer the same feed, let the goats have the weeds and briars, the multi­flora rose and the cedar, and leave the grass and clover to the cows. Land costs could be trimmed by a third. If the $20 figure above is valid, that means a reduction in total costs, which also amounts to an increase in profits, of $6.67 per doe. The profit figure has just jumped 41%!

Will it Cash Flow?

We hear a lot about bankruptcy these days. That does not necessarily mean an operation is unprofitable, nor that it has a negative net worth. It simply means there is no way of meeting financial obligations when they are due. It often occurs that one creditor panics and goes to see his lawyer, and everybody else is forced to jump in; the result is lots of hot water.

Almost any enterprise, and goats are no exception, requires an initial investment. It may be in the form of breeding stock, and will likely include equipment, feed, and supplies. The money needed to start the venture may come from savings, but most of the time it will come from a lender. Revenues are not expected to begin for a time. This means there may be a period when cash is short, unless the shortfall is properly budgeted.

All expense items create an obligation, usually specific as to time. In other words, we know when we will need cash to meet those obligations. We also should know when we are to have cash available, based on when we have goats to sell. Almost certainly, the two flows of cash (the inflows and the outflows) will not match. However, if we estimate them fairly accurately, we can plan for the deficit periods. That is what the banker is looking for. He does not like surprises.

A cash flow statement, just like the budget, is also a look into the future. It takes the individual income and expense items and separates them by period, usually by month, but sometimes by quarter. The cash flow statement need not be complicated, and is usually fairly subjective, a four­dollar word for an "educated guess". Such estimating is not particularly risky if we go back and adjust our numbers as we proceed through the year. After all, only a fool expects to guess perfectly on everything. It's a matter of asking "How am I doing?" every so often.

Looking first at income, when will the kids be ready for market? How many and what will they be worth? The sale of breeding stock can also be planned. When will they likely be sold? Cull nannies probably will be disposed of after weaning time. These items can be totalled for each month.

Moving on to expenses, and beginning with the first item on the list of budget expenditures, when will concentrates by fed? Probably in the heart of the winter, or when lactating nannies need some help. What about hay? During much of the cold weather. The same reasoning can be applied to animal health, fertilizer, and labor. Utilities (including telephone) might reasonably be divided equally throughout the year.

Once we know what the expected income and expense totals are on a monthly basis, we can use this information to keep track of our budget, item by item. As we proceed through the year,, we may find that our original budget needs adjustment. At other times, we receive a warning that we are letting certain items get out of hand.

Table 2 presents a division of one revenue and four expense categories for the first four months of the year, taken from the budget values shown in Table 1. Note that the percentages allocated for each particular month are also given, so that the cash flow entries can be checked against the totals shown in the budget.

Table 2. Cash Flow Statement (Partial), Meat Goats, 50 Head Unit
Month
Jan FebMar Apr...... Total
Revenues
(40%) ...... (100%)
Sale of market animal $560......
Costs
Variable costs
(30%) (25%) (15%)- ...... (100%)
Concentrate 6958 35- ...... 231
(40%) ...... (100%)
Animal health -- 60- ...... 150
(10%) (10%) (30%)(10%) ...... (100%)
Supplies 2525 7525 ...... 250
(08%) (08%) (08%)(08%) ...... (100%)
Overhead 1313 1313 ...... 160

Once the monthly figures for each revenue and expense item have been estimated, a cash flow summary can prepared. Table 3 shows the components of a cash flow summary.


Table 3. Cash Flow Summary
Month
Jan Feb----- DecTotal
Beginning Cash Balance -- -- --
Add in revenues -- -- --
Less expense -- -- --
Surplus/Deficit -- -- --

Some producers make the cash flow summary even more comprehensive by including receipts from additional loans and payments back to the lender.

The cash flow summary helps us deal with our lender. By checking the surplus/deficit line, we can estimate when we will need additional money, or when we are likely to have some to pay back. Just imagine, you go in to your lender and say, "Sam, I've been looking at my numbers and it looks like I'm going to be short about $200 in April, but I'll be ahead around $500 by June. A banker loves this sort of thing. While he's gasping for air, you might suggest he take you out to lunch!

A final word about cash flow. This may seem tedious. If it doesn't, perhaps you had better check in with your analyst. But shovelling manure is also tedious, and digging post holes, and balancing your checkbook. The question is, where is the biggest payoff? The returns to time spent on financial analysis may be 20 (or 50) times as great as time spent on production items. Use money you save to make life a little easier. And let someone else shovel part of the manure.

Is it the Best Place to Put Time and Money?

Say the goats budget out to be profitable. Say the cash flow problems appear to be surmountable. But there are other candidates for one's time and money. Some of them are undoubtedly better in terms of profit and cash flow. So there should be rewards beyond the financial for the goat owner.

True, the babies are cute, but your billy in a neighbor's vegetable garden will not provoke a lot of laughs. When someone mentions goats, people tend to snicker. Others say goats carry an offensive odor. And there are those who, for whatever reason, cannot stand the thought of consuming goat meat. Goats get out. Goats get sick. Goats get killed.

Women fare better than men in the goat business. Perhaps they are more compassionate. They probably pay better attention to detail. They may tolerate menial tasks better. But the successful goat producer thinks his animals are cute ­ most of the time. He probably even thinks they smell good ­ most of the time. If there isn't something there for you, the goat business is just another form of drudgery. The point? What are the rewards, other than profits, that make a goat enterprise satisfying?

Environmentalism, with all the fog that surrounds it, is here to stay. Goats work exceptionally well with cattle, although it requires a change in management. Goats keep the weeds down, not to mention briars, rose bushes, and honeysuckle. That reduces pesticide costs. They scatter manure very well, which can reduce the cost and environmental damage associated with inorganic fertilizers.

The environmental movement encourages a more extensive, "back­to­nature" agriculture. Sound arguments link such agriculture with financial sustainability, for at least some farm families and some farmsteads. Goats are compatible with small scale agriculture, and with farmers of limited resources, be they expressed as financing, restricted land area, or modest technical training.

Goats are uniquely adapted to make a living from the resources already in place on the farm. Goats help keep a place neat. They are cleaner than most grazing animals. Given adequate containment and protection, they are relatively pleasant to be around.

Most producers in northern climates produce meat goats at a loss for at least two reasons. One, production practices are patterned after the dairy goat enterprise, and per head revenues from meat goats will not approach those of dairy goats. Two, some of those folks have only two seasons ­ July . . . and winter. The meat goat is by nature a browser, and there is not that much year­round feed available, except that it be supplemented, usually out of a sack. Our operating costs can be much less than theirs.

The point to be made concerns whether or not to invest in the goat business. Once the profitability and cash flow issues are resolved, other considerations take precedent. Is it the way you want to spend the rest of your life? Goats may keep you out of the rest home, or they could put you in there before Christmas.


 

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