Can outsourcing sharpen your competitive edge?
HOW to make the decision

This is a complement to the "Can outsourcing sharpen your competitive edge?" story. Click here to visit that page.

HOW to make the decision: A Look at Mid-County Farm

The best way to make a decision about outsourcing is to make certain that you assess your total financial picture. To do so, you must maintain accurate records. With accurate, detailed financial records at your fingertips, you can base your management decisions on facts, not feelings.

When you separate income and expenses by enterprise or individual segments of your operation, you create the information you need for sound planning and financial control. Then, by comparing financial records that display resources used in different ways, you get an indication of the most profitable use of those resources. With this information in hand, you can make a common-sense decision regarding outsourcing.

Let’s visit a fictitious farm to illustrate our point. We’ll call it “Mid-County Farm.”

For the past year or two, the owner-operators of Mid-County Farm have wondered whether outsourcing could be more profitable for their business than doing certain jobs themselves. Specifically, the owners were taking a close look at their corn harvesting enterprise. They were also considering selling the harvesting equipment, and eliminating their very small custom harvesting business in order to focus on milk production.

They checked with Carol Kemp, their farm records specialist with First Pioneer Farm Credit in Burrville, N.Y., and also with Bill Zweigbaum, their First Pioneer business consultant. To provide data for their analysis, Carol and Bill recommended Mid-County complete two important planning steps: an enterprise analysis and partial budgeting to help answer their question.

Step 1: Enterprise analysis with AgCHEK™.

Carol recommends AgCHEK™ for Windows software to maintain a set of accurate, detailed financial records. With AgCHEK™, you can track information for your total operation (for tax purposes and balance sheet) or break it down by business units for income/expense tracking and profitability analysis.

“AgCHEK has financial reports that can tell you a lot about your business finances, such as profitability and income and expenses,” Carol says. “AgCHEK’s Income Statement tracks as much detail as you want from your total operation and also from every business enterprise or segment. It also tells you the costs and profitability of each. When you know how each enterprise is doing, you can determine if it makes sense to outsource and concentrate efforts where they will profitably benefit your business.”

Step 2: Partial budgeting.

Bill recommends partial budgeting as the second step in this plan. He says, “Partial budgeting looks at costs and returns that will change by outsourcing a segment of your business. Partial budgeting involves weighing added income and/or reduced costs associated with outsourcing (credits) against added costs and/or reduced income (debits).

In this case, Mid-County’s owners weigh the credits associated with the decision (income from sale of equipment no longer needed with associated lower fuel expenses, wages, equipment repairs, loan payments) against the debits (custom operator’s fees and reduced income as a result of eliminating a small custom harvesting enterprise).

This partial budget analysis is summarized in the following table.

Accurate records are essential — and Farm Credit can help
A set of well-maintained financial records is an absolute requirement for maintaining financial control of your business and when evaluating a decision to outsource. Up-to-date information is critical in evaluating past performance and planning for future business decisions.

Comprehensive records do not, by themselves, provide solutions to the outsourcing challenge. However, records do provide much of the information needed to start the decision-making process.

In his own words “I would have discussed testing the partial budget for Mid-County Farms beyond the first year for a more complete picture of their situation. In the first year of the budget, for example, they enjoy an $18,700 return ($38,700 credit less $20,000 debit). If they stopped at just one year, they would not see that in future years, their cost for hiring the custom operator jumps to $1,300 more than the cost of ownership. That’s because the $20,000 added return for the pull-behind chopper was a one-time sale.     “When considering outsourcing a segment of your business, remember that your out-of-pocket costs will typically be more than ownership. To compensate for the additional expense, you need to turn your newly ‘freed’ hours into productive time.     “In the Mid-County Farm example, the farmers gained about 100 hours of time and better quality forage as a result of a more timely harvest. They should use that time to enhance milk production, and make a positive impact on their profitability in the long run.”

A look at Mid-County’s numbers Carol Kemp says, “Let’s take a look at a couple of AgCHEK Income Statements* generated for Mid-County.     • Income Statement 1 is for the dairy segment. You can see that the dairy farm paid the field corn segment $20,000 for the purchase of corn.     • Income Statement 2 shows the farm’s field corn segment. This tells you the sources and amounts of income from the business, both for the current month and year-to-date. So you see the $20,000 income for corn sales. The expense section lists expenses incurred for the corn enterprise. Since the farmers wanted to identify major expenses they could control and where they may want to outsource, they broke their corn harvest expenses from their total corn segment expenses. The statement shows their harvest expenses total $10,700.”     *Note that AgCHEK can provide a Whole Business Income Statement for your entire business, as well as Income Statements for each of your business segments or profit centers.

That’s why it’s always a good idea to discuss major business decisions with your Farm Credit business consultant, loan officer or records specialist. A business specialist can be your chief cheerleader and business strategist. He or she can challenge your thinking and encourage you to step out of your comfort zone. As was the case with the hypothetical Mid-County Farm, your Farm Credit specialist can help you explore the outsourcing alternative to determine the risks and rewards. Whatever your decision, Farm Credit can help you gain and maintain the competitive edge.

Contact us at info@farmcreditmaine.com for more information.

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