What is Profitability?
by Rebecca White
The definition of profitability from acountingcoach.com is:
“A word to describe whether a company is able to earn more revenues than expenses.”
Sounds simple enough. Is your dairy profitable? Was your dairy profitable this past month? This past year? The past five years?
Dairy farm profitability is more complicated than whether you have money in the checking account at the end of the month or not. An Income Statement or a Profit and Loss Statement for a period of time (usually for a one-year period) determines if a dairy farm is profitable. It reports all revenues and expenses and the net income.
Other Measures of Financial Health Common on Dairies
There is more than one way to size up the financial health of a dairy operation. Here is a short list of measures or indicators of profitability and each topic area will be explain in more detail in following blog posts to come!
Cost of production: How much does it cost you to produce one hundred pounds of milk?
Debt per cow: how much debt does each cow have to carry?
Financial ratios: Return on Assets (ROA), Asset Turnover Ratio (ATR), Operating Expense Ratio (OER), Debt: Asset
Where do I Start?
If you haven’t been involved with a profitability assessment of your dairy operation before, it can seem overwhelming. Ask your accountant or loan officer for an explanation of your income statement and balance sheet. Usually, loan officers develop balance sheets for their clients before a new loan is granted. Income Statements use information from your Schedule F from your farm income taxes or from your accounting software. Click here to find out how.
More resources can be found on our website at www.das.psu.edu
For more information about profitability assessments, visit our Managing for Dairy Profitability website
Questions? Comments? Please feel free to contact us directly or leave a response below.