Five Points Help Evaluate New Tecnology

Five points help evaluate
new technology

Before you sink money and time into a new product or practice, decide if it fits your management and your business goals

By Jason Karszes & Wayne Knoblauch

A flyer you receive in the mail declares that K & K Wonder Widget will improve your dairy’s profitability. Then over dinner, your neighboring dairy producer expounds on the advantages of Sleep-So-Soft Cow Mattresses and tells you that you should install these.
Should you? Of the hundreds of new technologies pelting dairy producers nearly daily, how do you evaluate which ones will work on your dairy and with your management? Will any be your economic and production salvation?
To rescue yourself from the quagmire of new technology decision-making, consider these five points and the questions related to each:

1. Research
With solid information, management can understand what is needed to make new technology work.
Ask:

What research supports the new technology and verifies claims about its impact?
Have other farms similar to yours successfully used the technology?
What is required to support the new technology?
What type of support is available to help adopt a new practice or technology?

2. Business and Management Mission/Vision
To determine whether a technology fits your business, it’s important to know where you want your business to be five and 10 years from now, not just its direction this week, month or year.
Ask:

Does the new technology support your dairy’s and your family’s goals and interests?
Does the adoption of a new process or product support your business and help it move towards its goal?

3. Management Requirement
Adopting a new product or a new process generally requires some change. But change can’t occur if owners, managers and employees fight it rather than embrace it.
Ask:

What is necessary on your dairy to allow the new practice or product to work?
Based on the research, does your dairy have all the necessary practices, supplies, feeds, personnel and other resources in place and working properly to take advantage of the new practice or product?
If not, can your business do what it must to take advantage of a new technology?

4. Financial Feasibility
The financial rewards a new technology promises often motivate adoption.
While there are always numerous claims that all things work great, in reality they don’t. To lessen the chance of adopting something that may not provide any financial benefits,
Ask:

Is it a profitable decision?
Construct a profit partial budget or a pro-forma income statement to look at the profit-generating capacity of the new practice or product. Does the increase in revenue from all sources, or the decrease in expenses from all sources, offset the change in expenses from all sources needed to use the new technology?
Can your dairy pay for the technology?
Once you determine that your dairy’s profit will increase with the adoption, determine if it cash flows. Depending on the complexity of the new practices or products, a partial cash budget or a cash whole-farm budget can show whether your dairy can pay for the new technology.
If the practice or product doesn’t work, and takes longer to provide the expected benefit, how sensitive is your business to not being able to pay for the product or meet the cash commitment needs of the business?
Is adoption the best use of your limited capital and other resources?
By knowing how profitable the decision may be, you can answer this most important question. Generally, resources are limited on a dairy, whether it’s cash to invest, land to produce crops, labor to do work, or management to analyze decisions and track results. Before adopting a new practice or product, the management team must look at where else limited resources could be invested and the impact of that.

5. Risk Evaluation
Businesses that don’t change may find themselves unable to meet business and personal goals. They can lose ground to competitors and place their business’ future at risk. Every decision, then, has to balance the risk of not adopting something new against the risk of adopting technology.
Ask:

If the farm doesn’t adopt this technology, how is it positioned for the future?
A new technology may not work, even after diligent consideration of the five points. But by answering the questions, you increase your dairy’s ability to adopt new technology successfully.

Dollars & Cents Any decision-making process to evaluate new technology must include financial feasibility. Will the technology pay? And can it cash flow? A profit partial budget, or pro-forma income statement, assesses the profit-generating capacity of a practice or product. Here’s how a 50-cow dairy developed a profit partial budget to determine whether stall mattresses would be a good investment: To install mattresses in 50 tie stalls would cost $3,250. The mattresses cost $65 each, including installation labor and additional labor to manage cows while mattresses are being installed. The dairy wants a 5% rate of return of the average investment before inflation and taxes. Let’s assume the mattresses last five years with zero salvage value. Bedding costs are projected to drop 50%. Due to improved cow comfort and lower stress, milk production increases 1 pound per cow. The milk, in this example, has a value of $7, after deducting milk marketing and feed costs. All other costs remain the same. If these assumptions hold true, installing mattresses on this dairy increases profits by $2,046.25.
Cash Flow Partial Budget
Items adding cash income 50 cows X 1 X 365 X 7	$1,277.50	Items decreasing cash income

Items decreasing cash expenses Decreasing bedding @ $30/cow	$1,500	Items increasing cash expenses Annual payments @ 105.63/month Repairs – none	$1,267.60

Total Cash Additions	$2,777.50	Total Cash Reductions	$1,267.60

Change in Cash Flow $1,509.90
Now that you know whether a technology will pay you back on your investment, determine if it will cash flow by developing a cash flow partial budget. Here’s how the 50-cow dairy’s cash flow looks with stall mattresses. The dairy wants to finance the mattresses over three years with monthly payments and a 10.5% interest rate. If all of the assumptions here and in the profit partial budget are correct, the dairy generates $1,509.90 more cash after mattresses are installed. Even if milk production doesn’t increase by a pound per cow, bedding savings alone increase cash available by $232.40. If bedding savings weren’t as high, or if repairs or other variables increased cash expenses, then the installation of mattresses might not pay for themselves in three years.
Profitability Partial Budget
Items adding revenue 50 cows X 1 lb of milk	$1,277.50	Items decreasing revenue

Items decreasing expenses Decreasing bedding @ $30/cow	$1,500	Items increasing expenses Depreciation $3,250/5 years Interest @ 5% X $1,625 Repairs – none	$650.00 $81.25

Total Additions	$2,777.50	Total Reductions	$731.25

Change in Net Farm Income $2,046.25