Profit and loss in Dairy Farming Milk Business in India

Profit and Loss in Dairy farming is the first question that intrigues any aspirant dairy farm entrepreneur’s mind.

Often the economic viability of the milk business is discussed and question arises – Whether milk business is profitable or not? 

Is dairy farming profitable?

Dairy Farming is profitable, when you are able to control your costs and keep the milk production level at constant or increasing level by maintaining good pregnancy rates for your cows

 

Most of them consider this business is loss making with firsthand experiences 🙁

Everyone has his own opinion.  For us,  dairy farming is definitely profitable and worth a go. Since inception, we at PowerGotha.com , believe and recommend that the milk business can be profitable right from the start.

To succeed in any business, at first,  we need to note down all income & expenses to measure the profitability.

How to decide about profitability? Let us walk through step by step.

3 types of financial statements

Those of you with commerce or economics education background already know that there are three kinds of financial statements

1. Profit and loss statement
2. Balance sheet
3. Cash flow statement or profit loss statement

Profit loss statement

Profit as is calculated as:

Profit = income – expenditure

For calculating income, we have to consider actual money earned from sale of milk, sale of calves, selling cow dung manure, sale of cows.  In any dairy farm, major expenditure is from fodder.  The fodder management can help you in this and you can reduce the costs by using silage for your farm. 

Remember, the actual selling price is the amount we get in hand after selling. Things which are not sold till now have to be considered in the balance sheet as assets and not in profit & loss statement.

If your yearly sale is Rs.10 lakhs, then your turnover is Rs. 10 lakhs.

Expenditure – It includes all type of expenditure on the business. Expenditure on fodder & feed supplements, medicines, electricity, water, labour, etc.

If you are working at your farm, you must pay yourself salary and account for it as the expenditure of the dairy farm business.

Accounting for Fixed Investment

You may not have considered certain items as investment, like cost of purchase of cow and construction of cattle shed.  If such investment, say of Rs. 10 lakhs is considered good for 10 years (including cow’s life span), then per year Rs. 1 lakh should be included in Profit & loss statement as expenditure under depreciation head.

You should also deduct the price (rent or purchase) of your land as part of the cost. If you have your ancestral land, then a certain amount should be paid to yourself as rent for using that land for Dairy farming.  The logic for this – if you could have lent this land to someone else, he would have paid you rent out of his user of the land.  Thus, you must account for rent of your land too.

If, in the first 1-2 years, you are having high losses because of low return on investment, you should actually divide them over next 3-4 years as expenditure.  Certain provisions of income tax allow you to do so.

After deducting all the above expense from the revenue, which is Rs 10 lakh in our example, the amount remaining will be your profit.

Once you have got all such numbers ready, you can confidently borrow money as capital from third party and can repay him back (interest and principle).

Balance sheet

The balance sheet has Assets on one side and liabilities on the other side. Balance sheet will always have assets equal to liabilities.

If you have taken 5 lakhs as loan from bank – Animals for Rs. 3 lakhs, Construction for Rs. 1 lakh and Machinery for Rs.1 lakh, in then your balance sheet is of Rs. 5 lakhs.

When calves are born in your farm, the approximate selling cost will be added on the Asset side as an asset and will appear on the Liability side as unrealized profit.

For example in our case of balance sheet of Rs. 5 lakhs above,

• if a calf is born and its market price is worth Rs. 10,000 then both your Assets and Liabilities will increase by Rs. 10,000.   The value of total balance sheet becomes Rs. 5 lakh and 10 thousand.

If you suffer loss in the first year, you have to subtract that figure from the asset side. For example, if the loss is Rs. 1 lakh you should subtract Rs. 1 lakh from both the sides of a balance sheet, reducing the value of balance sheet to Rs. 4 lakh.

The logic for maintaining the balance sheet is that, if you decide to close down the business overnight and sell all the cows shutting down dairy farm, the investor will receive Rs. 4 lakh.

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Cash flow statement

How much do you earn every month? How much money flows in to your business and flows out of your business (investment or expenditure or income)?

The statement where all of it is noted is called Cash Flow statement.

All businesses before investing for long term like 5 to 10 years plan and forecast the Cash Flow statement first.

Imagine that in the first month operations, you invest Rs. 5 lakh, Rs. 20 thousand is expenditure, and milk sold is worth Rs. 10 thousand, then reduction of Rs. 10 thousand from Rs. 5 lakh 20 thousand is your cash flow i.e. – 5,10,000 (negative) is your net cash flow

For a small farmer, knowledge of Profit-loss statement is sufficient.

If you observe very closely, the sale of milk which covers only working expenditure (rolling cash).

Actual profit can be expected by selling the calves or by developing them on the farm for future milk production.  Repeating the process of producing high yielding quality cows for multiple years, your business will grow multi fold.

Profit-loss (Income) statement

A sample Income statement is given below. Following assumptions have been made:

Assumptions

1. 6-7 in-milk cows which give 150 liters of milk everyday
2. Revenue of Rs. 3,000 to 5,000 by sale of cow dung manure every month
3. Sale of cow or calves – one or two times every year
4. Labor cost is limited to Rs.10,000 per month
5. Depreciation – We have considered animals worth 5 lakh, cattle shed worth 1 lakh, machinery and milking machine worth 1 lakh. Totaling to Rs. 7 lakh, which would be used for a period of 10 years. Resulting into yearly depreciation expenditure of Rs. 70,000.  Thus, we have considered Rs. 6000 per month as depreciation expense.
6. Rent of the space – Even though the space is self-owned. We have considered Rs. 8000 per month as the rental cost of the land. The rent may be considered zero as well. Depreciation of the land is not considered as generally, the land prices don’t fall.
7. Animal fodder and feed, mineral mixture is considered approximately 70% of all expenses. When the fodder is grown on your own farm,  the expense can be calculated by considering its revenue if you would have sold the fodder to someone else. It would be even better if you could actually record the expenditure incurred on cultivation of fodder and use that as fodder cost.
8. Maintenance cost, medical cost, electricity & water cost is considered Rs. 500 rupees per month

Profit and Loss in Dairy Farming Using Excel Sheet

If you want the excel sheet for calculation of profit and loss of your dairy farm -> Download Excel Sheet here

In the above Income statement,  the turnover is Rs. 10 lakh 39 thousand till August 2017 and actual profit is Rs. 1 lakh 95 thousand.

Milk business has narrow margins of profit.   Cow not conceiving on time or falling sick has a major negative effect on milk business.

Therefore, to increase profit, reducing input cost is of utmost importance – such as reduction in cost of fodder & medicines, taking steps to ensure that cow does not fall sick, steps to produce regular heat signs and thereafter timely Artificial Insemination to be carried out.

Sale of cows or calves is one of the most profitable activity in milk business.

Then, you may pay the interest of the bank or the investor from net profits.  By doing systematic calculation in this way, you have already deducted your household expenses by paying rent and wages.

You can use the remaining profits as savings in a bank, or use for further investment, to increase business or to use it in times of difficulty.

Thus, you will record all your activities in detail, in excel and calculate profit and loss. 

Happy Dairying !!

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P.S.

Dairy Farming Profit Loss Calculator

We have made a simple Profit and Loss Calculator for Dairy Farming Business.

If you have rough or accurate figures of your daily/monthly expenditure and projected or actual income from Dairy Farm, then go to Dairy Farming Calculator to calculate approximate profit using simple questions.

Alternatively, Download our app for Dairy Farming Management

P.s. Download Powergotha Pashupalan App today to calculate profit loss readily – daily, monthly, yearly and any custom period.  download it here.

 

 

Other articles about Dairy Farming in India on PowerGotha

If you haven’t yet started with dairy farming, you can read about starting a new dairy farm here.

Introduction to Dairy Farming

What is PowerGotha – Concept of Profitable Dairy Farming 

Silage Making for keeping Costs low and profitable milk business

How to run milk business even when Milk Prices are low

About PowerGotha

PowerGotha is a movement to make Indian Dairy Farming profitable. We provide training, software, products, services, solutions to existing or new dairy farmers.  We are mentored by Dr Shailesh Madane, a Veterinarian, dairy expert and dairy farm consultant.  You can read about Dr Shailesh Madane here

You can mail us with your queries at support @ powergotha . com