Planning for Profit a Year in Advance
As I’m writing this, it is 20 degrees outside with 80 mile-per-hour gusts – a good day to be inside working on the economics of the ranch. I’m guessing there will be plenty more days like this before winter is over, and I would encourage you to make some time to work on your ranch business before calving season begins.
If you are like most ranchers, your answer will be, “I have no idea. We will just wait and see.” I would argue that right now, at the beginning of the production year, you should be projecting profit for the coming year.
Sure – you don’t know exactly how the production year will play out, but I’m sure you know enough about what will likely happen that you can make an educated projection. Do you know how many bred cows and bred heifers you have? Do you know how many are likely to wean a calf? Do you know approximately how much hay and other feed a cow will likely need? This list could go on, but you get the point.
As Eisenhower said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”
When the production year begins to unfold and weather and markets begin to play out you may throw out the plan and react to the conditions, but in planning the production year, forecasting your profit is indispensable.
Why make projections?
What are the reasons to make profit projections?
What if you discover that your chosen enterprise is unable to meet your profit targets? It would be much easier to adjust course now rather than when it is too late. Maybe there will be opportunities to lock in calf prices that meet your profit targets. How will you know when those opportunities present themselves unless you have identified the target?
Other benefits are that these projections can help you plan for feed purchases, perhaps allowing for some forward pricing if opportunities present themselves and planning for other items such as summer grazing needs, ear tags, etc.
How do I project profit?
How do I make profit projections?
There are several managerial accounting systems that would allow you to do this.
Participants of the High Plains Ranch Practicum School have been made familiar with the Unit Cost of Production system. This is also available online with video tutorials at hpranchpracticum.com.
We use the same system to make projections as we do to record actuals. If you are not comfortable using one of these systems, then just simply sitting down and writing down all your projected expenses and revenues can give you a starting place.
Once you have your profit projections prepared for next year, the fun begins. Now you can start asking the “what if’s” and running various scenarios that can help you evaluate management decisions.
What if we moved our calving season and reduced winter feed costs but sold a lighter calf? What if we reduced supplemental feeding but reduced our breed up by two percent? Any of these type of questions can be evaluated using the system once you have your projections completed.
If this is your first time working on something like this, you can be comforted in that you are not alone. However, I would offer you encouragement to set aside some time to make this happen. It will not be easy the first time, but the more you work on it and become comfortable with it the easier it will become.