Don’t Screw Up the Windfall Profits
By Dallas Mount
The year 2023 is shaping up to be a record profit year for many in the cattle business. I realize not everyone is participating, as there are regional droughts and specific situations for some, which will take them out of this opportunity.
Nevertheless, for others the stars have aligned.
The last time we saw record profits in the cattle business was in 2014, and poor decisions made by ranch managers in 2014 resulted in many hard times for years to follow.
I feel like the crusty old guy sitting at the coffee shop when I say, “Don’t make the same mistakes this time.”
To understand what these mistakes are, it is important to look at the economic and financial structure of most ranching operations.
Some common problems we find in the way many ranches structure their business include too many employees and people for what the business can support in a healthy way, too much wealth tied up in fixed assets which don’t produce cash flow in excess of their costs, too little money in “liquid” assets and lack of business management knowledge by key people.
Let’s explore each of these problems a bit deeper.
Too many employees
We have a benchmark at Ranching for Profit (RFP) called gross product per full-time employee (GP/FTE). The most economically healthy businesses are usually exceeding $400,000 GP/FTE.
Those who don’t speak RFP, might think gross product is the same as gross revenue – it isn’t.
Gross product is the economic value the enterprise creates. Most ranching businesses have way too many mouths at the table for the value the business is producing. I’m not saying these people are lazy. Usually, it is quite the opposite.
However, they often aren’t engaged in tasks or enterprises that are good at adding value to the business. When income is high and money is rolling in, it is tempting to bring Junior home or add people to the business.
If a business isn’t exceeding this benchmark or getting close to it, individuals might be making the problem worse by adding more people.
Too much wealth
tied up in fixed assets
We all love stuff, especially machines to make our work easier. As a business grows in maturity it is tempting to invest profits in things we enjoy and things which make our lives easier, even if it doesn’t make economic sense.
Our rule of thumb is equipment has an annual ownership cost of 20 percent of its current value. This means a tractor worth $100,000 today has an annual ownership cost of $20,000 per year.
This might strike one as unreasonable, but when we think of repairs, depreciation, insurance, interest, taxes etc., it begins to make sense.
If the tractor isn’t producing well in excess of $20,000 per year, then economically, one shouldn’t own it. Most ranches have way too much of their wealth tied up in fixed assets which don’t produce cash flow in excess of their costs.
Neighbors are going to pile their profits into machines they want but can’t economically justify. This is often done in the name of tax avoidance. Don’t be like your neighbors. Pay the dang tax if you have to or deploy the money somewhere in the business that will improve profitability and make the tax problem worse next year.
Too little money
in “liquid” assets
Liquid assets are cash or things one can quickly turn into cash.
If an individual had to get their hands on cash in two weeks, how much could they comfortably come up with? What are the annual costs of keeping the doors open on their farm or ranch? What percentage of their annual operating costs are available in short notice?
Our recommendation is at least 50 percent of annual operating costs should be available with short notice. For many farms and ranches this number is closer to five or 10 percent – well below the target.
This often leaves the business with their back against the wall when things go bad. The next drought, flood, fire or market crash is just around the corner. Prepare by having adequate reserves.
Lack of business
management knowledge by key people
Ranchers are often very skilled at raising livestock, but many stink at running a business to raise livestock.
Does the ranch have clear roles and responsibilities, economic projections for the coming year, a cash flow budget and plan, a clear mission and vision for the business, a grazing and operating plan, regular strategic work sessions, regular operations work session and a clear succession plan that is communicated?
If your business has some holes in the list above, you’re not alone. But, the profits from this year could be an opportunity to invest in key people, to help them build the proper skills to produce results your business needs.
Ag business owners are rightly taught to be frugal. Unfortunately, this frugalness spills over into being cheap when it comes to investing in people.
Our recommendation is at least one month’s salary per year in professional development. If this isn’t occurring on a consistent basis, it is a problem.
I hope 2023 is a record year for you. I hope you deploy the profits from 2023 to build a stronger and more resilient business for the years ahead.
I would be honored if RFP can be part of helping build this business. Registrations for our 2023-24 schools are at an all-time high, and many of our winter schools are close to full.
For those who want to attend a school this winter, I strongly recommend getting registered now with a deposit to secure a spot in the school you want to attend.
We look forward to seeing you in the classroom.
Dallas Mount is the owner of Ranch Management Consultants, home of the Ranching for Profit School and the Executive Link program. He can be reached firstname.lastname@example.org or 307-213-6010.