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Fire prevention vs. putting out fires

Rick Purnell Published on 24 January 2014

Paying attention to five elements of your business helps ensure profitability

It seems straightforward. You work hard, put in long hours, use top genetics, seize marketing opportunities and hope to earn a decent living.

And it works – sometimes. While profit is seldom guaranteed, there are steps you can take to help make your ranching business end up in the black more often than not.

Whether you run the most profitable outfit around or are just starting your dream operation, there’s good reason to stop, double-check and make sure you’re seeing things realistically.

Not surprisingly, the first check experts recommend is the financial health you and your business possess.

Ron Plain

“I often say that people get into ranching because they don’t want a desk job,” says Ron Plain, professor of agricultural economics at the University of Missouri.

“The reality is that ranching takes a lot of money. Managing money is as important to success as managing cattle. Cattle require feed, and whether you have enough on hand depends on the weather.

“Having a budget as to how much hay and feed you plan to buy in a typical year helps you understand what it costs to feed the cattle. It also helps you plan what to do if this year turns drier than expected.”

When budgeting, an understanding of how dollars work helps ensure final numbers that are as accurate as possible.

Dave Pratt

“People often fail to make a distinction between economics and finance,” says Dave Pratt, owner of the Ranching for Profit school, Fairfield, California.

“Economics answers the question of ‘Should I do this thing?’ Finance answers the question of ‘Can I do this thing?’ Lastly, taxes will answer the question of ‘What are the consequences?’”

Pratt adds that when it comes to finance, we tend to put money in the wrong places.

“Working capital is something you intend to sell. Fixed assets such as land, equipment and breeding cattle are things you intend to keep.

These don’t create income. In fact, they can suck up what little income we get from our working capital and keep us from making money,” he says.

Often, a lot of time and energy go into avoiding taxes. Pratt’s advice? Make the money and pay the taxes. Sure, it’s OK to legally avoid paying as much tax as possible, but paying taxes beats losing money any day.

Get paid
It’s said that sports professionals get paid to play, and amateurs pay to play. Pratt is adamant the same should hold true with ranching.

“Professionals get paid to ranch,” he says. “Most ranches aren’t real businesses. They’re a collection of assets and a bunch of jobs.

The first step in transforming your ranch into a business is to transform yourself. You may not be a businessperson right now, and it’s an internal transformation to see ourselves as businesspeople.

The ranch is a place to go to work, but most of us have never been taught to run a business or set up a management team, let alone a family management team.”

Pratt adds that while there’s no hard and fast rule, you should pay yourself properly. Consider what it would cost to replace yourself, and be realistic.

This assessment of getting paid resonates with Plain, as he notes one of several ways to determine wages.

“One way to figure what your wage should be is to determine what it actually costs you to live each year. For example, let’s say your cost of living is $50,000 a year.

Pro-rate what you need to make into a per-hour or per-head cost, and you’ll figure out if you can support yourself or if you need to change something.”

Act like a business
Paying yourself is one step to making the ranch run like a business. Another is to think and act like one. That’s often imagining what you want your business to look like.

“There’s a distinction between being self-employed versus being a business owner,” Pratt says. “Ranchers often manage to keep bad things from happening.

That’s self-employed thinking. A business owner tries to make good things happen. Either way, there’s a lot of adrenaline. In one case, it flows from running from the jaws of a tiger. In the other, it comes from chasing a dream.”

He likens the day-to-day tasks of running a business to creating a fire prevention plan instead of putting out fires.

He says that working on the business – production, sales and finance – is equally, if not more important than working in the business completing everyday routines and chores.

He suggests spending a minimum of 20 percent of one’s time doing the former. That’s about two mornings a week.

“You have to act like a business owner to become highly effective at it,” he says.

Separate life from business
According to the National Institute for Occupational Safety and Health, farming and ranching are among the top 12 high-stress occupations. It also states that owners were second only to laborers in the rate of death for stress-related diseases.

“You have to set a boundary between life and the business,” Pratt advises. “Stress from the business can spill over to family. That’s just one reason it’s important to get away from it at specific times.”

He admits it’s easier said than done, especially if your office is in the house. But it’s a worthwhile effort to maintain your health.

Know where to turn
There’s no shortage of advice available when it comes to enhancing business profitability. The challenge is making sure you find quality information.

“One place to start is land-grant university extension websites,” Plain says. “You can find forms for just about any ranch-related budget item if you’re willing to do it on your own.

You can also find basic ranch management guides, too. Banks that have ranching expertise on staff are also helpful.”

Pratt concurs that it is important to shop around to find experts willing to fully understand your operation and your goals.

Then, work toward forming long-term relationships so that your ranch – your business – has the greatest prospect for long-term success.  end mark

Rick Purnell is a freelance writer based in California.

PHOTO 1: Ron Plain, professor of ag economics, University of Missouri.
PHOTO 2: Dave Pratt, Ranching for Profit school. Photos provided by Rick Purnell.