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Jim McGrannJim McGrannRanch Management EconomistRanch Management Economist

Professor Emeritus Professor Emeritus Texas A&M UniversityTexas A&M University

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Making The Making The Numbers TalkNumbers Talk

Using Financial and Using Financial and Economic Information to Economic Information to

Send the MessageSend the Message

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Topics Covered Topics Covered

Financial and Economic InformationFinancial and Economic Information

Historical SPA data and QuestionsHistorical SPA data and Questions Select Beef Cattle Decision AidsSelect Beef Cattle Decision Aids Components of a Ranch Business PlanComponents of a Ranch Business Plan

Exercises for Participants - Exercises for Participants - Application Application

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Long Reference Paper I’ve Long Reference Paper I’ve ProvidedProvided

Purpose is to give you a paper with Purpose is to give you a paper with examples and remindersexamples and reminders

Its basic producer level economics Its basic producer level economics and financeand finance

Ideas and concepts can carry over to Ideas and concepts can carry over to your business. your business.

What terminology means and how its What terminology means and how its usedused

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I’ll Point Out Areas I’ll Point Out Areas

To show you what is in the paperTo show you what is in the paper Key things to keep in mindKey things to keep in mind What communicates bestWhat communicates best

Try not to replete your previous Try not to replete your previous review of finance and partial review of finance and partial budgeting – should be a reminderbudgeting – should be a reminder

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My Main MessageMy Main Message

Learn to do your own numbers Learn to do your own numbers Use spreadsheetsUse spreadsheets Veterinarians often miss opportunities Veterinarians often miss opportunities

to communicate because they don’t use to communicate because they don’t use economics to show producers practices economics to show producers practices are profitable.are profitable.

Your poor or non existing written Your poor or non existing written reports means your numbers do not reports means your numbers do not talk to owners talk to owners

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Things I DislikeThings I Dislike

Misuse of financial and economic Misuse of financial and economic terminology that gives misleading terminology that gives misleading information – always overstates information – always overstates performanceperformance

Terminology – cash profit, breakevensTerminology – cash profit, breakevens Misuse of the term profitMisuse of the term profit No sector misuses finance and No sector misuses finance and

economic terminology worst than the economic terminology worst than the cow-calf sector cow-calf sector

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Starting the Process - Starting the Process - NumbersNumbers

1.1. What are the main financial What are the main financial objectives of the owner? – smart objectives of the owner? – smart goals – measurable & realistic. goals – measurable & realistic.

2.2. What is the current financial and What is the current financial and production status of the business?production status of the business?

3.3. What are the different alternatives What are the different alternatives to accomplish the goals?to accomplish the goals?

4.4. What are the main constraints?What are the main constraints?

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Most Communications Most Communications FailFail

Incomplete answers to 4 questionsIncomplete answers to 4 questions Misguided or incomplete analysisMisguided or incomplete analysis Needs to fit audience levelNeeds to fit audience level Professionals often out smart Professionals often out smart

themselvesthemselves

Failure on professional’s part – willing Failure on professional’s part – willing to give answers without full to give answers without full informationinformation

Rancher’s Numbers

Need to present the production numbers with the finance numbers.

They need confidence in the production numbers before they believe the finance numbers.

Integrated numbers – I know they are right

Production numbers are more stable than finance numbers.

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Cost and Profit InformationCost and Profit Information Can Be Useful Can Be Useful

Reduce cost and look at alternativesReduce cost and look at alternatives ““What if” analysisWhat if” analysis Investment decisions – operating Investment decisions – operating

capitalcapital Retained ownershipRetained ownership Leasing arrangementsLeasing arrangements Measurement is part of managementMeasurement is part of management

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Big 5 “F” CostsBig 5 “F” Costs

1.1. FuelFuel

2.2. FeedFeed

3.3. FertilizerFertilizer

4.4. Family – often left off listFamily – often left off list

5.5. FinanceFinance

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Alternatives to NumbersAlternatives to Numbers

Opinions and talk – dominate in cattle Opinions and talk – dominate in cattle industryindustry

Emotions – hide from financial realtyEmotions – hide from financial realty Published numbers have real limitationsPublished numbers have real limitations Being profitable at the cow-calf level is Being profitable at the cow-calf level is

difficult – operating earnings.difficult – operating earnings. Not many in the sector like to work with Not many in the sector like to work with

numbers. Few analyst.numbers. Few analyst. Message do you own numbers - know what Message do you own numbers - know what

they mean and limitationsthey mean and limitations

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Terminology – Big IssueTerminology – Big Issue

Financial Profit – Net Income – Recall Financial Profit – Net Income – Recall the financial statement or P&Lthe financial statement or P&L

Economic Profit – Uses Opportunity Economic Profit – Uses Opportunity cost on all resources – land, capital, cost on all resources – land, capital, labor & Management.labor & Management.

Cash profit is not a Cash profit is not a financial termfinancial term! ! It’s a misuse of the profit term.It’s a misuse of the profit term.

Cash marginCash margin is a better term is a better term

Business ProfitabilityBusiness Profitability

You can have a business that is not You can have a business that is not profitable but frequently find profitable but frequently find changes that are profitable – cost changes that are profitable – cost effective. The added returns are effective. The added returns are greater than added cost.greater than added cost.

This should be a focus of attentionThis should be a focus of attention Reducing losses is increasing profit! Reducing losses is increasing profit!

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Depreciation is a Real Depreciation is a Real CostCost

You don’t write a check for You don’t write a check for depreciation –non-cash cost. depreciation –non-cash cost.

Allocation of a capital asset cost over Allocation of a capital asset cost over its economic life – vehicles, its economic life – vehicles, machinery & equipment and machinery & equipment and breeding stock.breeding stock.

Has to be calculated because IRS Has to be calculated because IRS reports do not provide the values reports do not provide the values needed.needed.

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Ranchers Work For Ranchers Work For NothingNothing

Labor and management Labor and management compensationcompensation

Family living withdrawalsFamily living withdrawals

Goes back to IRS sole proprietorshipGoes back to IRS sole proprietorship Corporations pay salaries and Corporations pay salaries and

payroll as part of operating expensespayroll as part of operating expenses

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Most Cost Analysis do Most Cost Analysis do Not IncludeNot Include

Any compensation for owner operator Any compensation for owner operator labor and management or payroll labor and management or payroll expenses – social security etc.expenses – social security etc.

IL Farmers $60,000 a year.IL Farmers $60,000 a year. If you provide an owner numbers – If you provide an owner numbers –

include his compensation – support the include his compensation – support the family!family!

General & Administrative or overhead General & Administrative or overhead are frequently underestimatedare frequently underestimated

If You Want Actual Costs If You Want Actual Costs and Returnsand Returns

You have go the business financial You have go the business financial statement or Profit & Loss statementstatement or Profit & Loss statement

Need an accrual adjusted statementNeed an accrual adjusted statement Reconcile cash flow and you will see Reconcile cash flow and you will see

family living withdrawalsfamily living withdrawals I like QuickBooks™I like QuickBooks™ Finance part of SPA takes the least Finance part of SPA takes the least

timetime

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Published Cow-Calf Cost Published Cow-Calf Cost DataData

Table 1.Table 1. Land Grant Universities – short on Land Grant Universities – short on

overhead & labor and management.overhead & labor and management. Cattle Fax and DroversCattle Fax and Drovers Texas SPA Texas SPA You need to know what your are You need to know what your are

readingreading I doubt that underreporting cost serves I doubt that underreporting cost serves

the industry well.the industry well.

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Other Topics of Other Topics of ImportanceImportance

Appreciation of land – land rich and Appreciation of land – land rich and cash poor.cash poor.

Never high economic profit – Never high economic profit – opportunity cost of land – leaseopportunity cost of land – lease

Incomplete data and projecting herd Incomplete data and projecting herd expansion or contraction.expansion or contraction.

Small cow herds – opportunity for Small cow herds – opportunity for full service for vets.full service for vets.

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Using SPA- What we Have Using SPA- What we Have LearnedLearned

Look over reports – recall historical Look over reports – recall historical cost data is of limited usecost data is of limited use

There are enormous opportunities There are enormous opportunities for improvement. Big 5 F !for improvement. Big 5 F !

What gets measured gets managed.What gets measured gets managed. Execution is under valuedExecution is under valued

Top ManagersTop Managers

Do the right thingsDo the right things Get things done right – though Get things done right – though

capable and motivated people capable and motivated people Get things done on timeGet things done on time

Are good analyst – good analyst Are good analyst – good analyst demand good data and information!demand good data and information!

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MessageMessage

With quality numbers you can let the With quality numbers you can let the numbers do talking.numbers do talking.

Be informed about the situation and Be informed about the situation and write one page summary. write one page summary.

Put details but don’t force owner to Put details but don’t force owner to read them.read them.

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Appendix A – Check It Appendix A – Check It OutOut

Cost Terminology and Use for Cost Terminology and Use for Decision-makingDecision-making

Using cost to reduce costUsing cost to reduce cost Always include labor – extra effort Always include labor – extra effort

requiredrequired Its about management & ExecutionIts about management & Execution

Expect Some Expect Some Frustration - Frustration -

PProducer Attitudesroducer Attitudes

Financial – the need for Financial – the need for change is the motivator change is the motivator Lack of production response Lack of production response datadataManagement – execution of Management – execution of the planthe plan

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Addressing Your SPA Addressing Your SPA QuestionsQuestions

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Decision Aids Decision Aids

Nebraska Cattle BudgetsNebraska Cattle Budgets IRS- Cow-Calf IRS- Cow-Calf Herd Bull – investment versus costHerd Bull – investment versus cost Cow-bidder – how much can you payCow-bidder – how much can you pay Vehicle cost – if you have questionsVehicle cost – if you have questions Health economics – margin above Health economics – margin above

costcost

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Components of a Business Components of a Business Plan – Wish I Could See Plan – Wish I Could See

Written PlansWritten Plans Present situation – resources –Present situation – resources –

financials and performancefinancials and performance Objectives and GoalsObjectives and Goals Management and PersonnelManagement and Personnel Product and servicesProduct and services MarketingMarketing Financial projections Financial projections Implementation planImplementation plan

With Quality NumbersWith Quality Numbers

Your can let the numbers do the talkingYour can let the numbers do the talking Find Cost Effective or profitable Find Cost Effective or profitable

opportunitiesopportunities

Under reporting cost and over stating Under reporting cost and over stating performance does not serve the performance does not serve the industry’s needs industry’s needs

Producers manage what is measuredProducers manage what is measured