A Perspective on Gross Margin from Aaron
Aaron Helmick is a pain in the rear. Even worse he is a dairy farmer from West Virginia pain in the rear. 😆 Somehow Aaron managed to marry Tara and that vastly improved his chances in life. Aaron and Tara are alumni of Ranching for Profit and Executive Link. They are amazing and thoughtful people who I’m blessed to call friends. Aaron called me recently to share he had focused on improving the value of his cull animals this past year and had managed to double the value he got for his culls, but then went on to describe how that hardly made a difference at all to his business. I asked him to write up the why behind this and the following article is the result. I know you’ll enjoy Aaron’s perspective and I’m sure there are implications for your own business in his lessons.
Looking Inside the Gross Margin
It is the time of year where we project our numbers for the next year. I remember sitting in the Ranching for Profit classroom, thinking what do all these new terms mean? At the school we learned terms like gross product, direct costs, gross margin, and overheads. But until we practiced using and implementing them, these terms didn’t have real meaning. As ranchers, farmers, or franchers (farmer/rancher) we have a tendency to not enjoy the numbers or working on them. I am not sure if it is fear, technical skill, or lacking the proper instructions to guide us with what to do, with this or that set of numbers once we have the nice paper pile.
For my wife and I, it has been a journey learning how to actually do the numbers, what the numbers mean, and then being able to look into the numbers to identify the right approach for our business. I don’t claim that we have it all figured out, but we have made significant strides from where we started. I hope that by sharing our story you may find some value for you and your business.
Once upon a time, we were a successful dairy business, which lost control and became an unsuccessful business. We have regained control and now have another successful business. What changed? We did! We had to change the way we see things, the people we let influence us, and our paradigms. We got an education at the Ranching for Profit School (RFP), we joined Executive Link and had a great board, we attended Soil Health Academy and Wally Olson’s Sell-Buy Marketing School, and worked with John Haskell’s team at Ranch Right. I am a slow learner. As all these pieces came together, a slow change caught fire resulting in a big change! A reminder that change will happen, but we must see it through (The Dip by Seth Godin).
To make this real, I want to tell you a recent story from our business. For the last 6-8 months, we have been in a cash flow crunch that forced us to look seriously at selling part of our land base so that we could free up cash to continue to operate. On one hand, we had good numbers, but coming up with the cash to cover our land payments was making things extremely tight. While our gross margin percentages were good, the dollar amounts were small relative to our debt.
I want to be clear; Tara and I had a pretty good grasp of our numbers and were watching the gross margins (GM) closely. If the GM wasn’t exceptional, and it wasn’t scalable, the enterprise was cut. We still felt there was something missing.
What we have learned is, if we want to be excellent, we had to change the trajectory of our franch. To do this we had to reach our financial goals faster than we ever thought possible and we needed to go deeper than the gross margin. The GM allows us a quick and easy 30,000-foot view of the business. But to understand the operation of the business and to identify opportunities for improvement even in a good enterprise, we needed to go deeper. We outsourced the production of our gross margins by working with a team of people who understand the ranch business. This allowed us to get extremely focused on the part of our business that had the greatest impact. At the Ranching for Profit School we learned the 80/20 rule. 80% of your results come from 20% of your effort. We had to focus and scale the pieces that were working and let the small things fall where they may. Now, with this new information we needed the time and the energy to look further for those parts of our business we were set to really grow our profits.
As we reviewed our financials, we realized the breeding ewe enterprise saw an increase in total sales to around $407,000 (from $107K), without an increase in numbers of sheep. The sales and transfers of lambs were consistent with prior years of right around $100,000. This enterprise created an additional $307,000 in gross product through marketing (choosing to sell overvalued breeding animals and replace them at a profit), with no added overheads or direct costs. This focus on marketing of our high value animals was a big deal for us. Had we tried to get this same increase by simply running more sheep we would have had to scale this enterprise by 4 x to provide the same gross product, I assure you the costs would have changed, AND, it would’ve required A LOT MORE CAPITAL, that we didn’t have.
During this same time, we had worked hard to improve the marketing and value of our culls, which we doubled, but …wait for it … culls are less than 2% of our total sales, so who cares! In focusing on marketing our culls we were focusing on things that didn’t move the needle in our business.
Finally, we examined our lamb development enterprise where we develop breeding lambs and lambs for slaughter. I had thought this enterprise did ok, but it has never really excited us. This is a 60-90 day enterprise that for us produces about $280,000 of gross margin. When we looked deeper into this a realization smacked us across the face. For the amount of time we were investing, this enterprise was creating a lot of value for our business. To realize this we had to look deeper into the gross margin. When looking into the GM we have found that 25% of sales of this enterprise happens in this short time period. What does this mean? At first glance the gross margins are all good, but looking deeper really gives an accurate gauge of where to deploy, time, energy and capital.
For our franch, we will not focus any time on culls, we will scale a short season enterprise and thus free up more time and biological capital. We will strategically grow the breeding herd but not allow the voice of production to tell us we have to! And right now, we are not forced to sell land.
How could you apply these things to your business? By identifying the things that you are doing that are working well. By only focusing on the enterprises that are working well, how much time would this free up for your family, your spouse, or your kids? How much stress could we relieve on people and land resources not continually looking for the bigger is better?
The answer is INSIDE the gross margin.
November 09, 2022 at 6:35 am, Bill Barnes said:
great in-site.. enterprise mix and structure
November 09, 2022 at 10:06 am, Joe Morris said:
Excellent analysis, Aaron. Thanks for putting it down on paper. My take away is that one doesn’t only have to do the basics of what is taught at the School; one has to do them well! The quality of your work makes all the difference.
November 09, 2022 at 10:10 am, Tom A Krawiec said:
What a fantastic insight! This article should be shared far & wide!
November 11, 2022 at 10:29 am, MARY E. DEL OLMO said:
Thank you Aaron! I really needed to hear “If the GM isn’t exceptional and it wasn’t scalable, the enterprise was cut.” today as I do 2023 projections!
November 16, 2022 at 10:58 am, Jared Lyman said:
Great article, direct, honest and on point. Thanks for sharing your experience. I learned recently that we need to be sharing our experiences (successes and failures) more than sharing do this or do that. Thanks also for being a pain in Dallas’s rear!