Going Backwards Working for Wages
I was having a conversation with a ranch family the other day about doing their own trucking. They haul cattle to corn stalks and back each year, so they hire about 20 loads hauled to get it done. They were running numbers thinking about what owning a semi and cattle pot (trailer) would cost. They thought they could do it cheaper themselves than hiring it out. When discussing the idea, they added that they could also haul cattle for their neighbors to help cover the truck expenses and make some wages at the same time. Let’s put aside the decision on if buying and running the truck is a good idea and focus on the concept of working for wages.
I asked this family what amount per day does their business need to produce to hit their profit target and cover overheads. They looked at me strangely. I backed off and asked, “What are the overhead costs to keep the doors open on the ranch?” They didn’t have a number top of mind, so we did some quick estimates. Let’s see … three people working full time, utilities, repairs, maintenance, depreciation on the equipment, opportunity rent on the ranch, outside leases, I’d guess somewhere around $400,000 to $500,000. They agreed. Let’s use the $500,000 number assuming overheads are $400,000 and we have a $100,000 profit target. Now let’s convert that to dollars per day of value the business needs to make to cover overheads and be profitable. I don’t know many ranchers who only work 5 days a week and take all holidays, but if you did that would leave 261 working days a year. If we use that number, then each day you devote to your business you need to generate $1,900 per day or $237 per hour. Hardly truck driver wages.
If we are running a business, we need to get it out of our head that our job is to create work for ourselves that generates laborer wages. Let that sink in for a minute. If we as business leaders just create work that yields laborer income, we will work ourselves to death and go broke doing it. We need to hold ourselves accountable to looking for things that are good at producing value. Better yet, things that produce good gross margin.
I’m not suggesting you shun everything that doesn’t pay $237 an hour, but when we allow ourselves to pile on low-paying jobs on top of everything else we do, pretty soon there isn’t time to do the WOTB (Working On the Business). WOTB is what allows you to find the significant elements that will really move the needle in making your business profitable. Your job as a business leader isn’t to fill your day with physically demanding, low-paying jobs. Your job is to structure your business for success.
I’m not suggesting you shouldn’t own a truck. Maybe trucking is your business. If so, maybe you should own 20 trucks. For this ranch they were asking the wrong question. They were asking “how can we justify buying a truck so we can stop paying the trucking bill?” Asking that question, we can find a way to justify buying the truck, but at the end of the day what was our result? We created a months’ worth of work for an already overworked family employee and the value created barely covered the depreciation, repairs, insurance and other costs of owning the truck. It didn’t move our business farther ahead, but it added to our already inflated overheads and we purchased another depreciating asset with crappy cash flow.
Too often, those of us in agriculture seek to add things to the to-do list to keep us busy rather than finding ways to simplify the business and create value. When considering a new enterprise or activity, make sure you budget in hiring someone to do the additional work created. If it doesn’t create significant value above all costs, including labor then it isn’t profitable.