Profit – What is it Anyway?

by Dallas Mount

counting money

At the Ranching for Profit School since we talk about profit, we believe we better define it. We ask the participants at the school to come up with a definition of profit, they usually respond with something like Income – Expenses = Profit. Let’s play with that definition some and see how it works.  

If we are in a drought year and sell off 30% of the cow herd what happens to the cash income? It goes up, right? What happens to that winter’s expenses with feeding those cows? Goes down, right? So did we make a big profit? No, we sold off a wing of the factory. What if we have a year when we decide to grow the herd by keeping all our heifer calves and breeding them the following year? Income goes down and expenses go up. Did we make a huge loss? No, we added a wing to the factory. The point is, profit is more than just cash income minus cash expenses. We need to track the value we are creating. Your banker tracks this through your balance sheet, more specifically by looking at changes in earned net worth. At the school we teach a more practical approach to project profit using the RFP Economic Model.  

But wait … there’s more! Just because your neighbor reports having made a profit, can you really compare their numbers to yours? After all your neighbor is 3rd generation on the place, doesn’t make land payments, doesn’t owe any money on cows or machinery and we know one person works in town to cover most of the family’s living expenses including health insurance. How can we compare profitability of that operation to one that is a startup? When we do economic analysis we remove all the crutches ranchers often use to prop up their business. Here is the way we define profit:

Can you pay:

  • Cash rent for the land
  • The full cost of labor (no one works for free or steeply discounted)
  • Interest on all assets used in production (cows and machines)
  • All other production costs (feed, vet, etc.)

Using this definition of profit how many of your neighbors are profitable?  

This might seem like a high bar, but it is a really useful high bar. It allows us to compare 3rd generation operations with startup operations on the same metrics. It allows for profit targets to be established and for the uses of profit to be defined. 

When we say profit we need to be speaking the same language. Profit is not what you pay yourself for the work you contribute to the business. It is a value the business generates above and beyond the contributions of the labor force. Are you Ranching for Profit?

 

11 Responses to “Profit – What is it Anyway?”

March 24, 2021 at 2:31 am, Warren Burles said:

What you have written, the logic of it, makes sense to me. It’s almost like those old Ripley’s believe it or not comic books. Ranching is a business, believe it or not. When your next back up to Canada will be signing up for your school.

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March 24, 2021 at 6:44 am, Casey Everett said:

Very good article. Thank you.

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March 24, 2021 at 8:37 am, Chris Venn said:

When are you coming to Canada? Students are standing by…

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March 25, 2021 at 6:55 am, Dallas Mount said:

Hi Chris. We would like to come back to doing schools in Canada. Unfortunately it has become very difficult for us to conduct schools north of the boarder. The cross-border issues are difficult to navigate and would take some major investment in international attorneys and even then only good till the rules change again. We continue to have Canadians come to schools in the US. As COVID restrictions ease I expect the numbers to rise even more. We also added a school in Minot this coming winter for Canadians wanting a closer school. For the best RFP experience, we recommend traveling to a school outside of your area.

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March 30, 2021 at 6:33 pm, Chris Venn said:

Thanks for this note, Dallas. Let us see if we can get to your side of the border and take your training. We need it. Thanks a ton.

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April 27, 2021 at 7:20 am, Alicia said:

Hey just curious, why do you suggest attending a school outside your area?

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April 27, 2021 at 7:31 am, Dallas Mount said:

Hi Alicia. Here is a past post I wrote on the subject of attending a school outside of your area. https://ranchmanagement.com/get-outside-your-area/

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March 24, 2021 at 9:43 am, Monte lerwick said:

“But wait…. there’s more!!” You got me hooked 🙂
One question; economic profit projection is covered, how does RFP like to look back and measure actual year over year profit?

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March 25, 2021 at 6:57 am, Dallas Mount said:

Hey Monte. Apply the 80/20 rule. 80% of your time looking forward (projections), 20% of your time looking back (actuals). In my business I find that ratio to be more like 90/10. Actuals are fine to check how things are going, but not very useful for planning purposes, especially when the plan is to make a significant change.

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March 24, 2021 at 1:24 pm, Michael said:

Very educative

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March 25, 2021 at 9:25 am, Barbara Roise said:

Great article and happy to see a Minot, ND location added ~ in our neck of the woods! We will work to spread the news. Keep up the great work.

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