Uses for Profit
When we talk about uses for profit some people roll their eyes. “Profit – yeah right! Like that ever happens in agriculture.” The reality is that most ag operations are not profitable. In fact most are really expensive hobbies. However, it doesn’t have to be that way. Many are profitable every year. Some are highly profitable. The difference is MANAGEMENT.
Profit deployment is not something to be considered after the fact. Making a plan for your profit will allow you to develop a profit target. You will then be able to deploy this profit to build the business and the life you want.
Let’s assume your ranch made $100,000 profit this year. What will you do with the profit? I bet your mind goes to all the deferred maintenance items on the ranch or that project you’ve been thinking about for a few years. Before we go too far down that list, let’s step back and think more broadly about the categories that would catch ‘uses of profit’. At a recent workshop in Malta, MT the participants made a list that included the following categories:
- Build reserves
- Back into the ranch
- Invest in a business off the ranch
- Pay down debt
- Distributions to ownership
- Enjoy it – treat the ranch team and/or ownership to something
That is a pretty good list and I think they captured most of the places we could choose to put profits. When your ranch makes a profit and deploys that profit, have you really thought it through? Where do most agricultural businesses put profits on the rare event they occur? After servicing mandatory debt reduction, most put 100% of profits back into the farm/ranch. Also most choose to invest profits in things that don’t produce enough cash flow to cover their costs. What this means is that when we have a profitable year, we compound the problem of being asset rich and cash poor.
At the Ranching for Profit School, we suggest a new strategy for deploying profit. Start by working through each of the categories listed above and write a dollar amount next to each, this will be your target for the coming year. Some might have zeros, others might have big numbers. How much should go to debt service? Reserves? Reinvestments into the farm/ranch? Etc. When you have these numbers, total them up to develop your “Profit Target”. If it is helpful this information can also be formatted into a pie chart that can be applied to actual profits at the end of year. Displaying your profit target this way should prevent impulse decisions when important uses of profit get neglected for new ranch toys that will often make future profits difficult to achieve.
When working on your profit target I highly recommend you look closely at a few categories I often see under-funded.
- Reserves – What percentage of your annual overhead costs do you want to keep in a form that you can quickly get your hands on? I’d suggest that it is between 50-100%.
- Off-farm investments – Look for things that are not subject to the same risks you ranch business has and are investments that produce excellent cash-flow.
- Enjoy it – Many in agriculture look down their nose at spending money on ourselves, but you are important and you are worth it! Budget this and be specific about what you’re going to do. Twenty years from now you’ll likely wish you took more time to enjoy life.
If profit feels impossible, we can help. This winter’s Ranching for Profit Schools are filling up quickly, sign up for a school so you can start Ranching for Profit!