What Are You Worth?

by Dave Pratt

I often ask audiences at schools and workshops if anyone pays themselves what it would cost to replace themselves. Very few hands go up and those that do are usually attached to the arms of Ranching For Profit School grads. Many justify not paying themselves a fair wage claiming that their ranch isn’t profitable enough to pay them. If your ranch isn’t profitable enough to pay yourself and other family members a decent wage, then it isn’t profitable at all. Fair wages, paid or unpaid, must be deducted as an overhead cost to calculate profit.

 

Most family ranches, regardless of scale, are subsidized with free or underpaid labor. There is nothing wrong with subsidizing your ranch if that’s what you want to do. But shouldn’t you at least know the extent to which you are subsidizing it? To know that, you’ve got to include the full cost of labor. That means showing what it would cost to hire someone else to do all of the work you currently do. Here’s how we figure the wage you ought to show on the books.

 

If you are like most owner/operators you have a lot of different jobs on your ranch. At times you are the CEO and should be earning $100 per hour. Other times you are the hired hand, earning $15 per hour. These are minimum wages for these positions and assumes you are also getting a benefits package that includes housing and health insurance.

 

At the Ranching For Profit School we suggest taking 2 mornings a week to work ON your business as CEO or business manager. The other 80% of the time you work IN your business as a hired hand.

 

Do the math:

$100/hour x 4 hours x 2 days/week x 52 weeks a year = $41,600

$15/hour x 32 hours/week x 52 weeks = $24,960

$41,600 + $20,800 = $66,560

 

If you’re spending two mornings a week working on your business, and the rest the time working in it, $60,000 – $70,000 is probably in the ballpark of what you ought to be paying yourself or at least recording on the books.

 

Of course, underlying these calculations is the assumption that you are a competent CEO and are worth $100/hour when you are working on your business. There is an easy way to know if you are worth $100/hour. If you are taking two mornings a week to work on your business and the business still can’t afford to pay you, then you should probably question your competency. Maybe it’s time you thought about investing in some business training, check out our current schedule.

 

For more on how to value labor fairly watch the video below:

 

2 Responses to “What Are You Worth?”

October 10, 2018 at 10:47 am, Burke said:

A good friend has told me that he does the $100 per hour jobs–CEO. His wife does the $30 per hour jobs–moving and allocating grazing for three groups of cattle nearly every day which has done much to greatly increase their carrying capacity and requires exceptional observation skills. And then he does the $10 per hours jobs–fixing the problems with fence and water that his wife finds when moving the cattle.

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October 11, 2018 at 3:09 am, james coffelt said:

There are other factors to consider

James Coffelt

Ohio Land and Cattle

77500 Jamison Rd,

Cadiz, Ohio 43907

Phone:330-328-4470 Email

OhioLandandCattle.com JamesCoffelt@hotmail.com

Building Wealth VS Income

As a group, farmers/ranchers are the hardest working, highest quality, most honest people,

and poorest financial thinkers.

A favorite book, and great education, is “Knowledge Rich Ranching”, by Allan Nation.

Building wealth is different from income.

Income is used to live. It is the cash flow. Without it, we are out of business. Cash flow,

or lack there of, sinks ships. It is required. All income above what is required to live

can be rolled into appreciating assets. There is no better business than this business for

accumulating appreciating assets, pretax.

Ranching is remarkable from a pure business standpoint, with its wealth building

abilities.

There are three financial tools that are critical, an income statement, balance sheet, and a

personal financial statement. The income and balance sheet are used for the tax man.

They include depreciation and a variety of items that change the true picture of wealth building.

The personal financial statement is the correct picture of wealth building. Every bank will

provide a blank form, update it twice per year to measure progress.

If a spouse complains that there is no money in the checking account, that is a cash flow issue.

It is possible to have a great year of wealth building, with poor cash flow, and, a great cash flow

year with diminished wealth. Building wealth is measured on the personal financial statement. It is possible to have a year or more with negative wealth building, it is not possible to have long periods

of negative cash flow, as the cash and borrowing ability evaporate, and you’re out of business.

As I think back over 30+ years of business, each ten year period might have two years of losses,

two years of “out of the park” earnings, and six years of good enough. Had we not been in the

game when it mattered, the two great years would have been missed.

Examples:

Land appreciates, and that additional wealth is not taxed until the land is sold, or never taxed,

depending on strategies. Land wealth increased. The cattle herd is larger, livestock wealth

increased. That appreciation is real wealth. That wealth is not in the checking account,

but it could be via refinancing or selling land and livestock.

Selling will prompt taxes, financing does not, and with financing, you still own the land.

Many are adverse to debt.

It is a financial tool, which can be used well, or not used well. We are comfortable with up to 40% leverage, with the idea that if things went south we could take the hit. Money at the moment is

almost free, that is, 3.5%, which is in turn deductible from income. Effectively it is 3.5% less

your upper tax bracket. Meanwhile, pasture land has appreciated 7% in our area, using a

3 year rolling average.

Land wealth grew by 5%+/-, after interest. The land produces cattle income, hunting income,

gas and oil income, timber income, pipeline income, solar income, maybe mining, and so on.

If you do not already own the land when gas and oil, mining opportunities, etc. appear, it is

too late, which is a benefit to owning the land when possible. You must be in the game before

it starts.

The recent tax bill increases the estate deduction to $22.5 million. Most will be able to move

assets to the next generation, tax free. Taxes are an enemy of building wealth

As a side issue, and comfort, what is most liquid? Cash. What is second most liquid?

Livestock. Livestock may not be sold at the top of the market, but, livestock is highly liquid.

Like stocks, timing the market is difficult.

LIVESTOCK

(Place Picture 1)

Cattle and other livestock produce income. However, there are a lot of moving parts. In our case,

the model is selling into a premium market, bulls, seed stock, all natural steers, and grass finished

beef. All are registered Black Angus, because they sell for more as registered, and consume the

same forage as commercial. Is it perception or real? I simply know registered animals sell for

more.

The animal class matters. Consider the value cycle of a cow. In our case, a heifer calf might have

an $1100 value, keep her another year, at a cow cost of $296, and her value is $1900, bred to a good

bull. Her value will remain there or increase up to around 5 years old, and she will then depreciate

in value.

A principle is to turn the herd over while cattle are younger, before her value drops.

Assuming good bulls, the genetics are better with each generation.

Consider using older cattle for grass finished beef. The flavor is better, and they marble/finish

easier. While some middle meats will be lost, the carcass size more than offsets what was lost.

This helps with herd turnover. In Europe, they want older cattle, as the flavor is best.

Our favorite is a well fleshed, five year old cow.

While we sell bulls, my opinion is that this is a mostly female business:

Cows CALVE and consume more forage than a young cow or heifer.

Steers GAIN WEIGHT.

Young cows GAIN WEIGHT AND CALVE. While the young cows will produce smaller calves,

they permit more animals on the same forage/acreage This produces more total calves,

which more than offset the smaller calves by some 20%, in a production per acre model.

Buying appreciating assets, cattle/livestock and land, in that order, with the income above what is required to live nicely, is the model. If costs are high, there is no cash to buy, borrow, or

accumulate wealth.

Become fully stocked first, as the largest driver of profit is stocking rate. It is a production per

acre model, not production per head. With high turnover, and good bulls, genetic improvement

is advanced quickly.

Costs

I had mentioned cow costs of $296. This includes year round grazing, no vaccinations, no worming,

and no labor or injuries, to man or beast, while performing those activities.

(see our website regarding the cow cost formula)

Genetics and cow size and type matter. Pharo, Pinebank, and Wye genetics work well here.

Moderate size, moderate milk and moderate growth, enable finishing on grass. Animals that

thrive in a low input management model, while selling into premium markets, and still working

in the commodity market, as needed, is the a model.

(Place picture 2)

The less equipment the better. We run this 8000 acre ranch with one 100 horse John Deere tractor,

two diesel trucks, a stock trailer, and some ATV’s . Why John Deere and diesel trucks?

Simply, they hold their value.

Some costs can be converted to profit centers. For example, until last year we had assigned a $23

breeding cost to each cow for the cost/value of breeding bulls. A friend and large rancher uses AI

extensively, and his breeding costs were also $23.

Last year we began leasing our bulls to others. There are 3 breeding seasons, spring, summer,

and fall. We calve in May/June, and consequently, can lease bulls in spring and fall, producing

income. Many herds are small, and the idea of buying a good bull, and exchanging bulls with a

like minded cattleman, with a similar quality bull, can reduce bull costs by half, more if there is a

third friend.

Bulls can make money, and not cost money. Because the bull is profitable, better bulls can be

purchased, which in turn makes them easier to lease or exchange.

(Place picture 3)

In short, invest in appreciating assets, livestock first, land second. Avoid spending on depreciating

assets and labor.

Taxes

If a ranch made some money, buy appreciating livestock, which can be expensed, do not buy

equipment unless absolutely necessary. Many accountants depreciate livestock as opposed to

expensing, this is a mistake. Livestock is income when sold, expensed when bought.

Use 1031 exchanges: if you sell land, place the money in a 1031 exchange, tax free. Assuming it

takes 90 days to close, you will have 6 additional months to buy other land with those pretax funds,

for a total of 9 months to purchase. Buying with pretax money increases the capacity to buy

by the amount which would otherwise have been paid in taxes. Taxes are the enemy.

Peter Drucker, the famed business writer said, ‘‘Every idea, every activity, every employee,

and every business model, should be on trial for its life, every single day’’.

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