Take it to the Bank: Keys for Financial Success Keys for Financial Success Barry H. Dunn, Ph.D. Animal and Range Sciences Dept. South Dakota State University

Goals for Today 1.Discuss measuring profit to reflect efficiency! 2.Explain profit and financial efficiency as a set of relationships! 3.Share research results! 4.Discuss the importance of using the correct denominator! 5.Profit: Risk vs. Opportunity

Defining Profit

Definition of Profit: Net Income Profit $ (Net Income) () - = $ Gross Rev lbs. $/lbs. X + /- Inv. Ad j. $ Total Exp +/- Inv. Adj.

Definition of Profit: Return on Assets (ROA) )(- $ Total Investment in Land, Cattle, Buildings. Equipment $ Total Exp +/- Inv. Adj. Profit % (ROA) = $ Net Income lbs. $/lbs. X + /- Inv. Ad j. [ ] + $ Int.

Measure for Efficiency 1.No denominator!!! 2.Measure of Output 3.May be affected by differences in production 4.Not a measure of financial efficiency! Net Income

“Net Profit (Net Income) can no longer be used as a gauge of whether resources are used efficiently” Earl Heady, 1952

Measure for Efficiency 1.No denominator!!! 2.Measure of Output 3.May be affected by some differences in production 4.Not a measure of financial efficiency! 1.Has a denominator 2.Output/Input 3.Is a measure of managerial efficiency!! Net Income ROA

Profit: Determined by a Set of Relationships

Profit: A Set of Relationships Investment in assets (Land, Cattle, Equipment) Biological Production System Value in the Market Place Annual Expenses

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

ROA: A Set Of Relationships $ Gross Income/Cow $ Total Expenses/Cow $ Assets/Cow ROA,%

Research Results Directed at Identifying the Factors of Affecting Profitability of the Cow-calf Enterprise

Materials & Methods Data collection: Data collection: – Field data, voluntary participation – Followed SPA guidelines – 239 individual SPA reviewed – 148 herds in final data set

Materials & Methods Data Analysis: Data Analysis: – Sample characterized with SPA measurements; Mean, SD, and Min.-Max. – Data divided into 3 profit groups, based on ROA: High Profit = Top 16% High Profit = Top 16% Low Profit = Bottom 16% Low Profit = Bottom 16% Medium Profit = Middle 68% Medium Profit = Middle 68% – Means for all SPA measurements for all three Profit groups were compared – Multiple Regression Techniques used To determine factors affecting Profitability

Reality Check! Avg. ROA for businesses in the US: Avg. ROA for businesses in the US: 10% USBC, 1998 Report for ROA cattle enterprises from across the Nation: Report for ROA cattle enterprises from across the Nation: 2-3% McGrann et al, 1992 FINPCK FINPCK

“There is no profit without pleasure, but there is no pleasure without profit” Mark Twain

SPA Measurements for Low Medium, and High Profit Producers Low Profit Medium Profit High profit lbs. Weaned/Cow exposed $ Income/Cow $ Expenses/Cow $ Net Income/Cow $ Investment/Cow ROA, %

SDSU research indicates that profit is a set of a specific relationships! On a Unit basis (per cwt. or per cow.) On a Unit basis (per cwt. or per cow.) – Low Investment! – Low Annual Costs! – Average Production (high reproduction)! – Excellent Marketing!

How many cows? The Net Income in the High Profit group can pay off all debt in 10 years and provide $35,000 of family living with 200 cows! The Net Income in the High Profit group can pay off all debt in 10 years and provide $35,000 of family living with 200 cows! To provide $35,000 of family living with the Medium Profit group, it will take 972 cows and you will pay off no debt! To provide $35,000 of family living with the Medium Profit group, it will take 972 cows and you will pay off no debt!

In the face of the same problems, environments, markets, & policies, some cattlemen in the very same business are able to make substantially more money than others!

Per What? The importance of using the correct denominator!

Per Cow! Pros Pros – Good communication – Used in property valuation – Good measure for: Reproductive Performance Reproductive Performance Calving Distribution Calving Distribution Death loss Death loss Cons – No Output! 600 lb. Calves? 400 lb. Calves? – Masks stocking Rate – Per cow what? Exposed Beginning year Preg. checked

Per Acre! Pros Pros – Fundamental unit of production – Largest investment – Shows regional differences – Expresses different management choices Cons – Per what? Total beef enterprise Hay separate – Large regional differences – Could lead to overuse/abuse of land resource

Per cwt. of Weaned Calf! Pros Pros – Inclusive measure Reproduction Reproduction Growth Growth Nutrition Nutrition Herd Health Herd Health – How cattle are marketed!!!! – Excellent tool for cost control!!!! Cons – Not how we are used to thinking Cow –?–?

Analysis of SDSU SPA data showed per cwt. of weaned calf was the most sensitive measure of financial efficiency when compared to per cow or per acre

Inputs Outputs Understanding Output/Input Relationships: Relationships: Production Function

Inputs Outputs Understanding Output/Input Relationships: Relationships: Production Function Rational Business Behavior

Body Condition Score Production Function: Probability of Preg. During a 60 Day Breeding Season Pruitt & Momont, 1990 BCS 5 BCS 6 BCS Probability of Preg.

Body Condition Score Production Function: Probability of Preg. During a 60 Day Breeding Season Pruitt & Momont, 1990 BCS 5 BCS 6 BCS Probability of Preg. Rational Business Behavior

Investment is the Main Driver of Profit! Barry Dunn, 2003 Investment in assets (Land, Cattle, Equipment) Biological Production System Value in the Market Place Annual Expenses

Thank You!