1. 1 Jim McGrann Ranch Management Economist Professor Emeritus Texas A&M University

2. 2 Making The Numbers Talk Using Financial and Economic Information to Send the Message

3. 3 Topics Covered Financial and Economic Information Financial and Economic Information Historical SPA data and Questions Historical SPA data and Questions Select Beef Cattle Decision Aids Select Beef Cattle Decision Aids Components of a Ranch Business Plan Components of a Ranch Business Plan Exercises for Participants - Application Exercises for Participants - Application

4. 4 Long Reference Paper I’ve Provided Purpose is to give you a paper with examples and reminders Purpose is to give you a paper with examples and reminders Its basic producer level economics and finance Its basic producer level economics and finance Ideas and concepts can carry over to your business. Ideas and concepts can carry over to your business. What terminology means and how its used What terminology means and how its used

5. 5 I’ll Point Out Areas To show you what is in the paper To show you what is in the paper Key things to keep in mind Key things to keep in mind What communicates best What communicates best Try not to replete your previous review of finance and partial budgeting – should be a reminder Try not to replete your previous review of finance and partial budgeting – should be a reminder

6. 6 My Main Message Learn to do your own numbers Learn to do your own numbers Use spreadsheets Use spreadsheets Veterinarians often miss opportunities to communicate because they don’t use economics to show producers practices are profitable. Veterinarians often miss opportunities to communicate because they don’t use economics to show producers practices are profitable. Your poor or non existing written reports means your numbers do not talk to owners Your poor or non existing written reports means your numbers do not talk to owners

7. 7 Things I Dislike Misuse of financial and economic terminology that gives misleading information – always overstates performance Misuse of financial and economic terminology that gives misleading information – always overstates performance Terminology – cash profit, breakevens Terminology – cash profit, breakevens Misuse of the term profit Misuse of the term profit No sector misuses finance and economic terminology worst than the cow-calf sector No sector misuses finance and economic terminology worst than the cow-calf sector

8. 8 Starting the Process - Numbers 1. What are the main financial objectives of the owner? – smart goals – measurable & realistic. 2. What is the current financial and production status of the business? 3. What are the different alternatives to accomplish the goals? 4. What are the main constraints?

9. 9 Most Communications Fail Incomplete answers to 4 questions Incomplete answers to 4 questions Misguided or incomplete analysis Misguided or incomplete analysis Needs to fit audience level Needs to fit audience level Professionals often out smart themselves Professionals often out smart themselves Failure on professional’s part – willing to give answers without full information Failure on professional’s part – willing to give answers without full information

10. Rancher’s Numbers Need to present the production numbers with the finance numbers. They need confidence in the production numbers before they believe the finance numbers. Integrated numbers – I know they are right Production numbers are more stable than finance numbers.

11. 11 Cost and Profit Information Can Be Useful Reduce cost and look at alternatives Reduce cost and look at alternatives “What if” analysis “What if” analysis Investment decisions – operating capital Investment decisions – operating capital Retained ownership Retained ownership Leasing arrangements Leasing arrangements Measurement is part of management Measurement is part of management

12. 12 Big 5 “F” Costs 1. Fuel 2. Feed 3. Fertilizer 4. Family – often left off list 5. Finance

13. 13 Alternatives to Numbers Opinions and talk – dominate in cattle industry Opinions and talk – dominate in cattle industry Emotions – hide from financial realty Emotions – hide from financial realty Published numbers have real limitations Published numbers have real limitations Being profitable at the cow-calf level is difficult – operating earnings. Being profitable at the cow-calf level is difficult – operating earnings. Not many in the sector like to work with numbers. Few analyst. Not many in the sector like to work with numbers. Few analyst. Message do you own numbers - know what they mean and limitations Message do you own numbers - know what they mean and limitations

14. 14 Terminology – Big Issue Financial Profit – Net Income – Recall the financial statement or P&L Financial Profit – Net Income – Recall the financial statement or P&L Economic Profit – Uses Opportunity cost on all resources – land, capital, labor & Management. Economic Profit – Uses Opportunity cost on all resources – land, capital, labor & Management. Cash profit is not a financial term! It’s a misuse of the profit term. Cash profit is not a financial term! It’s a misuse of the profit term. Cash margin is a better term Cash margin is a better term

15. Business Profitability You can have a business that is not profitable but frequently find changes that are profitable – cost effective. The added returns are greater than added cost. You can have a business that is not profitable but frequently find changes that are profitable – cost effective. The added returns are greater than added cost. This should be a focus of attention This should be a focus of attention Reducing losses is increasing profit! Reducing losses is increasing profit!

16. 16 Depreciation is a Real Cost You don’t write a check for depreciation –non- cash cost. You don’t write a check for depreciation –non- cash cost. Allocation of a capital asset cost over its economic life – vehicles, machinery & equipment and breeding stock. Allocation of a capital asset cost over its economic life – vehicles, machinery & equipment and breeding stock. Has to be calculated because IRS reports do not provide the values needed. Has to be calculated because IRS reports do not provide the values needed.

17. 17 Ranchers Work For Nothing Labor and management compensation Labor and management compensation Family living withdrawals Family living withdrawals Goes back to IRS sole proprietorship Goes back to IRS sole proprietorship Corporations pay salaries and payroll as part of operating expenses Corporations pay salaries and payroll as part of operating expenses

18. 18 Most Cost Analysis do Not Include Any compensation for owner operator labor and management or payroll expenses – social security etc. Any compensation for owner operator labor and management or payroll expenses – social security etc. IL Farmers $60,000 a year. IL Farmers $60,000 a year. If you provide an owner numbers – include his compensation – support the family! If you provide an owner numbers – include his compensation – support the family! General & Administrative or overhead are frequently underestimated General & Administrative or overhead are frequently underestimated

19. If You Want Actual Costs and Returns You have go the business financial statement or Profit & Loss statement You have go the business financial statement or Profit & Loss statement Need an accrual adjusted statement Need an accrual adjusted statement Reconcile cash flow and you will see family living withdrawals Reconcile cash flow and you will see family living withdrawals I like QuickBooks™ I like QuickBooks™ Finance part of SPA takes the least time Finance part of SPA takes the least time

20. 20 Published Cow-Calf Cost Data Table 1. Table 1. Land Grant Universities – short on overhead & labor and management. Land Grant Universities – short on overhead & labor and management. Cattle Fax and Drovers Cattle Fax and Drovers Texas SPA Texas SPA You need to know what your are reading You need to know what your are reading I doubt that underreporting cost serves the industry well. I doubt that underreporting cost serves the industry well.

21. 21 Other Topics of Importance Appreciation of land – land rich and cash poor. Appreciation of land – land rich and cash poor. Never high economic profit – opportunity cost of land – lease Never high economic profit – opportunity cost of land – lease Incomplete data and projecting herd expansion or contraction. Incomplete data and projecting herd expansion or contraction. Small cow herds – opportunity for full service for vets. Small cow herds – opportunity for full service for vets.

22. 22 Using SPA- What we Have Learned Look over reports – recall historical cost data is of limited use Look over reports – recall historical cost data is of limited use There are enormous opportunities for improvement. Big 5 F ! There are enormous opportunities for improvement. Big 5 F ! What gets measured gets managed. What gets measured gets managed. Execution is under valued Execution is under valued

23. Top Managers Do the right things Do the right things Get things done right – though capable and motivated people Get things done right – though capable and motivated people Get things done on time Get things done on time Are good analyst – good analyst demand good data and information! Are good analyst – good analyst demand good data and information!

24. 24 Message With quality numbers you can let the numbers do talking. With quality numbers you can let the numbers do talking. Be informed about the situation and write one page summary. Be informed about the situation and write one page summary. Put details but don’t force owner to read them. Put details but don’t force owner to read them.

25. 25 Appendix A – Check It Out Cost Terminology and Use for Decision-making Cost Terminology and Use for Decision-making Using cost to reduce cost Using cost to reduce cost Always include labor – extra effort required Always include labor – extra effort required Its about management & Execution Its about management & Execution

26. Expect Some Frustration - P roducer Attitudes Financial – the need for change is the motivator Financial – the need for change is the motivator Lack of production response data Lack of production response data Management – execution of the plan Management – execution of the plan

27. 27 Addressing Your SPA Questions

28. 28 Decision Aids Nebraska Cattle Budgets Nebraska Cattle Budgets IRS- Cow-Calf IRS- Cow-Calf Herd Bull – investment versus cost Herd Bull – investment versus cost Cow-bidder – how much can you pay Cow-bidder – how much can you pay Vehicle cost – if you have questions Vehicle cost – if you have questions Health economics – margin above cost Health economics – margin above cost

29. 29 Components of a Business Plan – Wish I Could See Written Plans Present situation – resources –financials and performance Present situation – resources –financials and performance Objectives and Goals Objectives and Goals Management and Personnel Management and Personnel Product and services Product and services Marketing Marketing Financial projections Financial projections Implementation plan Implementation plan

30. With Quality Numbers Your can let the numbers do the talking Your can let the numbers do the talking Find Cost Effective or profitable opportunities Find Cost Effective or profitable opportunities Under reporting cost and over stating performance does not serve the industry’s needs Under reporting cost and over stating performance does not serve the industry’s needs Producers manage what is measured Producers manage what is measured