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

1. Jim McGrannRanch Management EconomistProfessor Emeritus Texas A&M University

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

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

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

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

6. My Main Message Learn to do your own numbers Use spreadsheets 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

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

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

9. Most Communications Fail Incomplete answers to 4 questions Misguided or incomplete analysis Needs to fit audience level Professionals often out smart themselves 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. Cost and Profit Information Can Be Useful Reduce cost and look at alternatives “What if” analysis Investment decisions – operating capital Retained ownership Leasing arrangements Measurement is part of management

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

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

14. Terminology – Big Issue Financial Profit – Net Income – Recall the financial statement or P&L 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 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. • This should be a focus of attention • Reducing losses is increasing profit!

16. Depreciation is a Real 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. Has to be calculated because IRS reports do not provide the values needed.

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

18. Most Cost Analysis do Not Include Any compensation for owner operator labor and management or payroll expenses – social security etc. IL Farmers $60,000 a year. If you provide an owner numbers – include his compensation – support the family! 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 • Need an accrual adjusted statement • Reconcile cash flow and you will see family living withdrawals • I like QuickBooks™ • Finance part of SPA takes the least time

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

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

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

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

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

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

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

27. Addressing Your SPA Questions

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

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

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