Tag Archives: assets

Tradition vs Innovation Paradox

Another great blog from Ranch Management Consultants (Ranching for Profit).  If what you are doing regularly is only a tradition – start questioning why you continue and if the practice is still effective for today’s economy, whether for your home or business.

sunset cowboyAgriculture is steeped in tradition. These traditions serve as a source of pride and continuity which help make us who we are in agriculture. However, these same traditions create a paradox of sorts when it comes to managing the business of ranching. Balancing respect for traditions and fostering innovation can be tricky to navigate. Another complicating factor in ranching is that business leadership is often slower to transition than most. Generally this is because the decision making is in the hands of a generation that would have retired 10-20 years ago in any other industry. This generation is often making decisions from a place of risk minimization … rightly so from their perspective. However, when Junior is wanting to expand the business to support a growing family this can pit two very different business strategies against each other which often creates conflict on the family ranch.

I think there are some traditions on a ranch that need to be challenged to position the ranch to be successful in the coming decades. Each operation will need to find its own balance between tradition and innovation. Having clear goals will help determine the appropriate balance of risk management and growth strategy for the business.

Below is a short list of common ranch traditions that I suggest you look at and examine why you are doing what you are doing, then put some numbers to what it might look like if you did things differently. I’m certainly not suggesting everyone must change these traditions but have a discussion with your team about the pros and cons of staying the same or changing.

  • Grazing management
    I see far too many ranches where tradition determines the grazing plan rather than good planning. Effective grazing management is one of the most powerful economic levers you can pull. Does each pasture get adequate rest for plant recovery after every grazing? Are your animals in a pasture long enough to allow a second bite? I have never visited a ranch that couldn’t improve their grazing which would allow the ranch to increase carrying capacity, often as much as doubling historic stocking rates, while still improving the condition of the land. Often the driving force for not improving grazing practices involve hanging on to old traditions. Many equate better grazing with more fences or more work. Neither of these must be true.
  • Needing lots of stuff to ranch
    Here is an interesting thought experiment. Make a list of every piece of equipment on the ranch and what it would be worth if sold today. Total up the dollars and now pretend you have that money as cash in your hand and you have no equipment. Paint a picture in your mind of the type of business you want to build. Now, ask the question, “How would we best deploy the capital we now have to create the business we want?” Would you spend it all or save some for a cushion? When times are good on the ranch, we often fall into the trap of upgrading tools that make our lives easier. It is very difficult to go backwards in creature comforts once we step forward. However, from the numbers I’ve seen it is the rare piece of equipment that creates more cash flow than it costs in depreciation and repairs. Tradition might lead us to believe that we need all this stuff to ranch, but economics might be telling us that all this stuff is part of what makes ranching so financially difficult.
  • We should be running cows
    But we have always run cows! What is the purpose of your ranch? Is it to create opportunities for owners to do the things they enjoy or is it to create cash flow and profit to support the owners and provide opportunities for others? Might these two things be in contrast? I’m not saying you can’t run cows and be profitable, but often I observe ranchers who see no other alternative to the current enterprise structure on the ranch. I also don’t believe it is a problem if ownership sees the ranch as a place to allow them to do the things they enjoy – such as running cows. I do see a conflict when the ranch isn’t creating the outcomes required and people are unwilling to look beyond traditional enterprises. Might it be that the ranch could be an even more enjoyable place if it were highly profitable?

Following that line of thought, what other traditions should be challenged on your ranch? Which traditions must be held on to? There are some traditions that are core to who we are, let’s be sure we don’t jeopardize those in pursuit of profit. Balancing the paradox of tradition and innovation is part of what makes this business so interesting.

When Assets Become Liabilities

 

When Assets Become Liabilities

 

by Dave Pratt

Look up the definition of asset in Webster and it’ll tell you an asset is “anything owned that has value.” But Webster has it wrong.  If I put a down payment on a ranch, financing the balance, the full value of the land shows up in the asset column of my balance sheet, but I don’t own the whole ranch. The bank probably owns more of it than I do. No, an asset isn’t necessarily something you own. An asset is something you have. Your net worth (Assets-Liabilities) is what you actually own.

Although your banker would disagree, there is a completely different way to define assets. In his best seller, Rich Dad, Poor Dad, Robert Kiyosaki defines assets as “things that put money in your pocket” and liabilities as “things that take money out of your pocket.” Between monthly principle payments, interest, insurance, maintenance and repairs, most of the things your banker calls assets are, according to Kiyosaki, really liabilities.

Ironically, the fancy cars and homes that we see as the trappings of wealth are actually huge constraints to generating wealth. That doesn’t mean we can’t enjoy the finer things in life, but until we build a wealth generating machine as our foundation, buying “liabilities” will slow, and may block, our ability to create wealth.

There is an even bigger problem with assets.

In the final chapter of his wonderful book, Nourishment, Fred Provenza writes about taking a sabbatical to Australia with his family. To finance the trip he needed to sell their home in Utah. He explains that he didn’t build the house himself, but had done a lot of work on it and had “a lot of skin in the game.” Unfortunately, at the time of the sale the housing market was very depressed and, while they got their investment back, they didn’t get much more. Between the time of the sale and their trip to Australia, they rented a smaller house Fred called “the dump.” At first he was resentful of having to give up owning his “castle.” But after a couple of weeks in the dump he began to realize that he hadn’t owned the house he’d helped build. He explained,  “It owned me.” It owned him financially, requiring huge monthly payments. Even after the sale, it owned him emotionally.

Assets can clutter our space and minds, causing distractions and stress. They make it more difficult to clean and organize. They tie us down. The biggest constraint to moving for some of us is the burden of taking all of our stuff with us.

The things we own trap us. I recently had lunch with a couple who’d been ranching for about 10 years. They both worked off-farm to make ends meet. Over the last several years they’d bought a small place, secured several leases, and built up a herd of a couple hundred cows. But now, with a young family, significant debt and the off-farm jobs, they seemed stuck.

After subtracting the liabilities from their “assets” their net worth came to $1,300,000. On the back of a napkin I wrote them a “check” for $1.3 million and asked them, “If you had nothing but this check and the clothes on your back, and still wanted to achieve your dream, would you use this money to recreate the situation you are in? If not, how would you deploy this money to accelerate progress toward your dream?”

Their expression changed almost immediately. While they’d made progress over the last 10 years, the business they created was going to make it difficult if not impossible to achieve their dream.  Rather than a stepping stone, their operation had become an obstacle to further progress. They set out to use the wealth they’d created to change their course.

I went through the identical exercise with another couple whose net worth was closer to $3 million. When I asked if they would recreate the situation they were in, they immediately and in unison said, “No.” But, when I met with them again a year later, they hadn’t changed anything and resigned themselves to “staying the course.” Rather than using the assets they owned to create the lives they dreamed of, they were owned by their assets, which they used as an excuse to stay stuck. Chuck Palahniuk, author of Fight Club, described it perfectly when he wrote, “The things you own end up owning you. It’s only after you lose everything that you’re free to do anything.”

Listen to New England Executive Link member, Pat McNiff, explain the cost of keeping assets and the process they used to determine what they needed to keep and what to discard or sell.

4 Responses to “When Assets Become Liabilities”

March 27, 2019 at 2:31 amjames coffelt said:

I believe a personal financial statement is the best tool to measure wealth creation. It considers cattle and land appreciation. Update it twice per year, every bank has one. We measure the wealth creation relative to equity. We further measure the wealth creation against the 8% we can average in the stock market, passively.

Reply

March 27, 2019 at 10:11 am, Roger Ingram said:

Excellent article and video. Should be required reading and viewing for all chapters!

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March 28, 2019 at 1:48 pm, Keith said:

Good article, wouldn’t mind to be receiving such every now and then

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March 28, 2019 at 2:03 pm, Richard Smart said:

Please remember to deduct the tax man’s share when calculating what liquidating your assets will yield.

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The Road Ahead

Reprinted in part from Farm Journal, December 2015.

Reassess, Dump Loser Assets

Smart farmers will survive the challenges that arise in 2016.  Just as they’ve done in the past, they’ll reassess their spending and recognize cash is king.  I also recommend the following:

Understand true cost of production.  Account for every dollar.  It’s how you’ll quantify whether you’re headed for profit, loss, or breakeven.  Don’t overlook your true living expenses, including what you set aside for college and retirement.  “Tis the year for living frugally.

Scrutinize every line item in your budget.  It’s the only way you can stop haemorrhaging cash and become leaner.  Is there a way to cut your overall costs?  I challenge you to cut all expenses by 1%.  It might seem small, but I’ve witnessed this exercise lead to six-figure savings.  Question input costs and negotiate with suppliers.

Be sure to liquidate all non-productive assets.  You can generate thousands of dollars by selling losers.

Stay in contact with your lender.  They realise down cycles occur.  The last thing you want to do in tough times is cut them off.

article by Peter Martin, Finance & Growth Expert, Farm Journal magazine.

My comments:  Just because an asset is no longer working in your operation, doesn’t necessarily mean it’s a ‘loser’ for everyone.  Sometimes our goals change and someone else needs exactly what we no longer need.  Of course, if the asset is junk,  be sure to sell it that way.