Tag Archives: Income

What Is Sweat Worth?

What Is Sweat Worth?  By Dave Pratt, owner of Ranch Management Consultants

 

What is Sweat Worth?

by Dave Pratt

Most family ranches are subsidized with free, or underpaid, family labor. Sometimes the difference between what family members get and what it would cost to hire someone else to do the work they do is made up with the promise or expectation of sweat equity. But sweat is not a recognized form of currency and people counting on sweat equity usually have a grossly exaggerated idea of what their sweat is worth. This often leads to serious disagreement and disappointment.

If you are going to count on sweat equity and want to avoid the inevitable misunderstandings that happen when it comes time to cash in on your sweat, then you’d better start actually counting it. How many hours? For how many years? At what rate of pay? With what interest on the unpaid balance?

I mentioned the perils of relying on sweat equity in a workshop recently. I suggested we stop using the term sweat equity and call it what it really is, “deferred wages.” My comments apparently struck a nerve with one 30-something rancher. He approached me after the program and asked if I could help him calculate what his sweat was actually worth. He said that he’d come back to the family ranch after college 10 years earlier. He’d been drawing a low wage and banking on sweat equity. As is usually the case in family ranches, there was no formal agreement documenting exactly what his sweat was worth.

He was being paid $25,000 a year, but his compensation package included a nice home, a vehicle and insurance for his family. All-in-all a compensation package worth well over $50,000. “Maybe I’m not as underpaid a I thought I was,” he said.

I suspect that he was probably being underpaid somewhere between $10,000 to $20,000 a year. I showed him that for every $10,000 he’d been underpaid, he earned 0.1% equity in his family’s $10,000,000 ranch.

($10,000 ÷ $10,000,000) x 100 = 0.1%

I showed him that over the previous 10 years, compounding interest at a rate of 3.5%, he’d earned a whopping 1.2% equity stake in the ranch. Like a lot of young ranchers returning home, he hadn’t ever thought about how much his sweat was worth but had assumed that it would add up to a lot more than that.

Sometimes sweat equity isn’t just about compensating someone for the work they do. It’s about acknowledging the sacrifices someone may have made, foregoing other opportunities to come back to the ranch to support the family. If there are several kids in your family, but only one has invested time and energy working on the place and has shown a desire to continue the business, it may be fair to give them an equity position.  After-all, as succession planning advisor Don Jonovic points out, fair doesn’t necessarily mean equal.

But whether sweat equity is a substitute for a paycheck or acknowledging a sacrifice, we need to be clear about what we are compensating and its value. We need to convert assumptions and expectations into agreements. We need to figure out what our labor is worth (the topic of the last ProfitTips column). We need to document the value of our sweat while we are still sweating.

For more on documenting the value of sweat equity watch the video below:

What is Sweat Worth? youtube video

Ranching for Profit

I always chuckle a bit when i type out ‘ranching for profit’ because it’s almost an oxymoron!  Yet, David Pratt, owner of Ranch Management Consultants and Ranching for Profit instructor, contends that there is such a beast if we ranchers use sound financial and economic principles.

Mr Pratt’s most recent blog discusses using debt properly.  Now, okay, my mind goes immediately to the song, ‘Neither a borrower, nor a lender be.  Do not forget, stay out of debt.’  Which then led me to wonder where that came from.  I knew it was from Shakespeare’s ‘Hamlet’ (Polonius counsels his son, Laertes in Act-I, Scene-III of William Shakespeare’s play, Hamlet by saying, “Neither a borrower nor a lender be; / For loan oft loses both itself and friend.”  But what about the tune?

Completely surprised when i discovered that it was created and made famous on the TV sitcom, Gilligan’s Island, which i watched religiously when i was young.  SO FUNNY!  It is sung to the tune of the Toreador Song in Bizet’s Carmen.

The Bible also has advice on debt and teaches us to guard against being in debt, likening it to slavery and bondage.  However, debt does not seem to be a sin, but a tool to earn money wisely, but counting the cost before taking on the burden.

May 9, 2018
ProfitTips
from the Ranching for Profit School
A lot of people tell me that they want to be “debt free.” They are tired of making big interest payments on land, livestock, machinery and their operating note. They have had too many sleepless nights worrying about making the next payment. They believe that if they didn’t have to borrow money they would be more profitable and financially secure.
But the proper use of debt makes us more profitable, not less. And being debt free doesn’t make us financially secure. In fact, for most of us, short of winning the lottery, the appropriate use of debt is our only realistic path to financial security.
The problem isn’t debt, it’s our misuse of debt. The two most common ways we misuse debt are:
  1. We put finance first and economics a distant second
  2. We use debt on the wrong things.
Using debt effectively begins with understanding the difference between economics and finance. It boils down to this: In economics we ask, “Is this profitable?” In finance we ask, “Can I afford to do it?” If we are going to be smart about our use of debt, economics must come first. If it isn’t profitable you don’t have to worry about how you’ll pay for it, because you shouldn’t do it in the first place.
Smart Debt
Economics vs Finance
When RFP grads evaluate the profitability of a livestock enterprise they include opportunity interest on the herd as a direct cost in the calculation. If the enterprise has a healthy gross margin it tells us that borrowing money to expand the herd will increase profit. If we haven’t included opportunity interest in our calculation we can’t be sure if expanding the herd is a good idea.
Opportunity Costs
The other problem is that people use debt on the wrong things. There are two primary places where we put money in our businesses: fixed assets and working capital. Simply put, fixed assets are things we intend to keep (e.g. land, cows, infrastructure, vehicles, equipment). Working capital is the money tied up in things we intend to sell (e.g. calves). Most of us have most of our money invested in fixed assets. This is the biggest financial problem in agriculture. It’s a problem because when most of our money is tied up in things we intend to keep, we have relatively little to sell and generate very little income relative to the value of our assets. Making matters worse, a lot of the income that we do create gets spent maintaining the fixed assets. That’s why most ranchers are wealthy on their balance sheet and broke in their bank account.
Borrowing to buy fixed assets may be a smart long-term investment strategy, but it might cause you to go belly-up in the short term. We’d be better off to use debt to buy assets that directly produce income.
We shouldn’t be afraid to borrow money, provided the economics of our enterprise is rock-solid and we use the borrowed money to buy income producing assets.
2018 – 2019 School Schedule
Sept. 9-15, 2018
Boise, ID
at Holiday Inn Express
Dec. 2-8, 2018
Abilene, TX
at MCM Elegante Suites
Jan. 6-12, 2019
Colorado Springs, CO
at Radisson
Jan. 13-19, 2019
Billings, MT
at Billings Hotel
Jan. 20-26, 2019
Rapid City, SD
at Best Western Ramkota

Making Investments vs Creating a Job

Economic definitions:

Investment – an investment is the purchase of goods that are not consumed today but are used in the future to create wealth.  to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.

Job – a paid position of regular employment.  a piece of work, especially a specific task done as part of the routine of one’s occupation or for an agreed price. Everyone has goals in life – some will involve being financially secure.  If you are interested in building financial wealth, there are a few basic premises which need to be incorporated into your plans.

1) Your saved dollars must be put to work!

2) Break free from the bondage of financial slavery by changing your spending habits

3) Invest in yourself – education or your own business

4) Learn to manage the money you do have – more money will not necessarily fix your financial problems

5) Debt is a hard task master – avoid it!

6) Use your income from a paid job to make investments that will gain in value while you continue your paid job.  Later you can retire from your job and enjoy your investments.

Many, many economic experts have different ideas about how to invest, so it’s up to you to decide who or what you want to invest in.

Dave Ramsey Investing Philosophy

How to Become Wealthy  – Nine Truths that can Set You on the Path to Financial Freedom

Rich Dad/Poor Dad – Dave Pratt, Ranching for Profit newsletter

Shabbat Shalom!

tauna

Keeping Records

Yeah, i’ve harped before about keeping good records and tracking expenditures and income, but when i hear the same people complain about having no money to pay bills, yet when asked if they keep records, they say ‘no,’ it causes me to wonder if they just want to complain, don’t have any idea of where their money is being spent, or perhaps don’t want to know.  But, like anything, if one doesn’t make improvements, then you’ll always be able to complain about something and that is stressful.

Here’s a short article i stumbled upon.  “Make a Personal Budget and Keep Track of Spending

It’s imperative and so easy to keep track of expenses.  Most can simply use a notebook and pencil.  Even easier is to have a calculator in the mix. (Coffee optional)  Write down the amount or ask for a receipt when you stop by the coffeeshop for a latte.  Picking up a soda from a vending machine – well, you’ll have to write it down.  Whatever you need to do, keep track of even the smallest expenditure and categorise it.  THEN, you can make decisions to change and improve your financial situations.  Reimburse your cash expenditures by writing a check to maintain your petty cash stash.  Sure, you can take cash out of your paycheck each month, but it makes it more real when you have to write a check.  Keep your petty cash in balance.

This can be applied to businesses as well, but managing one’s household and personal expenses is the first step.  Personal finance record keeping should begin in the preteen years – as soon as you earn or spend money.

Cheers!

tauna

Farm Finance

Every business or family finances have some unique components that you must determine to help your business or home run smoothly.  However, there are some very basic tools that apply to all.

  1. Bookkeeping-every family and small business should employ bookkeeping principles.  These will include records by account, labor costs, profit and loss (income statement), working capital, balance sheet, debt-to-asset ratios.
  2. Use a double-entry system to keep track of where your money is spent.
  3. Set up basic accounts, these may need sub accounts depending on your company, but here are 10 basic ones:  sales, expenses, payroll, and retained earnings for your income statement and cash, accounts payable, accounts receivable, notes payable, inventory, and owner’s equity for your balance sheet.

 

Most of us have taken basic bookkeeping in high school and so already have the foundation for setting up appicable accounts for our own families and businesses.  The stumbling block is actually doing it!  If you wonder where all your money is at the end of the month or year or complain about the lack of funds, then it’s time to make a resolution and commitment to keeping track of where your money goes. This especially includes all those little cash purchases; coffee, candy bar, water bottle, etc.  Remember, too, you don’t have to buy software to do this.  For millenia, record keeping has been done with pen and paper.  However,  if computer software will encourage you to move forward, I think there are some very reasonably priced packages out there.  Many you may be able to try out for free for a short time.

Here’s a budget helper that seems to be free, but i don’t know anything about is.  It is Dave Ramsey’s EveryDollar free budgeting tool.  Plus Dave Ramsey has a bunch of free tools available.

Whether you choose computer software or a pencil and notebook, start this year taking control of your finances.

Cheers!

tauna

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.

 

Rural North Missouri

“Planning and strategizing are OK, but most of life is in the trenches. It’s just a lot of hard work, commitment and you’re never done.”   Tina Reichert, Brunswick, Missouri

Rural Missouri County Among Best Places To Grow Up For Future Income Growth

AUG 5, 2015
Brunswick street
Downtown Brunswick, Missouri