What Is Sweat Worth? By Dave Pratt, owner of Ranch Management Consultants
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:
Most people blame things beyond our control like the weather, government regulation, low commodity prices and increasing costs for their failure to make a healthy profit. These are the things most often discussed at producer meetings and in the coffee shop. These are also things we can do little about. Making them the scapegoats for poor performance makes it easy to absolve ourselves of responsibility. But if prices, costs, weather and regulation really determine profit or loss, why do some businesses survive, even thrive, in these conditions while others fail? Depressed markets are a crisis for some but a profitable opportunity for others. It is not the situation, but the decisions we make that determine success or failure.
According to the US Small Business Administration, most new businesses fail. Fewer than 10% survive to see their 10th year. In his best-selling book, The E-myth Revisited, Michael Gerber points to an exception. He says that 97% of new franchises survive beyond 10 years. Why the difference? Simply put, franchises have a clear-cut blueprint on how to run a business. McDonalds doesn’t succeed because they make the best hamburgers or because they hire the smartest, talented people to work behind the counter. Over the years they have achieved economies of scale and have a lot of clout when it comes to negotiating lower costs with their suppliers. But they wouldn’t have been in the position to do that if they hadn’t built a business that actually works. They didn’t grow first and then figure it out. They figured it out and then they grew.
As Gerber puts it, they worked on the business (WOTB) to build a business that actually works. We are so busy working in the businesses (WITB) doing $10/hour jobs that we often don’t ever get around to working on our businesses (the $100/hour work). This is the work that determines the winners and the losers in any business…including yours. More than genetics, prices, weather or any other factor, it is this issue that separates the men (and women) from the boys
(and girls) in ranching.
Our ranches suffer economically, financially and ecologically when WOTB takes a back seat to WITB. Our failure to effectively work on our businesses is the single biggest reason that most ranches aren’t profitable and that most ranches don’t survive generational succession with their land or family intact.
It doesn’t have to be this way. Ranching can make a healthy profit, thrive ecologically, stay in the family indefinitely and be the stimulus for revitalizing rural communities. You put your ranch on the path to achieve these results when you put the shovel down and pick up the pencil … when you start working on it, not just in it.
I’ve heard some complain that they don’t like working on their business. I wonder if the real problem is that they don’t know how to work on it. Previous generations may have been able to get by without WOTB when land values were cheaper and their ranch had only been split once by a generational transfer. But times and conditions have changed. What passed for management then, doesn’t pass muster now.
Score yourself to see how effectively you are working on your business:
Scoring: 0 = I have not addressed this issue
5 = I have addressed the issue but have more work to do
10 = This describes my business.
If you scored more than 70, congratulations! You probably have a healthy business with a promising future. If you scored 40 to 70, you’ll be feeling the pinch but will probably continue to get by with off-farm income subsidizing the place … at least until it comes time to pass the ranch on to the next generation. If you scored less than 40, you might want to think about going to work as a cowboy for someone else. If you want a good job, I suggest you hire on with someone who scored more than 60. He’s the one who’s Ranching For Profit.
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.
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.
Whether you choose computer software or a pencil and notebook, start this year taking control of your finances.
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.
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.
There seems to be a resurgence of retirees wanting to get back to a ‘simple’ life of growing their own garden and/or raising their own animals for food, milk, and/or fiber. Interestingly, it also seems to attract the young set as well with high hopes of being self-sufficient on the land. Nothing wrong with those ideals, but our American culture and requirements are different than what they were 100 or even 50-60 years ago. Many of our expenses are out of our control (health insurance, liability insurance, our reliance on electricity, phones, internet, medical expenses are out of sight, vehicles, petrol, etc, etc), so the ‘farm’ whether it is a hobby size or much larger needs to not only cover these expenses, but operating expenses as well. In other words, one must turn a profit to be sustainable. Don’t forget that ‘simple’ certainly does not mean easy.
I’ve blogged on this before, but one thing that is a killer to many striking out in an agrarian lifestyle is to get FAR TOO MANY irons in the fire. Focus on what you like to do and that which will also turn a profit quickly. After you become financially successful as to being out of debt and putting away a bit of savings, find other ‘holons‘ which will complement or add value to the core activity. Don’t be distracted by get-rich schemes – they do not exist in agriculture. If you have a town job – hang on to it until the farm is a going concern. Doing both is hard – no doubt – but staying out of debt is tantamount to being successful.
This type of operation is typically termed ‘holistically managed’ and there are resources to help you determine a course of action. Our first introduction to this type of thinking was through Holistic Management Resources now known as HMI, Holistic Management International. This link will take you directly to some free downloadable planning tools and and teaching materials. Allan Savory and his wife, Jody Butterfield, started HMI, but have now moved on to start a new organisation called Savory Institute. The Savory Institute website has numerous videos and papers for your perusal.
Marketing – where will you sell your product?
Equipment – how much will the initial investment be? How often will it be used? Does it have multiple uses? How can you make money with what you already own? If there is equipment you don’t use, consider selling it.
Time – when will the cash start flowing back to you?
Weather – Ag enterprises look so easy on paper, but consider that you have no control over the weather and inclement extremes can bring diseases in both plants and animals as well as drought and flooding, damaging hail can destroy thousands of acres of crops in just minutes. Be prepared, both financially and mentally, for complete failures and steep market price declines.
Government – you also have no control over government policies as it picks winners and losers.
Don’t spread yourself out to a lot of enterprises – especially those that are not related – you’ll be exhausted all the time and seldom see a financial reward. Also try to purchase multi-purpose equipment.
Learn from others’ failures, mistakes, and accomplishments. Your situation may be different, but there is no use setting up the same hurdles others have taken down. Some practices simply DO NOT WORK in some or all locales and situations.
Hindsight, of course, is much clearer as to making business decisions, but there are basic principles to be followed.
What is your dream job/career/life? And how are you moving towards it? Have you already experienced your dream job and found it wanting? Why?
Here is another thought from Burke Teichert, a man whom I’ve yet to meet, who has words of wisdom and experience worth pondering taken from his column “Strategic Planning for the Ranch” in Beef magazine” Although, this one seems a no-brainer and has been promoted and taught by the late Dr Dick Diven, very few of us have embraced the concept.
Calve In Sync with Nature
“This may do more to reduce cost and increase profit than any other one thing.”
We switched to late spring/early summer calving back in the late 90’s after attending one of Dr Diven’s Low Cost Cow Calf 3-day schools. Quality of life for both man and beast shot through the roof!