Tag Archives: RMC

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.

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

A Great Place To Raise A Family by Dave Pratt

Dave Pratt, owner of Ranch Management Consultants (formerly known as Ranching for Profit) hits it on the head again with another great blog entry.  Although his niche is specifically ranching, the ideas he shares are often for any business.

 

Home > A Great Place To Raise A Family

A Great Place To Raise A Family

I occasionally lead workshops I call Hard Work and Harmony: Effective Relationships In Family Businesses. In it I like to ask participants to explain to the person next to them why they ranch.  Some say they love being their own boss, or love working outdoors and with livestock. Almost all of them say something about loving the lifestyle. Near the top of most people’s lists is, “It’s a great place to raise a family.”

I agree. I grew up on a small place. The biology lessons I learned from tending livestock were more influential than any I ever had in a classroom.  I learned other lessons too. I learned how to work hard and how to be resourceful. But it wasn’t just about work. Our place was a great setting for any adventure my imagination could conjure up. My mom sold it when I was in college and it just about broke my heart.

A ranch can be a great place to raise a family, but it isn’t always. I worked with a rancher shortly after my son, Jack, was born.  When we broke for lunch he asked about my new baby. I told him that when they placed Jack in Kathy’s arms for the first time, I could hardly see him for the tears of joy streaming down my face.  Tears welled up in his eyes too, but they weren’t tears of joy. Trying to hold back a flood of emotion, he told me how he had worked sun up to sun down to build a place “for the generations to come.”  He said that he hadn’t been as involved in his children’s lives as he should have been. As we sat on the hill, he told me that now he rarely hears from his adult children, who want no part of the ranch. A ranch can be a great place to raise a family, but it is not a substitute for our active involvement in family life.

Many ranchers are addicted to work. I’ll bet you’ve even heard some of your colleagues brag about how long and hard they work, proudly proclaiming things like, “I haven’t taken a vacation in 20 years.” They say it as though it is something to be proud of.  When I hear things like that I shake my head wondering, “Are things that bad?” You can’t run a sustainable business on unsustainable effort.

Intentional or not, work can become an excuse to avoid working through the issues every healthy family faces at one point or another.  When work consistently takes precedence over family needs, we set ourselves and our families up for trouble. Engaging in what may be uncomfortable conversations when issues first come up can keep them from growing into big problems.

In the last few months I’ve met a number of people who are learning that lesson the hard way. After decades of avoiding uncomfortable family issues they are facing extremely difficult challenges regarding succession.  Now, without any experience working with one another to resolve small issues, they are hoping to work through the most difficult challenges many of us will ever face. The conversations are made even more difficult because of the hurts that have gone untended and the resentments that have grown from not taking care of the family in the family business.   It’s a tough way to learn that success has more to do with healthy relationships than with conception rates and balance sheets.

I don’t mean to suggest that the physically demanding work that ranches require can be ignored, but it doesn’t have to be all consuming. Many Ranching For Profit School alumni have discovered that the ranch was all consuming only because they allowed it to be that way. After the school they restructured the business to increase profit and liberate their time to put more life in their work/life balance. They still work as hard as anyone, just not as long. Their ranches are great places to raise their families, andthey actually take the time and make the effort to be directly involved in raising them.

To hear how one RFP alumnus decreased the work required to run their ranch while increasing profit and improving their quality of life, click here.