You are here
Expect a profit
Improving profitability could be as simple as changing expectations. In short, expecting a year-end profit is the first step in achieving it.
This mind-over-matter approach draws raised eyebrows from Roland Kroos’ listeners. Kroos, a longtime holistic management certified educator and consultant from Bozeman, Montana, has seen farmers and ranchers come from the brink of bankruptcy to profitability by letting management practices flow from changed expectations.
“The first step, of course, is making sure the products you produce are indeed marketable and stand a good chance of being profitable,” he says. “Then, despite variances in price and weather, take responsibility for profitability and resist the temptation to let cost expenditures rise to the expected level of production.”
Letting costs cancel out income is the core cause of unprofitability, claims Kroos. He maintains that it figures more strongly than price or weather in determining year-end profit.
Yet the tendency to overspend is deeply entrenched in human nature, he says. It harks back to the very origins of business transactions. As a teaching tool, he cites a book titled The Richest Man in Babylon. The author uses historical documents to describe the business foibles of camel trading in 300 B.C.
Spending to the level of production in a year when camel production unexpectedly drops puts the trader’s business in a downward financial spiral from which he can barely recover.
“This camel trader started to barter camels that hadn’t been born yet,” says Kroos. “Not that different from today when ranchers are expecting X number of calves to be born or when farmers are anticipating producing X number of bushels of grain.”
This pattern of behavior can lead to financial problems. Today, despite receiving high prices for their products, farmers and ranchers facing financial difficulty continue to engage Kroos in reversing a cycle of unprofitability.
“I’m still busy; I’m still working with farmers and ranchers even though they’re receiving high prices for cattle and crops,” he says. “Input costs like feed expenses are skyrocketing. Yet profitability is still possible.”
Kroos teaches students and clients how to kick the habit of outspending production income. Those who do, attain business prosperity.
As one example, Kroos points to a client -- a ranching family -- who for two decades had an unbroken span of profitability.
“They’ve gone through drought; they’ve experienced tough cattle markets and other adversities,” he says. “Yet, every year they earn a significant profit on their ranch. They’re able to do it because they identify their level of desired profit at the start of the year. They then monitor and control costs throughout the year to ensure they indeed attain the desired amount of profit.”
When teaching and consulting, Kroos outlines six points that can help farmers and ranchers achieve sustained profitability.
1. Change the profit formula.
“According to the old-school formula, year-end profit is determined by simply subtracting expenses from total income; the balance is the profit,” he says. “I encourage a transformational mind-set. At the start of the year, ask yourself how much income you want to earmark for profit.”
The sum for planned profit is then subtracted from total projected income; this yields total expenses. The expense total sets a limit on costs, and Kroos suggests slashing expenses until cost inputs come into line with this limit.
2. Ignore previous cost levels.
“Forget about last year’s costs and start from scratch,” he says. Set new targets for various inputs like fuel. An overall financial plan can provide a framework for the year’s business activity.
3. Monitor costs and income.
Monthly monitoring of income and expenses can help you hold to a predetermined budget designed to yield the desired amount of profit.
“I help clients create a cash flow/financial spreadsheet,” says Kroos. “This is a useful tool for monitoring monthly financial activity.”
4. Get creative about cutting costs.
“As a first step, look back at last year’s activities and take stock of what happened,” he says. “Then, get as creative as possible in figuring out ways to reduce expenses.
“If, for instance, you’ve earmarked 20% to 25% of total income for profit, it can be a heck of a stretch to achieve it,” he continues. “It’s not easy, and you might be able to meet that goal only with a teeth-grinding discipline. You might have to find alternative ways to feed livestock or to reappraise fertilizer applications on fields.”
5. Reconsider maximum production
Kroos encourages reconsidering practices aimed at maximizing production. “A maximum-production mind-set encourages the application of inputs until attaining the level where the last input dollar doesn’t pay for itself,” he says. “When you keep spending until the last dollar gives no profitable return, you can easily zero out profit.”
Letting go of bragging rights is part of the paradigm switch. For example, breaking the county record in corn or wheat production can be a badge of honor. “You might ask yourself whether or not it is consistently profitable to attain the highest yields,” says Kroos. “Costs can pile up when you shoot for the moon, aiming for the biggest yields and the heaviest calves. Reining back production can often be a more profitable management style.”
critical areas of management. Sustained profitability of a farm and ranch operation resembles “a three-legged stool,” says Kroos. It has three essential supports: finance management, technical know-how in raising crops and livestock, and the marketing of farm and ranch products.
If any one of these critical three legs is weak, the overall profitability of the operation may suffer. Each area, of course, requires its own specific set of skills and knowledge base.
The challenge is to excel in all three skill sets. Acquiring the necessary knowledge in each area is possible, of course, but often your lack of passion for one management area can cause shortfalls.
“If neither husband nor wife has a passion for keeping financial records, for instance, it can be very profitable to find a third party -- an outside person who loves to crunch numbers -- to help with that kind of work,” he says.
While consulting with farmers and ranchers in the 1980s, Kroos saw firsthand the sometimes ill effects of the combined forces of inflated land values, low interest rates, and rapid expansions. Though these conditions are again in play today, potential financial potholes may be avoided by the simple process of first expecting a profit and then planning a strategy to attain it.