This is an exciting time of year for me. Thanksgiving is awesome, and I have a lot to be thankful for. But that’s not the excitement I’m feeling right now. The excitement comes right after calves are weaned and cows preg-checked. Why is that so exciting? (I’m glad you asked.) It’s exciting because that’s when y’all should be building next year’s economic plan, projecting next year’s profit and thinking through contingencies for market fluctuations, drought and other foreseeable risks and opportunities. This is the time to do it because you know your closing inventory numbers for the year. That means you now have your opening inventory for next year. And it’s exciting because it gets everyone in your business on the same page and improves communication. It usually increases profit by tens of thousands of dollars and can have an even bigger impact on stress reduction.
The process starts with the Breeding Herd Statistics Chart. That may sound dull, but it is actually the launching pad for a fantastic discussion. This is a document that captures your educated guesses about performance for the coming year. Meaningful guesses come from exploring production alternatives and asking questions: What kind of animal are we trying to run here? How do we shift our herd toward that kind of animal? What weaning rates and conception rates do we want to aim for? What practices will it take to support that performance? What is our culling criteria? How are we going to market our calves and our culls? These are all things we love discussing.
Once we have those estimates we apply them to the opening inventory in a Stock Flow chart to project births, deaths, sales, purchases, transfers and everything else that will impact the herd in the coming year.
The Stock Flow gives us the tools to project our cash flow. At the Ranching for Profit School we refer to the cash flow as “the minutes of the production meeting, written in dollars and cents.” The cash flow shows when we expect income to come in and when we expect expenses to pile up. Temporary periods of cash deficits are only a problem if they come as a surprise. The cash flow helps us anticipate periods of cash shortages and surpluses so that we can plan our way through the year.
But the cash flow plan is more than just a budget. In fact, the biggest benefits of the cash flow is not the plan itself, but the thought that goes into creating the plan.
The full value of a plan is realized when we evaluate our results relative to the plan. I recommend updating the cash flow each month to show the actual movement of cash into and out of the business. A significant deviation between the budget and actual income and expenses is a red flag, enabling you to nip problems in the bud.
With inventory changes, sales and purchases projected in the Stock Flow and cash flow, it becomes a simple process to value each class of animals, project enterprise gross margins and business profit or loss.
Some people seem to think that planning isn’t useful since we can’t know what prices are going to be and how much rain we are going to get. They have it exactly wrong. The uncertainty makes planning all the more important. The uncertainty is why we recommend blocking a week of mornings after weaning to do this planning. It may take one morning to discuss production options and make tentative decisions. It will probably take another to draft the plan. But if you’re smart, you won’t stop there. You’ll think through and make projections for contingencies like drought and different market conditions.
There are two reasons that people fail to do this planning; only one is legitimate. The illegitimate excuse is that they are too busy. That’s illegitimate because if they took the time to plan they’d discover that some of the things they are doing are counterproductive. If they took the time to plan they’d be able to simplify their operations. The planning would not add to their work load, it would reduce their workload!
The more legitimate excuse is that they don’t know how to do it. How could they? Growing up we learned to build fence, put up hay and doctor livestock. No one ever taught us how to run a business. This planning process is fundamental to running a business.
If you don’t know how to do it, you’d better learn. If you do know how to do it, sleep well. You have exciting work to do for the next 5 mornings.
To learn more about the RFP Profit Planning Process you can watch Exciting Stuff, an 8 1/2 minute introduction to the RMC Profit Planning process.
A $10,000 Error shows how one RFP graduate used the process to turn their business around.