Books about personal financial management always encourage readers to pay themselves first. Every time you get a paycheque or other income, they say to set a percentage of it aside for long-term savings.
Most people don’t do that. They wait till the end of the month and if there is any left, they set it aside. Of course, there usually isn’t any left.
It is not all that different with farm and ranch businesses. We routinely get the initial grain price from the Canadian Wheat Board, or an estimate of calf prices in the fall, bring last year’s expenses forward, and try to pencil out a profit. This is not the way to make a profit in agriculture.
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Prices fluctuate a bit during the year, so learning how to improve our marketing skill will allow us to achieve a higher average price for our products within the annual price range. In general, however, agriculture producers are price takers. The best way to make a profit in agriculture is to control expenses.
I have mentioned before that I teach holistic management, and I mention it here because the holistic management approach to financial planning is different, and far more effective, than anything else I have seen. Of course, you have to do the work, but the results can be dramatic. In fact I know a family in Saskatchewan that manages this way, and stayed in the black, before any subsidies were counted, through the entire BSE debacle.
I have said before that farming and ranching simply consist of catching sunshine and putting it in the bank. There are three links in the chain from the sun to the bank:
- Plants catch solar energy and convert it to plant material, which is called the energy conversion link.
- You harvest the plants using either animals or machinery and create a product, which is called the product conversion link.
- You market the products, which is called the marketing link, and end up with money you received from the sun.
The simpler you keep the chain – in other words, the less technology you introduce – the more money you can put in the bank.
Now let’s go to the next step.
You decide each year which of the three links in this solar chain is weakest. For example, this year it might be energy conversion, meaning you are not catching enough sunshine: you have sparse crops caused by poor fertility.
List all your expenses and break them into three categories:
A expenses: generate new wealth.
B expenses: are inescapable, such as loan payments and taxes.
C expenses: are maintenance; neither inescapable nor do they generate new wealth.
Next, estimate your gross income for the year, based on initial prices, price forecasts and other market analysis.
Now, deduct 40 percent of your anticipated gross income and plan it as profit. The other 60 percent is what you have to pay expenses with. Yes, I realize it sounds impossible, but it is amazing what you can do with discipline, planning and creativity in place of your chequebook.
Allocate money to the A expenses first. These are expenses that will help strengthen the weak link. Soil sampling and fertilizer are a couple of examples of expenses that will help address a weakness in the
energy conversion link.
When that is done, allocate money to the B expenses. Remember, when listing the inescapable expenses, make sure they are truly inescapable.
Whatever is left goes to C expenses. Of course, you will not have as much money for these expenses as you did last year, so you will have to figure out how else to look after them. People who took my training courses during the 1990s frequently eliminated entire enterprises once they had analyzed them and discovered the return wasn’t worth the effort. Others sold equipment they didn’t use much but that cost them money every year. Some rented equipment, rather than buying it, for the brief times they needed it. When you open your mind, and especially when you get your children involved in brainstorming new solutions, it is amazing what creative ideas you can come up with to keep from spending money.
This approach takes effort, and frankly most people would rather work all day in a raging blizzard than sit in the house and plan. But as my friend Don Campbell says, when working outside you are worth only what you can hire somebody for. But nobody else can do your planning for you, and the time you spend planning a profit can literally be worth $1,000 an hour.
Edmonton-based Noel McNaughton is a sponsored speaker with the Canadian Farm Business Management Council, which will pay his fee and expenses for speaking at meetings and conventions of agricultural organizations. To book him, call 780-432-5492, email: farm@midlife-men.com or visit www.midlife-men.com.
