Take it to the Bank: Keys for Financial Success

1. Take it to the Bank: Keys for Financial Success Barry H. Dunn, Ph.D. Animal and Range Sciences Dept. South Dakota State University

2. Goals for Today • Discuss measuring profit to reflect efficiency! • Explain profit and financial efficiency as a set of relationships! • Share research results! • Discuss the importance of using the correct denominator! • Profit: Risk vs. Opportunity

3. Defining Profit

4. $ Gross Rev Inv. Ad j. lbs. +/- X $/lbs. Profit $ (Net Income) - ( ) $ Total Exp +/- Inv. Adj. = Definition of Profit: Net Income

5. $ Net Income [ ] + Inv. Ad j. $ Total Exp +/- Inv. Adj. lbs. +/- $ Int. Profit % (ROA) X $/lbs. = $ Total Investment in Land, Cattle, Buildings. Equipment Definition of Profit:Return on Assets (ROA) ( ) -

6. No denominator!!! Measure of Output May be affected by differences in production Not a measure of financial efficiency! Measure for Efficiency Net Income

7. “Net Profit (Net Income) can no longer be used as a gauge of whether resources are used efficiently” Earl Heady, 1952

8. No denominator!!! Measure of Output May be affected by some differences in production Not a measure of financial efficiency! Has a denominator Output/Input Is a measure of managerial efficiency!! Measure for Efficiency ROA Net Income

9. Profit: Determined by a Set of Relationships

10. Profit: A Set of Relationships Investment in assets (Land, Cattle, Equipment) Biological Production System Annual Expenses Value in the Market Place

11. ROA: A Set Of Relationships

12. ROA: A Set Of Relationships

13. ROA: A Set Of Relationships

14. ROA: A Set Of Relationships

15. ROA: A Set Of Relationships

16. ROA: A Set Of Relationships

17. ROA: A Set Of Relationships

18. ROA: A Set Of Relationships

19. Research Results Directed at Identifying the Factors of Affecting Profitability of the Cow-calf Enterprise

20. Materials & Methods • Data collection: • Field data, voluntary participation • Followed SPA guidelines • 239 individual SPA reviewed • 148 herds in final data set

21. Materials & Methods • Data Analysis: • Sample characterized with SPA measurements; Mean, SD, and Min.-Max. • Data divided into 3 profit groups, based on ROA: • High Profit = Top 16% • Low Profit = Bottom 16% • Medium Profit = Middle 68% • Means for all SPA measurements for all three Profit groups were compared • Multiple Regression Techniques used To determine factors affecting Profitability

22. Reality Check! • Avg. ROA for businesses in the US: 10% USBC, 1998 • Report for ROA cattle enterprises from across the Nation: 2-3% McGrann et al, 1992 FINPCK

23. “There is no profit without pleasure, but there is no pleasure without profit” Mark Twain

24. SPA Measurements for Low Medium, and High Profit Producers

25. SDSU research indicates that profit is a set of a specific relationships! • On a Unit basis (per cwt. or per cow.) • Low Investment! • Low Annual Costs! • Average Production (high reproduction)! • Excellent Marketing!

26. How many cows? • The Net Income in the High Profit group can pay off all debt in 10 years and provide $35,000 of family living with 200 cows! • To provide $35,000 of family living with the Medium Profit group, it will take 972 cows and you will pay off no debt!

27. In the face of the same problems, environments, markets, & policies, some cattlemen in the very same business are able to make substantially more money than others!

28. Per What?The importance of using the correct denominator!

29. Pros Good communication Used in property valuation Good measure for: Reproductive Performance Calving Distribution Death loss Cons No Output! 600 lb. Calves? 400 lb. Calves? Masks stocking Rate Per cow what? Exposed Beginning year Preg. checked Per Cow!

30. Pros Fundamental unit of production Largest investment Shows regional differences Expresses different management choices Cons Per what? Total beef enterprise Hay separate Large regional differences Could lead to overuse/abuse of land resource Per Acre!

31. Pros Inclusive measure Reproduction Growth Nutrition Herd Health How cattle are marketed!!!! Excellent tool for cost control!!!! Cons Not how we are used to thinking Cow ? Per cwt. of Weaned Calf!

32. Analysis of SDSU SPA data showed per cwt. of weaned calf was the most sensitive measure of financial efficiency when compared to per cow or per acre

33. Understanding Output/Input Relationships:Production Function Outputs Inputs

34. Understanding Output/Input Relationships:Production Function Rational Business Behavior Outputs Inputs

35. Production Function: Probability of Preg. During a 60 Day Breeding Season Pruitt & Momont, 1990 .98 BCS 6 BCS 5 Probability of Preg. .96 .93 BCS 4 Body Condition Score

36. Production Function: Probability of Preg. During a 60 Day Breeding Season Pruitt & Momont, 1990 Rational Business Behavior .98 BCS 6 BCS 5 Probability of Preg. .96 .93 BCS 4 Body Condition Score

37. Investment is the Main Driver of Profit! Barry Dunn, 2003 Investment in assets (Land, Cattle, Equipment) Biological Production System Value in the Market Place Annual Expenses

38. Thank You!