April 2, 2020
Although every segment in the cattle industry is concerned with profit margin, the cow-calf segment is unique in the supply chain in that it is an asset management business, not a margin-based business. Rather than buying a product, adding value to the product and reselling that product at a higher dollar amount, cow-calf producers are tasked with managing their asset base in a manner that returns some profit.Therefore, in order to increase effectiveness, it is critical to orient around the understanding that the cow-calf manager is an asset manager.
We tend to use the number of calves sold and the market price of those calves as the barometer of success on our operations. However, revenue alone does not determine profitability.
Some think net income is the ultimate measure of business success, but net income, although helpful in determining returns over expenses, does not indicate the efficiency of an operation. In order to gauge the true effectiveness of an operation, net income must be placed in proportion to its capacity. This concept is often referred to as “scaled.”
Scale is traditionally thought of as size; acres of ground or number of cows. Although these factors do help represent the proportional dimension of a business, all other asset groups should be considered when evaluating the capacity of an operation.
ROA (return on assets) considers all balance sheet assets on an operation and frames net income relative to those assets. ROA answers the question: how effective are the assets under ranch control returning the ranch profit? This ratio is calculated by taking the total net income, including interest expenses, divided by the average total asset value for the fiscal year.
A manager is placed in charge of many assets; people, land, vehicles, equipment, buildings, corrals, processing facilities, and of course cattle themselves. Each of these assets can be a productive part of returning value to the operation.
Most cattle mangers draw a hard line with their cowherd by culling any female within the breeding herd that didn’t produce a calf. This idea is easy to grasp—if the cow isn’t producing a calf, she isn’t adding value to the operation and therefore must go to town. Shouldn’t that same hard line be drawn with all assets?
Critically thinking through each asset on the ranch and asking the question, “How is this ______ increasing the profitability of my ranch?” is an important step in beginning to identify points of inefficiencies on an operation. Is there a piece of machinery in your possession that is rarely used? Even if that asset has fully depreciated, could it still be sold, and the money invested into a more productive asset that will help improve profitability?
The idea of making the most out of what we manage reminds me of a story in the Bible called the parable of the talents (a talent was a unit of currency in biblical times). In the story, a landowner calls his workers and gives one 5 talents, one 2 talents, and the other 1 talent. The first two went to work with the resources that were entrusted to them, and by using their creativity and skills, they multiplied the value of their talents. The worker who received only one talent was intimidated by the landowner’s charge and hid the one talent until the owner returned.
Upon the return of the owner, he called his workers and asked them what they had accomplished with what they had been given. The first two workers told the owner that they had doubled the value of what they had received, and the owner praised their faithful efforts and invested more resources with them. The other one, ashamedly admitted that he had hid what he was given, receiving no return on the investment. The owner called his efforts lazy and took the one talent away from him and gave it to those who had multiplied their investment.
The central question to take away from the parable is, how are we making the most out of what we manage? These are strong words and certainly have a greater spiritual meaning but can still be applied to how we evaluate our cattle operations.
A goal for every manager, regardless of size and resource base, should be to maximize effectiveness. If you don’t already, start tracking ROA from year to year and ask the questions, which assets are enhancing profitability and which ones are hindering my efficiency?
Hoffman is beef Extension associate in the Animal Science Department at Colorado State University. The opinions of the author are not necessarily those of beefmagazine.com or Farm Progress.
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