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Fiscal Fitness --Five strategies to get your bottom line in shape.

Chances are you've probably already tightened your business belt a notch or two during the last five years of continual low beef prices. But are there still costs that could be cut or profits gained?No one knows for sure what this year might bring, but predictions are for better beef prices. If such predictions become reality, beef producers should prepare now to take advantage of them, says Harlan

Chances are you've probably already tightened your business belt a notch or two during the last five years of continual low beef prices. But are there still costs that could be cut or profits gained?

No one knows for sure what this year might bring, but predictions are for better beef prices. If such predictions become reality, beef producers should prepare now to take advantage of them, says Harlan Hughes, North Dakota State University (NDSU) Extension livestock economist.

"Predictions are for three good years ahead in the beef business," Hughes says. "Producers tend to spend time looking at last year's prices instead of looking forward. But if they don't start planning now for better times, it will escape them before they can take advantage of it."

Iowa State University livestock economist John Lawrence agrees. "I think there will be some profitable years ahead," he says, but he cautions that it may not be as rosy as past cycles. "I don't think prices will peak as high as we've seen in the past."

Dave Pratt, of Albuquerque, NM-based Ranch Management Consultants, also sees prices inching up in the future, but he, too, is cautious. "Prices are likely to go up, and that's going to make it easier to make a profit. But I've never believed prices determine profit.

"Now's not the time to rake in money," he adds. "This is the time to position oneself for the next down cycle. The easiest time to make changes is when prices are good."

So, what can you do to get your bottom line in shape and take advantage of higher prices? Here are five suggestions.

1. Push The Pencil. Before any business changes are made you first need to measure where your business is at.

"Most beef producers would rather be cowboys than businessmen," Hughes says. "But to continue being a cowboy, they've got to become a businessman.

"The perception is that we can run cows without doing bookwork," Hughes adds. "But the profit margin is getting a lot smaller, so beef producers need to pencil out expenses and profits."

"Since we are looking at profitable times, producers may look for opportunities to increase herd size, but don't go overboard," Lawrence says. You've got to run the numbers first, he adds.

2. Count The Pennies. Once you've put the numbers on paper, you can calculate what you need to know - right down to the penny.

Profit is revenue minus cost, says NDSU's Hughes. "If you don't know cost, then you don't know profit."

Hughes says producers need to know what it costs them to produce 100 lbs. of calf. To do that, he says unit cost of production must be calculated. Unit cost of production equals the total cost of the cow herd divided by total pounds of calf produced.

Once unit cost of production is determined, producers can compare it to market price and give themselves a management score. (Management score is the difference between unit cost of production and market price.)

"If it costs you 70 cents per pound to produce and market price is 85 cents per pound you know you'll make 15 cents per pound," says Hughes.

Pratt, who teaches the Ranching For Profit School, likes to know gross margin as well. "Breakeven cost is a useful indicator, but gross margin includes cull margin, weaning rate, calf price, etc. and it's easier to see exactly where changes need to be made."

As an example he says, "Many producers sell as many pounds of cull cows as they do calves. Thus, a 5 cents per pound swing in cull cow prices could really affect profitability. That wouldn't be reflected in breakeven costs, only in gross margin."

3. Do Less With Less. Productivity seems to be the goal of many ranches, but Pratt questions that objective.

"North American ranchers are the most productive, but they are also the least profitable," he says. "Sometimes being less productive is optimum."

Pratt admits being less productive is not a natural intuition, but he gives this example. "In California I worked with a rancher who was fall calving and weaning 600-pound calves, but they were feeding a ton or more of hay which was expensive to grow, harvest and feed. We scrapped it and moved to spring calving to eliminate having to feed hay. Now weaning weights are lower, but profit has increased $100/cow because we are doing less with less.

"Producers often learn how to be productive, but don't learn how to be profitable," he says.

To determine if you are a high- or low-cost producer, Hughes suggests comparing your unit cost of production to benchmark herd information from SPA (Standardized Performance Analysis), a program developed by the Integrated Resource Management committee of the National Cattlemen's Beef Association.

You want to find the areas you beat the benchmark herds and those are the operation's strengths, Hughes says. "Benchmarking helps decide where to focus."

In most cases, low-cost producers can do better with less, Hughes says. Generally, among high-cost herds the one that stands out is feed cost, he adds.

4. Know What It Costs To Make A Dollar. In times of financial stress, Hughes suggests a holistic approach to managing the ranch. "Ask yourself: 'What does it cost to produce a dollar's worth of income?' If it costs $1 to produce $1, then changes need to be made. You need to ask which cost am I going to decrease?"

Hughes says to look at two categories: direct costs (hired labor, feed, trucking) and overhead costs. Overhead is independent of the units you produce such as machinery, facilities, corrals, pasture, rent, etc.

"There is opportunity in overhead that traditionally has been overlooked," Hughes says. "Sometimes to lower these costs you need to add more cows."

"Often when we think of decreasing costs, we think it means spending less. Actually it may mean increasing numbers to fully utilize resources," Hughes says. "In the unit cost of production equation, you need to increase the denominator or decrease the numerator to increase profitability."

Pratt agrees that the biggest drain on profitability is overhead costs that are too high. One strategy to decrease overhead costs is to "get in sync with nature."

It can be as simple as taking cues from nature. "When do wildlife have their offspring?" he asks. "Not in January, February and March, but in May and June when the forage resources are abundant."

5. Plan Ahead. "The beef industry is one of the few ag industries that has much positive going for it today," says Hughes. To take advantage of better times, Hughes encourages producers to put together an action plan to increase profits over the next 12 months. Begin by using the benchmark comparisons to identify areas that need improvement.

"The goal should be to have a management action plan that will decrease at least one bottleneck to profitability for the coming year," Hughes says. "But the changes must be based on data."

Lawrence also says strategic planning and risk management will continue to be crucial business management tools. Producers need to look seven or eight years into the future to position their operation," he says.

Lawrence says one of the biggest mistakes producers make when planning for the future is putting too much reliance on what happened in the past. "It's important to have a historical basis to base decisions, but there's no guarantee things will happen exactly like they did in the past. Producers need to understand why things did - and didn't - work to make sound decisions for the future," Lawrence says.

But don't get comfortable when times are good, Pratt says. "I'm afraid producers will get complacent. They need to position themselves for the next downturn."