Sound Financial Management: Working With Cattlemen Dr. Alex White Ag & Applied Economics Virginia Tech 540-231-3132 axwhite@vt.edu

Goals for this Session Information Needs Primary financial analyses Enterprise Accounting Primary financial analyses Enterprise Budgeting Breakeven & Sensitivity Analysis

Incomplete Information May lead to improper decisions Hassle at tax time Missed opportunities Must have a usable record keeping system Accurate, organized and correct methods Efficient – time and cost Understandable Provides the information you need/want Budgets, cash flows, balance sheets, income statements Cost of production, breakevens, sensitivity analysis

It all starts with good farm records Production records Breeding, herd health, crop/pasture production Revenue & expense records Financial statements Income Statement (Schedule F, Profit & Loss) Balance Sheet Cash Flow Producers should have most of this info already In some form

But, Is That Info Usable? For most producers – No Most financial records are: Summary data for the whole farm Only look at cash transactions Primarily for tax purposes Estimates for loan applications & renewals The key is Enterprise Accounting Allocate revenues and expenses to each enterprise Provides a lot more power to decision making! Doesn’t take much added effort

Enterprise Accounting Allocating your revenues and expenses to each enterprise Instead of: Annual fertilizer expense = $11,000 Record as follows: Hay enterprise fertilizer expense = $8,000 Pasture enterprise fertilizer expense = $3,000

Example: Typical Records 50-cow herd, fall calving Produce your own grass hay (~30 acres) Pasture (~140 acres) Total Revenues (cash) $30,000 Cash Expenses Fertilizer $11,000 Other (feed, vet, repairs, etc.) $12,500 Return Above Costs $6,500

Using Typical Records So, we’re making $6,500 per year? What can you do to improve your profits? A. What expenses can you cut? B. Purchase hay instead of producing hay? C. Changes to your marketing plan? D. Why change? We’re making profits now! Without good records, you’re just guessing

“Better” Record System Cow-Calf Enterprise Budget Revenues Steers (22 head x 6.5 cwt @ $/cwt) $17,000 Heifers (14 head x 6 cwt @ $/cwt) $9,000 Culls $4,000 Variable costs of production Grass Hay (120 Tons @ $100/T) 12,000 Corn (725 bu @ $/bu) $5,000 Pasture $4,000 Other VC $5,000 Return Above VC $4,000 Fixed costs of production $2,500 Return Above TC $1,500

“Better” Record System Grass Hay Enterprise Budget Value of hay (120 T x $100/T) $12,000 Use Net Market Value Variable costs of production Fertilizer (N/P/K per acre) $7,500 Lime (tons/acre) $500 Other $2,000 Return Above VC $2,000 Fixed costs of production $7,000 Return Above TC ($5,000)

“Better” Record System Pasture Maintenance Enterprise Budget Value of pasture ($AUMs) $4,000 Variable costs of production Fertilizer (N/P/K per acre) $2,500 Lime (tons/acre) $500 Other $500 Return Above VC $500 Fixed costs of production $250 Return Above TC $250

Using “Better” Records Which enterprise is not profitable? Hay Consider purchasing your hay? How can you reduce your hay production costs? Can calculate breakevens Breakeven selling price (calves, hay) Breakeven selling weights (calves) Breakeven hay yields Maximum input prices What if fertilizer prices increase by 10%?

Using “Better” Records Hay enterprise is not profitable in the long run Due to the fixed costs of the machinery Depreciation, Interest, Property Taxes Long run breakeven price of hay RATC / Tons of hay ($5,000) / 120 tons = ~$42/Ton increase in price $100/Ton current value + $42/Ton = $142/Ton necessary to be profitable Long run – as long as hay price is less than $142/ton, more profitable to purchase hay

Using “Better” Records Sensitivity to increase in hay price for your cow-calf operation (short run) RAVC for cow calf operation / Tons of hay = $4,000/120 Tons = $33/Ton increase Current market price = $100/Ton Breakeven purchase price = $133/Ton

Typical vs “Better” Typical record systems do NOT provide a manager with usable information Enterprise accounting is well-worth the added effort Helps with Loan applications Farm planning Production management Marketing

“Go the Distance” Enterprise accounting  Summary info Income Statement, Schedule F for whole farm It doesn’t take much extra effort Cash Flow Statement See your monthly cash flows Plan your operating loan needs, repayment, etc. Balance Sheet List your assets at net market value List your outstanding liabilities Track your net worth over time

So What? You already have this most of the information Organize it by enterprise Better production decisions Better financial decisions Sensitivity and breakeven Partial budgeting Looking at changes in production Work with/impress your lender Enterprise accounting is worth your time!

What Now? Find a record system that works for you: Virginia Cooperative Extension Farm Record Book http://pubs.ext.vt.edu/446/446-016/446-016.pdf Oklahoma State University “Quicken for Farm/Ranch Records” http://agecon.okstate.edu/quicken/download_manual.asp Work with your accountant to set up a system Codes for each enterprise (keep it simple)

Enterprise Budget Examples Virginia Cooperative Extension Livestock Budgets http://pubs.ext.vt.edu/446/446-047/446-047.html Crop Budgets NC State University Extension Enterprise Budgets http://www.ag-econ.ncsu.edu/extension/Ag_budgets.html Remember, these are examples. Customize the budgets to fit your operation!