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Recordkeeping Can Uncover Hidden Profits, Costs

Posted Dec. 1, 2006

Have you ever asked yourself, "Are all the things I'm doing on the ranch profitable?" At the end of the year, we know what was made in terms of profit for the ranch. But, if you really want to be more efficient with your current enterprises, you need more detail than how the ranch did as a whole. The key to having the detail is allocating the costs and revenue to each enterprise within the operation (i.e., cow-calf, stocker, hay, pasture, wheat, overhead, family living, etc.).

Understand, you aren't alone in the fact that you don't like to keep records not many people do. The key is to keep records you actually will use to help make management decisions. When you start keeping records just to have them, you lose sight of the goal and eventually get discouraged with the process.

By allocating costs to each enterprise to the best of your ability, you will know what it costs to produce each item. It is difficult to calculate a break-even if you don't know how much it costs. Some may say, "So what? I am going to raise hay and then feed it to my own cows, so it doesn't really matter." Or does it? If it costs $50 per ton to produce your own hay, then that is what you should charge the cows, right? No. If the market price for the hay is $65 per ton, that is what the cows should get charged, and the hay operation should show a $15 per ton profit. Likewise, if it costs you $75 per ton to produce your own hay, the cows should still get charged the market price of $65 per ton, and the hay enterprise should show a $10 per ton loss. The records will show where you are making money and where you are losing it. Perhaps they will tell you that you shouldn't be producing your own hay.

Is there a way to make it simple to look at the profitability of each enterprise? I suggest using Quicken or QuickBooks and assigning class (enterprise) identifications to each transaction entered. This is done in Quicken by typing a "/" after the category and then typing the first couple of letters for the class until it "auto fills." Classes can be added or deleted by selecting "class list" under "Tools." QuickBooks has a "class" column to select a class for each transaction. You then will be able to create profit/loss reports for each class.

Let's say you typically plant winter wheat pasture to run your own calves (202 head). The genetics of the cow herd are great, and you are weaning calves in the 575- to 600-pound range that then weigh 650 pounds after 50 days of preconditioning. The price for the calves, if sold, was $121 per hundredweight or $786.50 per head on Dec. 7, 2005. Dec. 7 represents selling the calves for $786.50 per head (cow-calf enterprise) and purchasing the calves at the same price for the stocker enterprise. The calves gain 2.25 pounds per day and are sold at 800 pounds on Feb. 6 for $103 per cwt. or $824 per head. You could have leased the wheat pasture to your neighbor, who also had 202 head of stockers, at $0.40 per pound of gain, which would have been $12,120. The wheat enterprise should show income of $12,120. The stockers should get charged the $12,120 (202*150*$0.40) and show $7,575 ((824-786.50)*202) of income for a net loss of $4,545. Ask yourself if keeping records is worth knowing you are giving up $4,545 in potential profit in just one enterprise? It is difficult to know which enterprises need to have resources increased or decreased to maximize total farm or ranch profitability if you don't know which enterprises are making or losing money.

For those interested in learning more about recordkeeping software, Texas and Oklahoma Extension and the Noble Research Institute hold courses to teach farmers and ranchers how to use Quicken and QuickBooks.