take it to the bank: keys for financial success keys for financial success barry h. dunn, ph.d....

Take it to the Bank: Take it to the Bank: Keys for Financial SuccessKeys for Financial Success

Barry H. Dunn, Ph.D.Animal and Range Sciences Dept.

South Dakota State University

Goals for TodayGoals for Today1.1. Discuss measuring profit to Discuss measuring profit to

reflect efficiency!reflect efficiency!

2.2. Explain profit and financial Explain profit and financial efficiency as a set of efficiency as a set of relationships!relationships!

3.3. Share research results!Share research results!

4.4. Discuss the importance of Discuss the importance of using the correct using the correct denominator!denominator!

5.5. Profit: Risk vs. OpportunityProfit: Risk vs. Opportunity

Defining ProfitDefining Profit

Definition of Profit:Definition of Profit: Net Income Net Income

Profit $(Net Income)

( ) -=

$ Gross Rev

lbs. $/lbs.X +/-Inv. Ad j.

$ Total Exp+/- Inv. Adj.

Definition of Profit:Definition of Profit:Return on Assets (ROA)Return on Assets (ROA)

)( -

$ Total Investment in Land, Cattle, Buildings.

Equipment

$ Total Exp+/- Inv. Adj.Profit

% (ROA)

=

$ Net Income

lbs. $/lbs.X +/-Inv. Ad j.[ ]+$ Int.

Measure for EfficiencyMeasure for Efficiency

1.1. No No denominator!!!denominator!!!

2.2. Measure of Measure of OutputOutput

3.3. May be affected May be affected by differences in by differences in productionproduction

4.4. Not a measure Not a measure of financial of financial efficiency!efficiency!

Net IncomeNet Income

““Net Profit (Net Net Profit (Net Income) can no longer Income) can no longer be used as a gauge of be used as a gauge of whether resources are whether resources are

used efficiently” used efficiently” Earl Heady, 1952Earl Heady, 1952

Measure for EfficiencyMeasure for Efficiency

1.1. No denominator!!!No denominator!!!

2.2. Measure of Measure of OutputOutput

3.3. May be affected May be affected by some by some differences in differences in productionproduction

4.4. Not a measure of Not a measure of financial financial efficiency!efficiency!

1.1. Has a Has a denominatordenominator

2.2. Output/Input Output/Input

3.3. Is a measure of Is a measure of managerial managerial efficiency!!efficiency!!

Net IncomeNet Income ROAROA

Profit: Determined Profit: Determined by a Set of by a Set of

RelationshipsRelationships

Profit: A Set of Profit: A Set of RelationshipsRelationships

Investment in assets

(Land, Cattle,Equipment)

Biological Production System

Value in the MarketPlace

AnnualExpenses

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

250250

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

400400 250250 15001500 1010

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

400400 250250 15001500 1010

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

400400 250250 15001500 1010

30003000

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

400400 250250 15001500 1010

600600 300300 30003000 1010

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

400400 250250 15001500 1010

600600 300300 30003000 1010

500500

ROA: A Set Of ROA: A Set Of Relationships Relationships

$ Gross $ Gross Income/Cow Income/Cow

$ Total $ Total Expenses/CoExpenses/Co

ww$ Assets/Cow$ Assets/Cow ROA,%ROA,%

425425 385385 23002300 22

400400 250250 15001500 1010

600600 300300 30003000 1010

700700 500500 20002000 1010

Research ResultsResearch Results

Directed at Directed at Identifying the Identifying the

Factors of Affecting Factors of Affecting Profitability of the Profitability of the Cow-calf EnterpriseCow-calf Enterprise

Materials & MethodsMaterials & Methods

• Data collection:Data collection:– Field data, voluntary Field data, voluntary

participationparticipation– Followed SPA guidelinesFollowed SPA guidelines– 239 individual SPA reviewed239 individual SPA reviewed– 148 herds in final data set148 herds in final data set

Materials & MethodsMaterials & Methods• Data Analysis:Data Analysis:

– Sample characterized with SPA Sample characterized with SPA measurements; Mean, SD, and Min.-Max.measurements; Mean, SD, and Min.-Max.

– Data divided into 3 profit groups, based Data divided into 3 profit groups, based on ROA:on ROA:• High Profit = Top 16% High Profit = Top 16% • Low Profit = Bottom 16% Low Profit = Bottom 16% • Medium Profit = Middle 68% Medium Profit = Middle 68%

– Means for all SPA measurements for all Means for all SPA measurements for all three Profit groups were compared three Profit groups were compared

– Multiple Regression Techniques used To Multiple Regression Techniques used To determine factors affecting Profitability determine factors affecting Profitability

Reality Check!Reality Check!

• Avg. ROA for businesses in the US:Avg. ROA for businesses in the US:

10% 10% USBC, 1998USBC, 1998

• Report for ROA cattle enterprises Report for ROA cattle enterprises from across the Nation:from across the Nation:

2-3% 2-3% McGrann et al, 1992McGrann et al, 1992

FINPCKFINPCK

““There is no profit There is no profit without pleasure, but without pleasure, but there is no pleasure there is no pleasure

without profit”without profit”Mark TwainMark Twain

SPA Measurements for Low SPA Measurements for Low Medium, and High Profit Medium, and High Profit

ProducersProducers Low Low

ProfitProfitMedium Medium ProfitProfit High profitHigh profit

lbs. lbs. Weaned/Cow Weaned/Cow exposedexposed

413413 455455 455455

$ Income/Cow$ Income/Cow 390.75390.75 423.08423.08 495.35495.35

$ Expenses/Cow$ Expenses/Cow 637.68637.68 386.87386.87 270.23270.23

$ Net $ Net Income/CowIncome/Cow -247.02-247.02 36.2936.29 255.13255.13

$ $ Investment/CowInvestment/Cow 15381538 23082308 13971397

ROA, %ROA, % -15.5-15.5 2.882.88 18.218.2

SDSU research SDSU research indicates that profit is indicates that profit is

a set of a specific a set of a specific relationships!relationships!

• On a Unit basis On a Unit basis (per cwt. or per (per cwt. or per cow.)cow.)

–Low Investment! Low Investment! –Low Annual Costs!Low Annual Costs!–Average Production Average Production (high reproduction)!(high reproduction)!

–Excellent Marketing!Excellent Marketing!

How many cows?How many cows?

• The Net Income in the High Profit The Net Income in the High Profit group can pay off all debt in 10 group can pay off all debt in 10 years and provide $35,000 of family years and provide $35,000 of family living with 200 cows!living with 200 cows!

• To provide $35,000 of family living To provide $35,000 of family living with the Medium Profit group, it with the Medium Profit group, it will take 972 cows and you will pay will take 972 cows and you will pay off no debt! off no debt!

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!

Per What?Per What?The importance The importance

of using the of using the correct correct

denominator!denominator!

Per Cow!Per Cow!

• ProsPros– Good Good

communicationcommunication– Used in property Used in property

valuationvaluation– Good measure for:Good measure for:

• Reproductive Reproductive Performance Performance

• Calving DistributionCalving Distribution• Death lossDeath loss

• ConsCons– No Output!No Output!

• 600 lb. Calves?600 lb. Calves?• 400 lb. Calves?400 lb. Calves?

– Masks stocking Masks stocking Rate Rate

– Per cow what?Per cow what?• ExposedExposed• Beginning yearBeginning year• Preg. checkedPreg. checked

Per Per Acre!Acre!

• ProsPros– Fundamental unit of Fundamental unit of

production production – Largest investmentLargest investment– Shows regional Shows regional

differencesdifferences– Expresses different Expresses different

management management choices choices

• ConsCons– Per what?Per what?

• Total beef enterpriseTotal beef enterprise• Hay separateHay separate

– Large regional Large regional differencesdifferences

– Could lead to Could lead to overuse/abuse of overuse/abuse of land resourceland resource

Per cwt. of Per cwt. of Weaned Calf!Weaned Calf!

• ProsPros– Inclusive measureInclusive measure

• ReproductionReproduction• GrowthGrowth• NutritionNutrition• Herd HealthHerd Health

– How cattle are How cattle are marketed!!!!marketed!!!!

– Excellent tool for Excellent tool for cost control!!!!cost control!!!!

• ConsCons– Not how we are Not how we are

used to thinkingused to thinking• CowCow

– ??

Analysis of SDSU SPA Analysis of SDSU SPA data showed per cwt. data showed per cwt. of weaned calf was the of weaned calf was the most sensitive measure most sensitive measure

of financial efficiency of financial efficiency when compared to per when compared to per

cow or per acre cow or per acre

Inputs

Outputs

Understanding Output/InputUnderstanding Output/InputRelationships:Relationships: Production Function

Inputs

Outputs

Understanding Output/InputUnderstanding Output/InputRelationships:Relationships: Production Function

Rational Business Behavior

Body Condition Score

Production Function: Probability of Preg. During a 60 Day Breeding Season

Pruitt & Momont, 1990

BCS 5

BCS 6

BCS 4.93

.96

.98

Pro

bab

ilit

y o

f P

reg

.

Body Condition Score

Production Function: Probability of Preg. During a 60 Day Breeding Season

Pruitt & Momont, 1990

BCS 5

BCS 6

BCS 4.93

.96

.98

Pro

bab

ilit

y o

f P

reg

.

Rational Business Behavior

Investment is the Investment is the Main Driver of Profit! Main Driver of Profit!

Barry Dunn, Barry Dunn,

20032003 Investment in

assets(Land, Cattle,Equipment)

Biological Production System

Value in the MarketPlace

AnnualExpenses

Thank You!