March 15 is the day that business taxes are due. I don’t know why it’s a month earlier than regular taxes, but ever since I started running On Pasture as though it were a business, I’ve learned a lot about that kind of thing. There’s so much to know, and as Dave Pratt says here, knowing how to raise livestock is not the same thing as knowing how to run a business that raises livestock. We may not want to learn about the business end, but if we don’t, we face burnout from too much work, or we don’t make money and we don’t get to raise livestock anymore.
A great a first step to creating a profitable business is this 5:17 video. In it, Dave identifies the difference between a “job” and a “business,” so we have some markers to compare what we’re doing against. He describes the difference between economics (“Can I do it?”) and finance (“Should I do it?”). I’ve found it very helpful as I think about what we do here at On Pasture as well.
It’s not easy to think about, but it’s important, not just to each of us personally, but to the wider community that relies on us for food and ecosystem services. So, take a few minutes to watch the video or read the transcript. Then, if you’re interested in more, I’ve included some resources at the end of the article that can help you take next steps. Enjoy!
Hi my name’s Dave Pratt. I run the ranching for profit school and our alumni program Executive Link. [Editor note: Dave has since retired from Ranch Management Consultants. Dallas Mount is the new CEO.]
The program is really based on a very simple concept. And that’s that knowing how to raise livestock is not the same thing as knowing how to run a business that raises livestock. That’s a completely different thing. In fact, I’ll go so far as to say that most ranchers aren’t real businesses at all anyway. The IRS may say they are, but most ranches are really just a big assemblage of very expensive assets and a bunch of physically demanding jobs. And a business is much more than that.
I mean, think about it. If you sold your ranch would you really be selling a business? Would you be selling a name, systems for marketing, for accounts payable and receivable, production systems? Or would you just be selling a bunch of assets? A business is much more than just a bunch of assets.
Can you leave? I don’t mean for a day or two or even a week or two. I mean for a month or two or even three. According to Michael Gerber and his book the E Myth Revisited, this is the difference, THE difference between being self-employed, where you own your job, and according to him you work for a lunatic, and owning a business. If you’re self-employed, you have to be there or results don’t happen. But if you’re a business owner, you can leave and things still get done. And when you come back they’re working every bit as good as when you left.
Now, there’s another. Have you ever said, “I really ought to run this as though it were a business”? “As though it were a business?” Of course we’re acknowledging it’s not really a business. It would be good if it were, so we’ll pretend. The problem is you can only keep the act up for so long. It either is a business or it’s not. And most ranches aren’t.
And here’s the kicker. Does it produce an economic profit and positive cash flow? Most ranches don’t. And here’s the test: Could you start your ranch today, from scratch, and build it into what it is right now. In other words, could you go out and rent the land at market rate? Could you hire the labor and pay competitive wages including family labor? Nobody works for free anymore. Everybody has to be paid what it would cost to replace them. Could you pay interest on all of the assets used in production? Cows, machinery, everything. Could you pay all the other production costs and after doing that. And after doing that would you still have something left over? If you do, if you would, you’re making a profit. If you can’t and you’re still there, you must be subsidizing the business in some way, either with off-farm income or not paying yourselves, or appreciating land values, or inherited wealth.
Now there’s nothing wrong with subsidizing a business if that’s what you want to do, if that’s what you have to do. But wouldn’t it be nice not to have to do that? And a business shouldn’t have to be subsidized to survive. In fact, a business by definition must be able to make a profit. It’s been said that profit is to business as breathing is to life. In other words, profit is not the purpose of business, but without it, you don’t have a business, but just a hobby – a very expensive hobby.
A lot of ranchers don’t even know the difference between economics and finance. Now if you’re going to be a business person, that’s a pretty fundamental difference. The difference is this: in economics we ask “Is this profitable? And how do I make it more profitable?” Whereas in finance we ask, “Can I afford to do it? Where’s the capital going to come from to get this thing going? And how is the cash going to flow?”
Now they’re both important questions, but economics must come first. Economics is the question of “should I do it?” where finance is the question, “Can I afford to do it?”
Now I don’t mean to chide or demean anyone. I mean how are we supposed to know these things? My Dad didn’t teach me. He didn’t know. I had courses in range management and animal science. I had courses even in business in economics in college. My professors taught me this. They never taught me how to build a business or run one. Where are you supposed to learn that stuff?
Well, that’s what we do. That’s what Ranching for Profit is all about. I hope you’ll join me at the workshop to learn the difference between economics and finance. To learn why ranches are wealthy on the balance sheet and broke at the bank. Why we’re asset rich and cash poor. And what we can do about that. I hoe you’ll join me to learn the three secrets for increasing profit. And how to transfer your ranch, this big collection of expensive assets and a bunch of physically demanding jobs into a real business that serves you and your family into the future.
I hope I see you at the workshop.
Interested in learning more about the Three Secrets for Increasing Profit? Here’s a link to an OP article describing what they and a link to a helpful DVD.
Finally, Dave’s latest book is now available. The Turnaround: A Rancher’s Story
This is a story about a fictional ranch (based on real experiences) that walks the reader through rethinking the traditional approaches of running a ranch. The story is easy to read, and the characters are relatable, but the concepts conveyed are deep and life changing. Dave Pratt is a gifted story teller and taps into his lifetime of experiences in working with ranching families at a deep level. It’s a great look at Ranching for Profit principles and how to apply them to your own operation.