Last month, I suggested ranchers look to their on-ranch accounting systems to answer two key business-management questions:

  • What did my family earn last year from running this ranch?

  • Is my ranch generating a positive or negative annual cash flow?

This month, I will add a third:

  • What is the source of my business and family funds, and how are the funds used?

The first question

The first question is answered with a “ranch profitability account,” where the bottom line summarizes the earned Net Ranch Income (NRI) for that business year.

Table 1 presents an example NRI for a hypothetical ranch. (The boxed numbers are inputs derived from the on-ranch accounting summary.) This ranch family earned $22,599 in the last business year from three resources provided by that family — unpaid family and operator labor, management and equity capital.

Notice how NRI is calculated — by adjusting net-cash operating income for depreciation and inventory change.

To insert real numbers into this discussion, Figure 1 presents the average Net Farm Income (NFI) for Minnesota beef farms from 1996-2004. (NFI and NRI are the same thing.) These averages are from the all-beef farms summarized through the FINPACK Financial Analysis System operated by the Minnesota Cooperative Extension Service.

Clearly, NFI varies considerably year to year, and an individual farmer's NFI varies even more than the group averages. That's why it's important for individual ranchers to measure NFI annually.

Note the upward trend for 2001-2004. What is your ranch's NFI trend over the last five years? Given the increasing calf prices of the last five years, it should have trended upward. My concern is for those ranches that missed out on the golden opportunity of the current beef price cycle.

If you've followed my articles, you know I recommend ranchers break their ranch business into profit centers, treating each as a stand-alone business. Table 2 presents the average NRI analysis for 118 North Dakota beef farms analyzing their beef-cow profit centers.

These 118 units averaged a $32,906 NRI in 2005. In other words, these families earned an average of $32,906/family from their beef-cow profit centers (about $218/cow) in 2005. Year 2005 may well end up being the highest profit year per cow in this current beef price cycle. The data in Table 2 can serve as a benchmark for Northern Plains ranchers.

Note the same economic analysis can be used for the total ranch business (Table 1) and individual profit centers within the total ranch business (Table 2). A rancher's NRI tells you what your family earned during the year from running your ranch.

Question two

Now, let's look at the second question — is my ranch generating a positive or negative annual cash flow?

Ranchers answer this question from a second, bottom-line summary entitled “Earned-Net-Cash Flow” (NCF). Table 3 presents the NCF for my example ranch.

NCF starts with the net-cash operating income presented in Table 1, and adjusts for debt principal payments, family-living draw, capital purchases, capital sales, and income taxes and Social Security paid this year (remember these taxes lag one year). This example ranch earned a negative $33,256 NCF.

This example ranch is profitable (Table 1) but doesn't cash flow (Table 3). A change in financial structure is needed.

Let's look at another example of NRI and NCF. Table 4 presents the average NRI for my nine, 2005 Integrated Resource Management (IRM) cooperator herds (385 cows/herd average). These nine IRM herds averaged a $49,665 NRI. Their average unit cost of producing (UCOP) a hundredweight (cwt.) of calf was $99. This NRI data can serve as a benchmark guide for Central Plains and Mountain States ranchers.

Table 5 depicts the average NCF for these same nine IRM herds, which also can serve as benchmark data for Central Plains and Mountain States ranchers. These ranchers earned an average of $33,880 NCI/herd, and their unit cash cost of producing a cwt. of calf was $111. Given my projected calf prices for the rest of this decade, this $111 cash production cost concerns me.

A third question

Now let's broaden our focus to an “even better accounting system” — one that provides the answer to one more critical management question needed to determine performance of a ranch business: What is the source of my business and family funds, and how are the funds used?

Since cash flow is all-critical in any successful ranch business, this report summarizes all sources and expenditures of cash — both business and family — during the business year. Table 6 presents the source and use of funds for my example ranch.

Cash can flow into a ranch from several sources. A ranch can start the year with a cash balance, and generate more cash through the year via the sale of production items or capital assets. Money can be borrowed, net off-farm income can be generated, and gifts and inheritance can be received. All these contribute to the source of funds. In this example ranch, the cash inflows total $456,830.

Cash also flows out of a ranch via operating expenses, payment of debt principal, capital purchases, family-living draw, and gifts and inheritance given. In this example ranch, total cash outflow was $417,786, generating a net-cash-inflow of $39,044.

The final adjustment is for income and Social Security taxes paid (this year) and household purchases. Thus, the calculated ending-cash balance for my example ranch is $31,544.

As ranchers face down-trending calf prices driven by higher corn prices and stage in the current beef price cycle, the three accounting summary tables — Tables 1, 3 and 6 — will become all-critical. These three tables will help you measure and assist in managing your ranch's financial success for the rest of this decade.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or harlan.hughes@gte.net.

Table 1. Earned-net returns from the ranch
Operating income $357,030
Minus Operating expenses $302,786
Equals Net-cash operating income $54,244
Minus Depreciation $42,645
+/- Inventory change $11,000
Equals Net ranch income (before taxes) $22,599
Earned net returns to unpaid family & operator labor, management and equity capital.
Table 2. Earned-net returns from beef cow profit center
Operating income $92,788
Minus Operating expenses $57,762
Equals Net-cash operating income $35,026
Minus Depreciation $3,097
+/- Inventory change $977
Equals Net ranch income (before taxes) $32,906
Earned-net returns to unpaid family & operator labor, management and equity capital.
118 herds averaged 151 cows
Table 3. Earned-net-cash flow on example ranch
Operating income $357,030
Minus Operating expenses $302,786
Equals Net-cash operating income $54,244
Minus Debt principle paid $37,000
Minus Family living draw $35,000
Minus Capital purchases $8,000
Plus Capital sales $0
Minus Income taxes & social security paid this year $7,500
Equals Earned-net-cash flow -$33,256
Earned net returns to unpaid family & operator labor, management and equity capital.
Table 4. Earned-net returns from beef-cow profit center
Operating income $232,925
Minus Operating expenses $159,390
Equals Net-cash operating income $73,535
Minus Depreciation $23,870
+/- Inventory change Included in operating income
Equals Net ranch income (before taxes) $49,655
Earned net returns to unpaid family & operator labor, management and equity capital.
9 herds averaging 385 cows; UCOP = $99
Table 5. Earned-net-cash flow on IRM cooperator herds
Operating income $252,175
Minus Operating expenses $177,870
Equals Net-cash operating income $74,305
Minus Debt principle paid $19,250
Minus Family-living draw $21,175
Minus Capital purchases Included in debt paid
Plus Capital sales $0
Minus Income taxes & social security paid this year $_______
Equals Earned-net-cash flow $33,880
Unit cash cost of production = $111/cwt.
Table 6. Source & use of funds
Operating income $357,030
Plus Beginning cash balance $9,800
Plus Capital sales $0
Plus Money borrowed $90,000
Net off-farm income $0
Plus Gifts and inheritance received $0
Equals Total cash inflow $456,830
Plus Operating expenses $302,786
Plus Debt principal paid $37,000
Plus Capital purchases $8,000
Plus Family-living draw $35,000
Plus Gifts and inheritance given $0
Equals Total ranch & non-ranch cash outflow $417,786
Net-cash-inflow $39,044
Plus Income taxes & social security paid this year $7,500
Minus Household capital purchases $0
Equals Ending cash balance $31,544