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.