Don't let depreciation expenses depress you.
In attacking our challenges, it's important to not limit ourselves or establish boundaries of tradition or personal prejudices. Always be willing to think outside the box
Granted, many options considered may not work or simply may not fit your management style. But if long-term sustainability, profit and/or expansion to sustain a growing family are some of your motivating factors, then let the Integrated Business Management Plan Key Operating Statistics Profit & Loss Statement (IBMP KOS P&L) guide you with the numbers.
People trapped within their box often say: "That may work over there, but it won't work around here!" I wish I had a dollar for every time I've proved that statement wrong.
While with the Rollins ranching organization, we AI'd 9,000 cows in less than 45 days in Florida and Georgia. Our cost per AI exposure was less than $13/exposed female (all costs accounted for, including labor, equipment and a chute fee). As a result of the AI, we added $140/exposed female in value.
Prove It First On Paper A very wise man once told me: "Any idea that challenges the status quo and is intended and appears to have the ability to improve a business's financial standing should be considered, but it first must be proven on paper. If it won't work on paper, you can't force it to work in the real world."
As tax time rolls around we scramble to get our taxes filed and worry about paying Uncle Sam. You don't want to pay any taxes? It's easy. Just don't make any money. With that as a choice, I'd rather pay taxes. It's smart to avoid taxes as much as possible, but don't hurt the long-term viability of the business just to avoid taxes.
Often, we see an agribusiness owner run out and buy a new tractor or pickup at the end of the year. This isn't necessarily a bad decision, but it shouldn't be done simply to avoid taxes. That new item just adds to your depreciation expense, often the third most challenging expense I encounter.
Let's say a rancher with 200 cows goes out and buys a $25,000 pickup or $25,000 worth of haying equipment. Using a seven-year, straight-line depreciation, it translates into $20.71/exposed female, just in depreciation expense. That's $5-7/exposed female more than they will normally spend on medical expense annually.
Don't get me wrong. Depreciation expense isn't always bad. Equipment must be replaced periodically, but there is a better way of doing it. Can the haying enterprise be out-sourced cheaper? Or, can hay be purchased and the hay ground utilized for beef "factories" (cows or stockers)?
In a 200-head operation, $25,000 worth of equipment will harness you with $20.71/exposed female of depreciation expense. It doesn't take much haying equipment to add up to $25,000. Then add at least $10-11.50/exposed female for fuel and a minimum of $12.50-15/exposed female in maintenance and repair, as well as $3.50-5/exposed female in haying labor and you have a total of $46.71-51.21/exposed female in haying expense. This doesn't even consider any interest or opportunity expense on the equipment, which at 8.75% is an additional $10.93/exposed female. Now we have $57.64-62.14/exposed female in haying.
Now Let's Try Cattle Let's say we ran a steer to 5 acres on hay ground rather than haying. That steer gained 1.85 lbs./head/day for 150 days (full season) or 277.5 lbs. If you charged on a gain basis at $27.50/cwt., that's $76.31 in lost income opportunity or $15.26/acre. If it takes half an acre of hay ground to supply hay for each exposed female, we're now at $65.27-69.77/exposed female in hay enterprise expense.
Often the time spent in the hay field could be better utilized to implement more profitable programs such as an AI program or a better individual record keeping system. Maybe even get an outside job, which pays you to help someone else put up hay, improves cash flow and possibly reduces the amount of operating note needed. And, liquidation of most of your haying equipment may result in cash that could be used to pay down debt and reduce interest expense, as was outlined in my January, 1998, BEEF article, page 30.
Often, the depreciation expense is a result of buying cows. This can't always be avoided, especially in a down market like we have now, where cows may be purchased cheaper than heifers can be raised.
Consider leasing cows from an investor or taking in cows on shares. Be sure to develop a system of "added value" before jumping into this and have an ironclad contract that provides for and details all expectations from all parties involved.
Depreciation expense reduction is very tricky. After feed and medical expense, it normally will have the greatest direct effect on production and operational management methods of any expense challenge you attack.
Next month: land leases.
Tom Hogan owns and operates AGRI-PLAN Corp., an operational efficiency and financial management consulting firm. For more information or his 100+page manual, "Planning Your Way To Profit," which guides you through the development of an Integrated Business Management Plan (IBMP), call 800/793-1671 or e-mail: AGRI-PLAN@compuserve.com