When cattle prices are high, producers must decide whether to pocket or spend those extra proceeds. The list of choices for spending these funds is often long. So, where should producers start when money is burning a hole in their pockets?
Expenses and Debts
Cashing a big check from cattle sales may create some wide grins, but those smiles will be only temporary if profits and economic sustainability are not also achieved. The profit equation is simple: Profit = returns – expenses. Returns must exceed expenses to turn profit. No matter how many dollars per pound that calf sold for, it does not create an economically sustainable enterprise unless operational expenses can be covered.
In situations where high levels of expenditures are incurred in bringing in large returns, profitability may or may not occur. What does occur though is a large cash flow both in and out of the operation. Cash flow is an important consideration even for a profitable cattle enterprise. Although the operation may be profitable for the year, the monthly and weekly cash flows may not balance returns with expenses. For instance, cattle sales are often seasonal with many animals selling at once and creating large cash flows into the operation at those times. Yet production expenses may mount prior to those sales creating a need to dig into cash reserves, liquidate assets to generate funds, or borrow money to meet expense obligations. Expenses may also not be evenly distributed throughout the year. Large purchases may occur at certain points in time, such as when winter annual forage seed is purchased, a commodity shed is filled with feed, or groups of cattle are bought. Advance planning is crucial to properly manage cash flows without compromising operational goals or becoming overburdened with debt.
Reinvesting in the Operation
A major decision that should be made is whether or not to take profits for personal use, to pay down debt, or to reinvest them back into the cattle business. Use caution when investing back into the business during periods of high cattle and other input prices. Make sure the long-term business plan indicates the need to invest. Many producers see high cattle prices and buy, buy, buy in the hopes of many years of good returns. Then when profitability wanes, they sell, sell, sell, often on a lower market. Unless, the cattle operation produces adequate returns from an investment from the initiation to the liquidation of that investment, then rethink the investment before it is made. A good investment ultimately produces profitability over the investment period, whether it short or long term.