From the January issue of Drovers CattleNetwork.
Economists have for many years said the average beef operation in the United States makes 1 to 2 percent profit over the life of any cattle cycle, or through about any 10-year period you want to pick.
Although the statistics also tell us some are making 5 to 10 percent profit, they also say equally as many operations are losing 5 to 10 perecent over time. That’s a poor statement about our industry as a business, and it says we surely need to pay a lot more attention to profitability and to the metrics that can help us step it up.
A new set of measurements and targets released by Texas economists could do that.
Called key performance indicators, or KPIs, these are economic measures of management decisions and their effects on profitability. They arise from a combination of real-ranch economic data derived from more than 20 years of standardized performance analysis, and they also incorporate farm financial-standards methodologies. These are well thought out and well tested.
Some of the KPIs are specific to cow-calf operations, while some will fit other beef operations, too, says Stan Bevers, Texas AgriLife economist at Vernon, Texas.
A few of these measurements will shock some managers, who are accustomed to glove-box economics and out-of-pocket expenses. An example is that most medium-sized cattle operations with a sole operator do not charge themselves for their labor in profit calculations, yet they take part or all of their living out of the operation’s proceeds.
Each KPI has a target that Bevers and fellow economist David Anderson have calculated to help you attain a decent profit level under current conditions and for each measurement. Each of these KPIs tends to measure management performance across multiple categories within a beef business.
Specifically, there are eight KPIs measuring finances, one KPI measuring production, and four KPIs that integrate both finance and production. In fact, however, all have components of each.
For example, pounds weaned per exposed female is a production measure, but it has critical financial ramifications because pounds of calf sold from all cow-calf operations and the price received for those pounds are the primary drivers of income, Bevers explains.
However, Bevers warns that no single one of these measures can assure profitability, and depending on needs, some measurements beyond the ones listed here could be an important addition for your ranch.
Perhaps most important, once you begin to calculate these KPIs each year, then you can form important trend measurements for improvements or devolution of your management decisions.
Here are the 13. We’ll take them one bite at a time through the next year in Drovers CattleNetwork’s monthly editions.
1. Pounds weaned per exposed female. Your target: 460 pounds
2. Revenue per breeding female. Your target: Greater than $950
3. Nutrition base expense as a percent of total expenses. Your target: 30-45 percent
4. Labor and management expense as a percent of total revenue. Your target: Less than 15 percent
5. Operating expense as a percentage of total revenue. Your target: Less than 75 percent
6. Net income ratio. Your target: Greater than 5 percent
7. Cost per hundredweight of weaned calf. Your target: Less than $170
8. Current ratio. Your target: Greater than 2.0
9. Total investment (market basis) per breeding female. Your target: Between $7,500 and $12,500
10. Debt per breeding female. Your target: Less than $500
11. Equity-to-asset ratio (market basis). Your target: Greater than 50 percent
12. Asset turnover ratio (cost basis). Your target: Greater than 15 percent
13. Rate of return on assets (market basis). Your target: Greater than 1.5 percent