You need a ranch financial team. Keeping ranch financial records for tax purposes is not the same thing as managing the financial health of a ranch. Stan Bevers has been teaching and consulting on ranch finance for decades with Texas A&M Extension, the King Ranch Institute, and now RanchKPI. This is the first episode in a two-part series with Stan on managerial accounting and key performance indicators (KPIs). In this episode, co-hosted with James Rogers and Clay Worden, we discuss tax accounting v. managerial accounting, benchmarking, regional differences in KPI values and expectations, and the relationships among financial stability and environmental sustainability. As Clay says here: "If there's no margin, there's no mission."
AoR 89: Ranch Managerial Accounting with Stan Bevers
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>> Welcome to the Art of Range, a podcast focused on range lens and the people who manage them. I'm your host, Tip Hudson, range and livestock specialist with Washington State University Extension. The goal of this podcast is education and conservation through conversation. Find us online at artofrange.com.Welcome back to the Art of Range podcast. We're in a series of episodes on ranch financial resiliency and have been talking through how to determine whether ranch enterprises are making or losing money and then how to manage so that they do. My guest today is Stan Bevers. He's a retired economist from Texas A&M and runs cattle himself and is a ranch management consultant that has taught for the King Ranch Institute. And I'm joined again today by James Rogers and Clay Worden, both of whom are repeat guests here. And if you're interested in more details on their background, go back to the first episode in this series. Stan, welcome.
>> Hey, thank you, Tip. I appreciate being here, being a part of it.
>>Tell us a little more about who you are mostly because I think we likely have a number of listeners who have not run in the same circles and may not know you. What was your pathway to doing ranch financial consulting?
>> Yeah. So, I'm a native of Southwest Oklahoma in North Texas. I've went to Texas A&M during graduate school. I got a master's there. I actually live at Vernon, Texas which is in North Central Texas. And if you think about the old ranch grope and drag ranches, the old Four Sixes that is being made popular now, the Wagner Ranch, the Pitchfork Ranch, the Matadors, they're all up here in North Central Texas in what we call the Texas Rolling Plains. So, when I finishedgraduate school, I was offered a position here at A&MCenter that is headquartered here in Vernon to do extension programming in Ag Economics. And obviously, that migrated to the area being so heavily in ranching that all my work started in ranch management with all the ranches around here.That coincided with 1980, or excuse me, 1991, people go back and some people may recall something that was called beef cow/calf SPA, SPA or Standardized Performance Analysis. And there was an effort back in the 1990 range that people were looking to or NCBA and academics and ranchers were looking for a way to come up with a way to standardize calculations for ranchers. I'll be at -- If you were at a coffee shop and you started talking to somebody about, "Well, I ended up with a 90% calf crop," what did that mean? Because if we'd calculate it one way and somebody else would look, "But I had a 98." And, you know, it's pretty easy to have a 98% calf crop after you've sold out all your open cows and all that and you don't calculate this the way that I do. So, you know, there is an effort there that come out from NCBA and ranchers and then the academics. So, that was endorsed, the actual standards, the SPA was actually endorsed by NCBA in 1991. So, that kind of corresponded with my works starting with Texas A&M Extension. And so obviously, you know, we had a lot of ranches that were interested in that at the time. Boy, the peripheral of beef cow/calf SPA was to create databases across the country that once a ranch completed the analysis, we could have this database of results, anonymous database. And we would know kind of well in TexasRolling Plainsweaning for sand age on cow should be roughly 82 to 83%. Well, not all the universities, not all the efforts by various states where, you know, it was very strong but we championed it here in Texas and particularly in the Rolling Plains of Texas. I know I traveled religiously across the state and really also here in the Rolling Plains getting ranchers to complete the analysis. So, we had the largest database here in the Rolling Plains. So, I did that for 27 years with extension. At the same time, I started, you know, having interest in other ranchers from out of states saying, "Well, why don't you come do this for me?" Or other university saying, "Can you come do a workshop for us?" And so, I got to where myself and a gentleman named Dr. Jim McGrath [assumed spelling] traveled the country doing workshops for other universities on how to how to do a SWOT analysis and also to other ranchers across the country doing the analysis for them. I couldn't do it in Texas. And, well, backing up just a moment. So, this ended up being, you know, the opportunity to do a lot of consulting outside of the state of Texas. Obviously, I work for these taxpayers of Texas. They paid my salary as I was working for Texas Extension. So, you know, I couldn't consult inside the state of Texas which was fine. I was happy with that. But as things kind of got bigger, I continued to consult outside the state of Texas which A&M allowed me to do. And then, one thing that kind of started happening later and in 2015 or 2016, I had one of our beef cattle specialist send me a paper on something that was called KPIs. And it was a list. It was put out by dairies. And, you know, if anybody's familiar with the dairies, it seems like they calculate anything and everything. OK.And they had a list of KPIs for dairy cows and dairies operations. So, they sent me the paper and said, "Hey, why can't we do these KPIs for cow/calf or for ranches?" Now, the -- and the movement, the migration from SPA to KPIs was the SPA,in and of itself, only dealt with the cow/calf operation around. And as we all know, even, you know, in the western states where you guys are, there is not a ranch out here in the country that only deals with cows. There's always other enterprises going on whether that'd be stock or cattle, wildlife enterprises, you know, shoot me, even water sales. OK.But from a SPA standpoint, SPA wanted to cut out all that information. So, I had too many ranchers saying, "Well, Stan, this is great. That's nice analysis and all this but if you don't tell me about the operation as a whole," because I've also run in yearlings. You know, I've also got a wild -- so anyway, given the KPI sheet that was sent to me from dairies, I said, "Well, yeah, there's no reason why we can't do this from an operations standpoint." And really look at a full ranch and look at all those enterprises. So, that's where KPIs came in and KPIs is key performance indicators. And a KPI is a number that's trackable over time. It's always calculated the same and it's an important activity that if it's -- if I fulfill my goals of establishing a KPI, then in fact, I'm contributing to the overall profitability of my operation or I'm in fact fulfilling the goals of ownership. OK.So, that's where KPIs kind of got started. I retired because the consulting deal outside the state got so big where I was traveling all over the country and still trying to do an A&M job. And then, I bought my first farm in 2007. So, I was also running my own cattle, still had a little bit to do with the King Ranch Institute, something had to give. So, that's when I decided to -- I've had kind of reached the point where I could retire from A&M. Did that in 2016, went full-time consulting. You know, in 2018, I was on ranches from Florida to Hawaii, from Texas to Montana in 2018. I was on an average of about two to three ranches a month and those visits was anywhere from a day to three or four days. So, things got really big. And that's where Ranch KPI, the company came down.And then again at the same time, I was asked to be a formal faculty member for King Ranch Institute down at Texas A&M Kingsville in 2018. I'd worked for them for a number of years. And that was really twofold. One was just I wanted to be able to really solidify what I was trying to do from not only the KPI standpoint, but also number two was to start having a legacy of people that would come through and kind of know, in my mind, of how to do this correctly. Now, I'll say one more little stuff here and then I'll shut up, Tip, and let you ask a question or whatever. But people kind of missed the boat on beef cow/calf SPA. Again, it was a cow/calf deal. And it was a great program, but where they missed was, and we all know this, good results are always a function of good data. Now, again, it's the old adage garbage in, garbage out. OK. And so, what we write, what we really found from a SPA standpoint is ranchers as a whole. And then again, this was in the early '90s, ranchers as a whole do a really bad job of record keeping, not only from a production side but obviously also from a financial side. And they could tell me, you know, I could ask them. I said, "Well, how many counts did you have say January 1st of this year?" And they would always tell me over the phone, "Well, yeah, I got that number. You know, I've got it right. You know, I ain't find it no problem."When you get there and, well, maybe there was a problem. They didn't keep as good a record as what they thought.OK. I mean, they may know how many total animals they have but when you start breaking it down. OK., how many 2022 replacement heifers have you got on the books right now, you start getting in a little more detail. And the inventory systems wasn't as good as what they thought. And then I don't even have to say a whole lot about how bad the financials was. Now, I'll say this about the financial record keeping. And I, you know, I don't want to upset any accountants at all but -- because again, they're doing what they're told to do. Now, from a financial standpoint, as an industry, the ag industry can continue to do cash record keeping now by the IRS. They are -- the agis the only industry in this country that is allowed to continue to do cash record keeping. As opposed to, you got cash record keeping as opposed to double-entry, full-cost accounting being the alternative or what some people call GAAP accounting, generally accepted accounting principles that every CPA would know, you know, exactly what we're talking about here. Cash accounting is a real issue of -- and does a very poor job of identifying good financial data from a ranch. And, you knowwe've -- but as an industry, we continue to believe that's what we need to be done. And I'm here to tell you I don't believe that at all. You start talking about two accountants and they say, "Well, there's no reason why we shouldn't, you know, why we -- you know, what you're telling us is it makes sense. We need to be doing it this way, not cash record keeping. So again, from the standpoint of what SPA did and what KPIs did was identifiedhow poorly we're doing our job on both production financial record keeping. So, where I spent a good amount of my time in consulting on ranches outside the state was, "Well. OK., Stan, you've told us this, can you help us change?" And so, I spend a lot of time setting up accounting systems and inventory systems for ranches across the country. And then, once you've got a good accounting system, a good inventory system in place, now you can really then calculate good KPI results and then trend them over time, and in fact really start making a difference on your ranch. You can actually use the data now to make management decisions, hence, what we call managerial accounting for ranches. OK. So, I'll shut up right there, Tip, and be glad to answer any questions or comments, man.
>>That's a great introduction. We've mentioned at the beginning of the series that some people's only accounting is keeping enough numbers to file their taxes and maybe even that's pretty sketchy according to what you're saying. When you're distinguishing that tax accounting from accounting them for the purposes of managing the operation, maybe here's a good example of a cow/calf enterprise analysis published by WSU back in the 1990s. Specific to irrigated pasture operations in Central Washington found that the average small to midscale ranch was losing about $75 per mother cow per year. You know, that may not be a big problem for taxation as long as the numbers are accurate, but it's a problem if you're trying to -- if you're running cows for the purpose of making money and not just keeping the grass down. Yeah, how would you define managerial accounting then?We've talked--
>> -- around it a bit.
>> Sure. So, here to me is the big difference. OK. So, cash record keeping focuses on cash flow. OK. Now, then -- and let's define cash flow for just a minute. Cash flow is I had this much money in the bank on January 1 or whatever year, you know, whatever day fiscal year you want to start.But January 1, I had this much money in the bank.You know, I bought stuff. I sold stuff. I bought capital assets like a pickup or bulls, you know, fixed assets, things, you know, expenses that I spend and expand on that have a useful life of more than one year.Relative here, you know, talking about a ton of feed versus buying one bull. OK. So, feeds obviously going to be consumed in one year, probably sooner than that. But a bull we hope is going to have a useful life of, you know, four to five to six years. And then, you know, my management style. So, cash flow is I start with this much money, I spend this much money, I've bring in this much money. And at the end of the year, here's my checking account again. And I went from 100,000 to 90,000. OK. Well, did in fact, I lose $10,000 in a cash flow basis. And cash accounting would say, "Yup, you lost 10,000. So now, I can calculate, you know." And tax accountant or IRA or, you know, anybody that's doing tax can say, "OK, I can do your tax accounting now," or, "I can file your taxes. And, you know, and in fact, we can do some tax manipulation and we can actually make 10,000loss look like a $40,000 loss. So, we can really benefit you there.""OK. You know, I'm all about paying less taxes.OK. That's me.I'm just like any red-blooded, you know, independent, capitalistic American. I don't want to pay more tax than I have to. So, I'm all for that." Well, the kicker is when I went from 100,000 to 90,000 it did not recognize the fact that now, part of that money was spent to buy a bull. And again, that bull is still on my place and still has probably an additional four years of life, you know, that my balance sheet should now be reflecting it. And therein lies a big difference between cash accounting. OK.. And what managerial accounting can and should be done where the managerial accounting focuses on wealth.OK. I'm talking wealth here. What's my balance sheet look like? OK. Because I may have spent a lot of that money on fixed assets that I still have those assets. Now, I took one year to -- and, you know, we're going to continue to get deeper and deeper here, Tip. So, you know, and anybody else, Clay, or anybody that has any questions, let's just open it up.
>> I've got my seatbelts on.
>>Mybalance sheet now reflects an increase in wealth,OK, even though my cash flow looked negative.OK. So, I did not calculate from cash flow what my true net profit was, my net income was. I can only do that through making those accrual adjustments or GAAP accounting or double-entry accounting that now shows my balance sheet went from, you know, 100,000-plus x number of dollars in assets to now, well, my checking account only says 90.But my goodness, my fixed assets have gone up, you know, $100,000. So, my wealth increased.OK. My cash flow decreased. So, again, that's the big difference here. And again, you know, IRS still allows you to do, you know, cash type accounting but it will never ever tell you what your true net income was for that particular year.
>>Hey, Stan, how do we help ranchers around this country get started with what you're talking about? So many of them, you know, they have dirt under their fingernails, they're out every dayand sitting behind a computer or a ledger sheet or the checkbook, you know. It's not really -- it doesn't feel a productive tool. How do you help them get started with these accountants?
>> Yeah, that's a great question, you know. And I've struggled with that for the last 20 years. I mean, how do we get this, you know, to be better because I know the people that are buying these ranches today and even the big ranches. OK. As you mentioned -- as we mentioned before we went on the air of, you know, some of these guys are buying these ranches and they're just believing, you know, I can just, you know, invest the big dollars and put, you know, a bunch of bulls out with a whole bunch of more cows and, you know, just sit back and watch the money roll in. And that's just not the case. How do you change this? Well, you have to -- and again, this sounds like a cop out but it's not.OK. Because first and foremost, you got to change the mindset of this industry. And when I say this industry, I'm talking about all the participants including not only the ranchers, self-evident there, the ranchers being a part of this industrybut also then their accountants.OK. And then also not only the accountants but if they're lending money or being, you know, working on borrowed money, then the lenders have to take it all into account. Because again, one thing that I try to teach on this is you need to understand, as a rancher, when you've got your team of people and including, you know, attorneys, accountants, lenders, all these what I term your ranch team, first thing you need to do is ask what's their motivation,OK, to you. And well, I've had a number, a large number of accounts telling me, "Well, Stan, if I did this or I propose this to my ranchers first off, are they going to have the time and the resources, including capital resource, to actually do a good job of accounting?" Second off, they're really just interested in, did I pay any taxes or did I not? The worst thing and I actually had an accountant told me that I would lose clients if on March 15th, I did their taxes and all of a sudden they had to pay 10, 15, $20,000 in taxes. The ranchers themselves as clients would come to the accountants and say, "My God, could you not have told me this and I could have bought something?" Well, I don't have any problem with pre-paying some expenses. But if you're spending $1 to save 20 cents, that just doesn't seem like good business management to me. OK. And so, not only that but then also, you know, let's cast a shadow on the lenders. And again, I'm not saying anything bad about them. It's just that the industry that we're trying to work in and how we change that, the lenders themselves again, you know. OK., well, you know, my banker called and said, "Stan, I need to bring in, you know, my balance sheet." And I scratch my head and say, "OK, well, what's the balance sheet?" Now, what do you want again? And I'll tell you, the default is the lenders are just, "Bring me your Schedule F." And what happens? Well, the banker and their associates, again I'm not saying this is bad, this is just what's happening, then the banker and their staff actually creates a balance sheet for them off their depreciation schedule on their Schedule F. And do you have any other cattle besides these that's showing up on -- because as we all know, you know, again one of the big issues that we couldspend, you know, a whole afternoon talking about is, you know, the replacement.The race replacement heifers were,"Well, yeah, you know, Mr. Banker, you know, I've got 100-headof replacement heifers that I'm keeping." Well, where are they? Well, they're not on your balance sheet. Well, they won't be because I'm doing tax accounting, because I took those, you know, expenses and wrote them off during that year to make sure I didn't have a whole lot of tax liability for the last year. But in fact, if I do a market-based balance sheet and I look out here and which is what the banker is going to want, "Hey, I want all your assets tied up." Again, that's kind of a bad way to put that. But again, I want to -- me as a banker want to collateralize all your assets in order to secure your notes. So, those 100-head of replacement heifers that you're talking about, I need them on a balance sheet but they're not on a cost-based balance sheet.They'd be on a market-based balance sheet. But the banker themselves typically are the ones that are creating the financial statements when in fact,you know, the rancher and his team should really be the ones that have a really good cost-based balance sheet.OK. Then I can take a cost-based balance sheet and create a market-based balance sheet very easily off of that. So, I think it's Clay, so how do you change that mindset,OK, to start moving this industry forward?You know, there was a time and I believe I'm correct in saying this in 1980, there was a movement, there was actually a bill put in for Congress and the beef industry called it the Heifer Tax. And what it was, was the IRS was trying to force agriculture away from cash record keeping and trying to make them do good business accounting like GAAP accounting, double-entry accounting. The industry fought it tooth and nail from what I got. I was, 1980, I was 18 years old so I really wasn't paying that much attention. I was more interested in other things at that point in my life. But what I've been told was the industry fought it tooth and nail and finally got it defeated. Well, that came up about five, six years ago and the industry beat it down again, you know? So, again, how do you change the mindset? And I think to me, that's the first thing to how you deliver this because again, there's going to be people that are very interested in doing this type of accounting to get this good type of record because again, you know, I've worked with ranches, you know, all over the country. And those that now have KPIs results and can trend those over anywhere from I've got ranches that can trend them for 15 to 20 years. And you talk about, you know, what it costs me to run a cow a year on my operation. Even though it's got other enterprises as I isolate the cattle, the cow/calf enterprise as one specific enterprise. And I can trend over time the last 10 years what it cost them to run a cow a year, what it cost them to wean a calf a year. And all that is based on good accounting, accurate accounting, along with a good inventory system, we know exactly how many they raised from a cow/calf standpoint or how many cows they ran. But to be able to get that over time, you know, those --it's kind of like the early adopter mentality. Those guys have got it. They've got good data. And they're continuing to move it forward. Now, how do you get everybody else to do it? Not everybody's going to be interested in. But boy, I tell you what, if you're going to be a commercial operation --and this industry loves to talk the buzzword sustainability. You know, one of the three pillars of sustainability that nobody -- the third one that nobody was talking about is economics. And, you know, if you want to talk about true sustainability at the ranch level, you better talk about profitability and you better -- if you're going to talk about profitability, you better be calculating it correctly. OK.Because I apologize, I get on the soapbox here and get the rambling too much, guys, so I apologize for that. But when you have industry leaders sitting there and talking about, "Well, this is how we calculate net income," or, "This is how we calculate profit."As the good Lord told us in the Bible, there's only one way to do it. OK.There's only one way to Christ. There's only one way to calculate net income and that is total revenue divided -- minus total expenses including all my depreciation and accrual adjustments. OK. So there's only one way to calculate net income. But when you got industry leaders sitting down in presentations to 200, 300 people and say, "Well, yeah, we understand that's the way you all calculate. This way we calculate net income." No, that's not possible. There's noway to do that. There's this is it and that's the only way there is. So, Clay, I don't have a good answer for you. You know, I beat my head against the wall for 20 some years.And there's enough people out there that I stayed extremely busy of, you know, I'm trying to retire but, you know, I have calls about every couple of weeks saying, "Well, we've seen your stuff. We've seen your website, you know.How do we get you involved?" Andso, not every university -- you know, you would think, "OK, well, it's got to be either at the accounting industry, it's got to be at the lending institute's or it's got to be at the universities." And it's kind of like everybody's job is nobody's job. But again, how do you get everybody educated on this? So, again, not everybody wants it. But those that do have it, it takes a long time to kind of get things and when I say a long time, it takes a year, year-and-a-half to kind of get things in place because again, things don't move fast in the cow/calf industry, so.But how do you get them to start moving that direction? Once they have it, they think, "My goodness, I don't know how I managed with that." I've had managers telling me, "Stan, there's no way I can manage without these numbers nowadays," so.
>> Well, I come in, Tip, for, you know, bringing up this topic that we're talking about now is, you know, the profitability side. I like to say if there's no margin, there's no mission. And so, we are certainly mission-based. We're trying to be sustainable. We're trying to do the right thing as fellow ranchers.But the economic side of it is difficult. And, you know, having these difficult discussions is part of the solution I think. Part of your work, Stan, has been, you know, developing some of these KPIs. And you've got several of them that you've published. If there are some key statistics, critical success factors, critical KPIs, why don't you tell me what we ought to have our folks really focused on? If they could only focus on a couple of them, what would that be?
>>Absolutely. Great question. And I will always, always go to the fixed costs of an operation. Now, and all your listeners are probably saying, "OK."Don't turn off the pod yet. OK. Bear with me for just a minute. If we're going to talk fixed costs, I don't want to hear it. No, no, no, bear with me for just a minute. OK. So, KPIs, I calculate-- when I set up an accounting system for somebody, I want to be able to isolate, quote, the fixed cost. OK.Now then, macroeconomic theory, fixed costs is the old DIRTI 5, D-I-R-T-I, depreciation, insurance, repairs, taxes and interest.OK.That's the old DIRTI 5. I throw a sixth one in there being labor. OK. So, you've got -- because again, labor is a very specific issue for ranching. OK.Labor, you know, in a Chevy dealership, you know, this is one thing. Labor in a car factory is a separate issue. But ranching from or labor from a ranching standpoint is a whole different beast. So, I throw in labor as a fixed cost. So now, you got those five things plus labor. And so, when I set up an accounting system, I want to be able to isolate those things. So, I create, you know, little buckets if you want to call it.And again, I'm not trying to sell anybody on QuickBooks but a lot of people use QuickBooks, a lot of ranchers use QuickBooks so I set up their QuickBooks forum such that I can isolate four things.OK. And the four things pretty much constitute all the fixed costs of that operation. Number one, machinery and equipment.OK. So, anytime somebody writes a check for repair cost on a tractor or a pickup, a new set of tires for the vehicles, you know, a new floor in the gooseneck, whatever, all those go into a bucket for machinery and equipment. OK., including fuel.OK. Fuel as well. So now, I have this big old bucket of cost strictly for machinery and equipment. Number two, labor and management. OK. So, anything I'm doing from a labor standpoint, paying salaries, even paying utilities on my GM's house and all my, you know, my campers' houses, my cowboys' houses, all those things, throw it into another bucket called labor and management. The third one that's easy is interest, so all the interest that I pay. Now, some of these ranches, you know, are blessed and don't have to work on borrowed money.That's fine.That means they don't have an interest bucket.OK.But some of us, you know, are borrowing money, working on borrowed capital. So, you have a third bucket called interest.Then you have a fourth bucket.OK. And the fourth bucket is G&A or general and administrative. OK.Most accountants know what G&A is.OK. Now, G&A is two things. So, G&A is all that little stuff,OK, like attorneys' fees, accountants' fees. And what I tell people is when you're entering the data, if you can identify within five seconds where that expense needs to go, whether it be to L&M or labor and management, machineor equipment, interest to the cows, to the yearlings, if you can identify in five seconds, and that's my five-second rule, it goes to G&A. Because I should know that quickly, if I wrote a check, I should be able to identify very quickly that it goes to either one of those enterprises or it goes to one of my four buckets. And I call those support centers. OK. So again, it's the fixed costs. The other thing about G&A is anything associated with buildings and equipment of, you know, I've had GMs tell me was, "Stan, you know, the owner wants, you know, the fences painted. He wanted that rock gate out front." One case in particular,"Stan, it's a quarter of a mile from the highway to my GM's house and the owner's wife wanted 100 pine trees planted there. And we are only in a 14-inch rainfall district." We have to water those pines. Understand, we've got a rule here. And the rule is he who has the gold makes the rules. And there's a rule too that if you ever question whether you need to spend money that you're owner or the owner's spouse is telling you to spend, always refer back to rule number one. OK. If he has the gold, he makes the rule. And if you have the pine, you know, you have the pine tree. And how to make long story short, pine trees died. OK. But anyway, that was what they wanted. OK. So again, buildings and improvement stuff goes in G&A. So now that you have a long way to get around to what the question was, if I combine those four big groups or big buckets, I now have what I call my support center ratio.OK. And the support range center ratio, if I took those four big numbers. OK., added them together and then divided those into revenue, the total revenue coming from the ranch, I don't care whether it comes from calf sales, wildlife, water sales, gravel sales, I don't care. Wherever my revenue came from, I will now have a ratio that says for every dollar in revenue that this operation brings in, and the KPI is about 62 cents, has to go pay fixed cost or those support ratios for those support centers. So, Clay, to answer your question, if there was one thing that I believe ranchers should look at, it is their fixed cost. OK. And in fact, that's how you do that. You isolate those expenses into those four groups. And you take an Eskimo or whoever you take it or where your revenue is and you come up with that ratio of fixed costs to revenue. It'smore -- it's usually are about two thirds. Now, what does that mean? OK. So, for every dollar that I bring in in revenue, if two thirds of it goes to pay my fixed cost, then that means I have one-third left to do what with. And there's two things I can do with that remaining one-third. One-third of that has to go to pay the variable cost. OK., feed, vet, all those things that go directly to an enterprise.OK. And I'm going to -- I'm here to tell you we're all pretty much doing the same thing when we talk about variable cost. I mean, you know, there's a whole feed industry built on what ends up being just the feed cost of an operation. And that tends to be the bulk of what that variable costs is. So, the variable cost has to be paid out of that other third. And oh, heaven forbid, we might want to keep a dollar or two of that revenue as net income, maybe. But anytime you get your fixed cost over 100% of your revenue, obviously, net income is going to be zero. OK. So, that's the first place in my mind any ranch has to start. And I would have -- you know, I've got ranchers that -- or owners that would say, "Hey, can you kind of run -- look at my numbers for me?""Absolutely. Send me your, you know, your P&L.Send me your schedule and whatever you've got."You know, hopefully, they've got some better stuff. But they'll send me stuff. And that's exactly what I'll do. I'll start isolating their expenses into various things, into those four buckets and calculate, you know, divide that by your revenue. And all of a sudden, you find out, "Well, did you realize that 110% of your revenue is going to pay just those four buckets of things?"
>> Yeah. Maybe one question related to that. It feels like it's a common recommendation from somebody who has not been in the middle of this to track individual ranch enterprises separately.But it sounds like what we're talking about, at least on the fixed costs, is keeping that -- most of that together. You know, say I've got a ranch that has a cow/calf enterprise and we run stalkers. And we sell some straight alfalfa hay. I've probably got a lot of overlap in the fixed costs of all those things. How do I keep those separate if I want to analyze each of those enterprises on its own?
>> Right. Yes, that's absolutely. And again, that's -- so you've got two things here. OK. You've got obviously the production and, you know, i.e. the inventory stuff that you have to keep track of.But then you also have the financials. So, starting with the financials, yes, those other buckets.OK. And again in, you know, in QuickBooks, they were called classes or you know what call them -- centers is what I call them. So, you have the support centers which again, that ignores -- well, I bought 1,000 gallons of fuel this week. I ignore that, you know, 10% of that may go to the cows. I also ignore the fact that 50% of that probably is going to the hay production. I don't try to make that on a daily basis, those adjustsor, you know, those allocations because it's just too tedious. I mean, to set -- most ranchers will not take the time or their data entry person which, you know, we can sit here and talk about who the data entry person is and that's pretty darn important.That person is pretty darn important in the operation who actually does a data entry. But now -- so I don't necessarily need them to sit there and say, "OK, well, of this 1,000 gallons or this, you know, this $5,000 worth of expense for fuel." Don't sit there on a daily basis and say, "OK, well, I'm going to allocate so much to hay, so much to cattle, so much to whatever."Throw it in that bucket.OK. And then at the end of the year, we're going to make one allocation. And OK, I ended up with a quarter of a million dollars in expenses for machinery and equipment. Now, take that quarter of a million and allocate it.Just do it one time. OK. So, you've got all those other things. Again, what I found, my experience is that if they try to do that on a daily basis or, you know, however often they enter their checks and, you know, their reconcile their bank account, it just falls down. It falls apart. You got a data entry person that's not being paid enough to sit there and make those calls. Because what happens, it's hard enough when you get, you know, an invoice for 10 tons of feed and a data entry person is sitting there wanting to put this into their accounting package. And, you know, here's a bill, you know, for $10,000 for feed or 100,000 for feed. And, you know, he or she probably doesn't know how much of that should go to the cows as protein and how much of that should go as a grow ration for my, you know, my weaned calves and how much should go for, you know, growing ration for a bunch of yearlings out here. Well, that's hard enough because again, first thing that person has to do is call the GM and say, "OK, split this for me.Where's it need to go? Who has to pay these expenses? And, you know, which enterprises does it go to?" It's hard enough doing the variable cost. But to sit there and try to do that on every set of costs that comes across a rancher's desk and in accountant's desk, it just falls down. OK. So, put it in a bucket and then make the call later. OK. Now, as you can imagine,and this is one of the -isms that I tell people about, obviously, the allocation of those big buckets at the end of the year is huge. In fact, what I tell people is the second most important decision that you're going to make in this managerial accounting type activity is what those allocations of the fixed costs are. With the first most important decision being to even do this in the first place. OK. That I'm going to do this this way. So, those allocations, as I tell people, "When you come up with. OK, you know, I've got cows," let's just make it simple,"I got cows, a wildlife, you know, and one other something, OK, a bed and breakfast or whatever. And I've got a quarter of a million dollars in fuel. Well, am I going to do it 1/3, 1/3, 1/3?" No, I'll make it a little more, you know, educated than that. Well, so much of it needs to go -- you know, 60% of it needs to cattle or the cows and so forth. Once you make those allocations, what I tell people,"Spend some time. Do your due diligence on determining what those allocations are. And leave them alone for three to five years." OK. Leave them alone because you know as well as I do, if you start changing those allocations every year, you're going to start changing the results very quickly and all of a sudden, my cow cost -- you know, if I decide, "Well, you know, fuel costs went higher on the wildlife." And, you know, all of a sudden, I drive my cow cost down because a portion of that field didn't -- that went there a year ago didn't go there this year. OK. So again, leave them alone once you come off the allocations. Leave them alone for three to five -- unless you structurally change your operation. You had dropped the wildlife component all together.OK. Unless you change your business structure totally, leave them alone. Now, if you change your business structure and you eliminated one of them, obviously, you know, I've got to change my allocation. So, that's a huge, huge decision. But it's all part of the implementation of it all.
>> You know, we've talked some about different enterprises. And not all of the enterprises function on the same calendar months. Do you see some folks splitting up those enterprises at interim in periods or does everybody just keep the records on a January 1st to December 31st basis?
>> Everybody that I deal with keeps them on a calendar year or, you know, a one-year basis. Boy -- and it may not be January 1. OK. A matter of fact, I was on a ranch just a week ago that has a June 1 fiscal year. And that's fine. I mean, there's -- a lot of the older ranches continue to have an October 1, you know, fiscal year. But I don't know that I have ever worked with an operation that has different, you know, fiscal years even though their production year may be different.OK. When you're calculating, you know, your results, your KPI analysis of --again, it starts at the operation, you know. And so, rarely do I ever see that.In fact, I can't say that I've ever seen an operation to do that. Whether it's doing good financial accounting is hard enough to -- again, it may be that any accounting package could, you know, just say, "OK, well, instead of January 1, show me, you know, March 1 through February 28." But it's a little more difficult than that. There's yearend adjust -- there's yearend transactions that have to be made as an operation and not an enterprise that makes it pretty difficult. So, you know, I'd be open to -- for anybody to add more to that, you know. Again, in my mind, it goes back almost full circle to what we talked about earlier about a balance sheet for the operation. First and foremost, I want to know is the operation doing well. And that's a, you know, that's a fiscal year, probably January 1 for all enterprises. And if I made, you know -- well, let's just say, you know, I lost $100,000 for the operation, my first question is, "OK, who made money and who didn't?" You know, I've got, you know, five different enterprises here or what I call profit centers along with my call centers and along with my support centers. Which ones are the profit centers actually contributed positively and which one is my dog? OK. Which ones are my dogs because there'll always be some that are [inaudible]. But I start at the top. OK. I want a 35,000-foot view of my operation. And in fact, the KPIs that I do, you know, the first, you know, five of them are at the operational level and not at the enterprise level. OK.
>> Stan, this is James. So, we've talked a little bit of -- and Tip and I've had this conversation, we talked about monitoring, you know, monitoring your ecological conditions on your landscape and how that information can be beneficial to make better management decisions. And you're talking very specifically about economics here. And so, we kind of think about the economics at the end of the year being your monitoring methods. How do you use -- once you get people to start keeping track of this information, how do you use it to make better management decisions? How often do you review it? Because if we only look at it at the end of the year, then the end of the year is over, right? We've already lost our money.But how do you start to advise people to use this information?
>> Yeah, absolutely. So, let's -- I'm going to use a production example to start with. OK. So, you know, and Tip, you can help me out here. So, we're going to monitor my range situation. OK. So, January 1, again, you know, first of the year or first of the [inaudible] season, whatever you want to call it, you know. And again, you guys, you range ecologists probably have all this information. You know, I put a score out here of my range of 100. Now, as you will know, Texas has been in a drought. And right now, my range conditions in August are probably a 10. OK. Now, granted it's probably going to be lower than 100 at any -- you know, always in August because that's when we're hottest and driest, but normally that only falls from a, you know, from 100 to 50. But here we are at a 10 and I'm just throwing out, you know, guess word numbers here. So, but in fact, you know, James, we're monitoring the range basically every time we go drive past it, right? And, again, Tip, now, when do you formally. OK. make those notations and when do you formally make those scores, you know, whether that's on a monthly basis or a weekly basis or whatever that you actually, and when I say formally, I'm talking about. OK. I've written down a number here. OK. So, that's -- now, shift over now to a financial model. OK. How do I do that from the financial standpoint? And we'll -- before we go there, let's talk about the livestock monitoring though. OK. So, from the livestock monitoring, it's going to be. OK. Well, you know, I'm at to the end of my feeding season but I'm at the start of my breeding season, what's my body condition score on my cow? So, I mean, we were looking at that two weeks ago out in West Texas. OK. You got an average body condition score on your cows out here, you know, at a 4.5 and I was a bit concerned to be honest with you. They were about a 4.5 to 5 and he was expecting to turn the bulls in about two weeks, and it's like you don't have any time to recover this to 5 1/2 to 6. So, you know, what's your expectation? My expectation is my conception ratio is going to be down. OK. But, again, the fact is I've monitored at some point and, in fact, across time throughout a year, I've done the monitoring on my livestock just like I have on my range. OK, now, what do we do on the financials? Well, from a financial standpoint, the things that are important in my mind is two things, and then this is what I've -- what I tell GMs that -- and owners. OK. This is what a GM should be supplying to you once a year, and then this is your monitoring tool. A cash flow. OK. Budget. OK. This how much I need from expense standpoint and a -- what I'm going to be generating from a revenue standpoint by month. OK. So, I can, in fact, monitor. Well, my feed cost for January was 10% higher than what I had projected or what I had budgeted it to be. OK. So, I'm, in fact, monitoring it over time. The second thing is, again, you -- once you've got the cash flow budget, the second thing is a capital asset purchase plan. OK. So, in March, I need to buy, you know, 10 new bulls. Well, here's what I think I might have to pay come April 1st or May 1st and I monitor my budget, my cash flow, or excuse me, my capital asset budget. I can actually go say, "Well, I'm out of line here," and I can, in fact, already be telling my board of directors or whoever that, "Look, my budget -- well, my expenses are already 10% higher than what I had budgeted. So, be prepared at the end of the year, you know, my net income estimate may, in fact, you know, be worse off than what I thought it was going to be."So, again, you're monitoring all three of those: the range, the livestock, and the financials. OK. And I know people want talk about, "Well, yes, I want to see this on a monthly basis. I want to see financial statements on a monthly basis." But really from a GM standpoint, the guy that's actually asked her on the table, you know, and behind the desks and trying to take care of the cattle, if he has that monthly cash flow budget along with his capital asset purchased for land, there's really nothing from a financial standpoint that the board of director shouldn't be able to take that and really get a pretty good idea of monitoring throughout the year from a financial standpoint. I hope that answers the question a little bit, James, but I'm open for discussion.
>> Yeah. I think the comparison to rangeland monitoring is a good one. It may be better than you realize. You know, you're -- if you're measuring how much standing for is there, is -- that's more like tracking what's in your gas tank but there are other indicators that are more like what's in your oil pan. Charley Orchard who had the land EKG rangeland monitoring system used to joke about people wanting to get a different dipstick and this goes back to some conversation we were having before we started recording about the dark side of benchmarking. It's only worthwhile if you're using consistent methods to measure it and/or comparing to somebody else.But, you know, he jokes that people want to get a different dipstick if you don't like the results when you check your oil level.
>> There you go. Right.
>> If the dipstick is accurate, there could be some dire consequences if you don't respond, you know, to a low oil level with adding some oil to the system, you know. So, back to measuring rangeland condition, you know, if we had 10 range scientists on the call here, we could come up with about 24 different definitions of rangeland condition. You know, one of them might be yield, how much is out there which I'm likening to what's in your gas tank, you know. But there's also whether or not you have a diverse plant community characterized by more perennials than annuals, for example, and that might be more like the oil where, you know, we would say that the rangeland is still healthy if you've got a lot of perennial grass. It just happens to be ate down right now, but it's going to come back when the rain comes. In terms of rangeland condition, you probably still have good rangeland condition. You just don't have a lot of standing forage right now. And, you know, you could see a million different ways that that would apply to finances as well, and then maybe you can say a couple things before we quit about the -- this dark side of benchmarking and the importance of measuring things consistently. And it goes back to a question that I think I still have about whether there's a difference between tracking KPIs and what's commonly called benchmarking. And maybe you've answered this and I just didn't quite catch it, but my, you know, my own -- from what I think I'm reading about the KPIs is that that's helping you track yourself overtime and that benchmarking could be both. But may also refer to comparing, you know, your specific values for the individual key performance indicator to what other people are getting for similar enterprises. Can you maybe define that a little bit more?
>> Yeah. Absolutely. Let me start by saying when -- you know, I've been doing this 5, 6, 7 years and I was presenting it to, you know, the Texas Southwestern Cattle Raisers and I had one of the old ranchers come up to me. And basically, he put me on the spot and said, "Stan [assumed spelling]," he said, "I hear what you're saying but, you know, you've --" and at that time, I'm really -- were just kind of showing, you know, what the benchmarks were becoming. OK. And when I say benchmarks, you know, that's kind of the average for a group. OK. So, this is --
>> -- where a benchmark is. OK. And he said, "Stan, I need you to tell me why I should be involved in this," because I hadn't convinced him. All I did was show a bunch of benchmarks, you know, and I quickly realized that that was my own problem, my fault. And I told the gentleman, I said, "Tom [assumed spelling]," I said, "I'm going to tell you right now, if I'm only doing this so I can add your data to the averages, I'm wasting your time and I should not be doing that. But if I do this analysis with you, OK, and you start comparing yourself overtime, then I have done a service for you."So, basically, the first thing was if this isn't important to you, don't waste my time and I won't waste yours. OK. Because, again, first and foremost, it has to be a benefit to the rancher himself. OK..So, in effect, what I'm saying is exactly what you just said, Tip, and that take these numbers, do it overtime, and compare yourself to yourself overtime. But I'm going to tell you, that scares us to death. OK. Because, again, now, I'm holding myself accountable to myself. And if I only end up with a 79% calf crop and I am the GM, that's on me, you know, again, with all the other things that's going on, weather and blah, blah, blah, the only thing in that equation though is weather. And I don't control that but everything else I control as a GM. How much I've fed them, what the body condition score was, how many bulls I've got per cow, blah, blah, blah. OK. Now, I'm holding myself accountable. So, first and foremost, in my mind, if I'm going to benchmark, it needs to be against myself. Now, that's not what we or other industry participants want because, again, I can ask you who is the most common frequent calls that I get for my KPIs summary and it's not ranchers. It tends to be the lenders. OK. They want to know what the benchmarks are. OK..Well -- and, again, in my mind, benchmark is just the average of a group. OK. Now, again, there's a difference between a benchmark and what I would term a target. OK. A benchmark is just what an industry average or a group average is. In most cases, it's an industry average. OK, 82% calf crop costs around a cow a year 950 bucks. OK. Whatever. But that does mean no good as an individual. I mean, if I'm at -- you know, if I'm at even 750 to run a cow or if I'm at 1050 run a cow, in order for me to be sustainable and move my operation forward, I need to know what my number is and what my number is next year. And then what the number was the next year and trend that thing over time. And, in fact, I am starting to move my operation. If I believe my goals or profitability, I am starting to move my operation towards profitability. OK. So, again, that's the dark side of benchmarking and that everybody wants to talk about benchmarking but the first question is. OK. What group are we talking about? Are we talking about the industry average? Are we talking about the Pacific Northwest? Are we talking about the Rolling Plains of Texas? Who are we talking about here from a benchmark standpoint? Because you guys, as resources out there, are totally different than ours.
>> Sure. And the market is doing great on the curve.
>> You know, so if I'm better than the guys around me but I'm still got a 72% calf crop, I'm probably not making money even though --
>> -- maybe my loss is less than the average from my area that doesn't help.
>> Yup. So, I've -- I identified -- you know, the bottom line from the KPI standpoint is to identify, first, my strengths but more importantly what my weaknesses are. Where am I aligned? Where can I actually make those adjustments? Benchmark is only going to tell you that you're in the ballpark or not, that is the only thing that's going to tell you. It will not tell you an action plan, it will not tell you how the other people that make up that benchmark are operating, didn't tell you what their resources are. In and of yourself, you have to know yourself. OK. What I have available, you know, then I create an action plan based upon my weaknesses. I mean, it may be fixed costs. I mean. OK. Who else -- how do you solve fix -- the high fixed costs? Well, number one is you keep the assets longer or, number two, you just quit buying stuff. You know, quit buying that new pickup. You know, that cost us so much now. So, again, you create the -- again, the ultimate goal of KPIs, you know, is to identify those weaknesses that are prohibiting me from reaching my goals and creating the action plan of how to change those numbers.
>> Yeah, that's good. I feel like we're going to have a difficult time figuring out where to close this off though we're probably about there. And I also really don't like the [inaudible] podcast closing where the host says, "Well, Stan, this has been a great conversation."
>> Yeah. Right. Right.
>> "Where can people go to learn more about your work?" But I do have a serious question.
>> If I've only been using a CPA to file my taxes and I want to get some help starting with managerial accounting, where would you recommend that I start?
>> You know, I know it's -- not everybody wants to travel south to -- the King Ranch Institute always does -- every year does a workshop called managing the cow calf business. And we touch on that quite a bit how to do managerial accounting, how do you start it, how do you -- you know. And with the ultimate goal and again, it's kind of like back to Stephen Covey's, you know, start with the end in mind. OK. So, if I know I want these KPIs, I feel like these are the ones that are important, and from an industry standpoint they are, how do I set up my managerial accounting system to match that and to progress and move to where I get to the KPIs? We do those. I mean, there's university extension services that, you know, again -- yeah, that's the best places that I can send you guys. I mean, you can check Two Degrees. Some of the websites, Two Degrees, my website has some of it, you know, but there's a few people out here that are really --you know, few of my people that I've trained over time that would be more than willing to help people get everything set up. I was on the phone yesterday with a young lady that, you know, she wants to be a consultant, she's a graduate of the institute, and she wants to do this. So, there's people out there that can help. But again, I understand it's not free. OK. I mean, your accountant, you know, at times believes his motivation to you as a customer is to reduce your liability and I hope not every accountant is like that because I think you're doing -- I think they're doing their customers a disservice by just focusing on reducing the tax liability. That does not drive profitability. So, you know, visit with your account and chances are they probably could, you know, start it but there's material out there that can help a person get started on. OK.
>>James, you and Clay have a business called Northway Ranch Services which can put ranchers in touch with what you call remote administrative assistance to help accomplish managerial accounting if their local CPA can't do that. And there's probably some others like that. Can you describe the impetus behind that service and what you see as being a potential useful first step for somebody who says, "I need to get there"?
>> Yeah,Tip. I appreciate it. And just for clarity, actually, Marissa Taylor and I are the ones that are the owners of Northway Ranch Services. Clay has been a big part of some -- kind of acting in an advisory role behind the scenes. As we've just ventured out, we've seen the need for ranchers to get their books in order and I think more than just their books, it's kind of their entire operations in order. And just -- I just have a lot of empathy with where ranchers are and the amount of work that they put in on a daily basis and, you know, working with mother nature or against mother nature and there's just so many challenges are there, the markets are there. And so, we've just seen the need to help ranchers get more organized with their information, and I think Stan is doing some great work. There's people like Stan that are out there that I would just recommend people get in touch with them and understand some of these principles, some of these accounting principles, and even get some help, getting -- learning and educating yourself on these things. And then, you know, one of the things that we've done is just try to gear our business around coming alongside ranchers and supporting them. We don't -- you know, we don't kind of tout ourselves as being the experts. I think there's people like Stan or Ranching for Profit or even Clay Worden that I would say are probably some of the accounting experts that are out there. But we've just seen a real value to come alongside and support ranchers to stay organized on an ongoing basis because one thing that we find is that ranchers getting -- they get neglectful about keeping their books in order along the way, whether it's their inventories or whether it's their budgets and their profit loss statements or their -- even their balance sheets. And so, having a good system in place and then having a back office to help support that to keep it current so that you can make management decisions along the way is a niche that we're trying to fill with our company. And we take a lot of pride in that just because we want to see ranchers be successful and it's a challenging world out there. But the better data you have and the more current that data is and that information, the better management decisions you'll make. And so, that's kind of where we see all these things fitting together.
>> Yeah, I appreciate that. And in thinking through, you know, where people can get help, I feel like there's two buckets of help. You know, one is training on understanding how this works, how accounting should be handled for ranch, and -- but then, there's the actual help from a real person who's essentially providing one-on-one assistance, you know, for your ranch. Those are two pretty different things and we'll put some links in the show notes for the King Ranch Institute classes as well as some of these outfits that can provide one-on-one assistance. Well, again, Stan, James and Clay, I really appreciate your time. This is a topic we could talk about for days rather than a few more minutes. But I think we'll probably come back here in a little while and do another interview, and talk through some of the specific key performance indicators and what the numbers mean. And how to measure them in order to give people a starting point for thinking through what kind of records do I need to have in order to even do that analysis so that I can have some idea whether or not I'm on the right track or not. So, thank you again for your time and I look forward to doing this again.
>> Thanks, Tip.
>> Thank you.
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Stan Bevers' website has articles on managerial accounting and more detail on key performance indicators (KPIs).
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