Don’t Let Today’s High Prices Create Tomorrow’s Problems

Dr. David Kohl, one of the sharpest minds in ag finance, recently made a statement that ought to stop every rancher and farmer in their tracks:

“I’m worried about the beef industry. The worst decisions are made in the best of times.”

I believe he’s right. We are currently in a moment of unheard-of cattle prices. For some folks it not only feels good, but it looks good on paper too. That is exactly the kind of environment where people can make decisions that will cripple their business three, five, even ten years down the road.

In a commodity business, high prices are the cure for high prices. Look at any commodity over history.  When the price gets high, supply, or demand responds to bring the price back down. At some point the market will adjust. These good times won’t last forever. The question isn’t “How much money are we currently making?” instead it’s:

“How are we using today’s profit to make the business stronger for the future?”

Because if your plan to avoid taxes is to spend money on things that don’t make your business better, you’re not avoiding a problem, you are just creating a new one.

The 60-30-10 Rule for Using Profit

Dr. Kohl offers a simple and effective framework for making smart decisions with good-year profit:

✅ 60% back into the business
✅ 30% to build working capital
✅ 10% to enjoy

Let’s break that down Ranching for Profit style.

 

60% Back Into the Business

Dr. Kohl says, “Better is better before bigger is better”.

This isn’t about iron, shiny paint, or “we’ve always wanted one of those.” This is about increasing profitability and resilience. At Ranching for Profit, we teach the 3 Secrets to Increasing Profit:

1. Improve Gross Margin per Unit (GM/U)
2. Increase Turnover (TO)
3. Reduce Overhead (OH)

Before you invest in anything, ask: Which of these three is holding us back? Then fix that.

And don’t forget, some of the best returns don’t come from steel or dirt. They come from people. Professional development that sharpens management skills, expands your network, and challenges your thinking often produces returns long after a piece of equipment is obsolete. Stephen Covey called it “sharpen the saw”.  Are you too busy cutting wood to stop and sharpen the saw? The highest-leverage investment available is to invest into your own capability.

Bottom line: Spend the 60% on things that make your business better, not just bigger.

 

30% to Build Working Capital

Cash gives you options and protects you from bad decisions.

Too many ranchers are working with dangerously thin cash reserves because they let tax strategy dictate business strategy. If the IRS gets a little, that’s not a tragedy but being forced into desperate decisions when cash tightens is.

What is a healthy target for your business? 120 days of working capital or more.
When you’re short on cash, you lose control. When you have liquidity, you gain leverage.

 

10% to Enjoy

Profit should reward people, not just operations.

Pay a dividend. Share profits with your team. Donate. Take the family on vacation. Just don’t let comfort calcify you. Celebration is healthy, complacency is fatal.

Smart Profit Use vs. Stupid Profit Use

There are smart ways and foolish ways to use profit.
Buying things you don’t need to avoid paying tax? Foolish.
Investing in capability, efficiency, and resiliency? Smart.

Dr. Kohl’s 60-30-10 rule is a powerful filter. I highly suggest using it. Decisions you make this year can echo for decades. Remember good times don’t last forever. But smart decisions made in good times can.

Please share your profit allocations in the comments below. I’m not looking for dollars, I’m looking for what you plan to do with it. X% to pay down debt, Y% to build reserves, etc. I’d love to see some ideas from way out of left field!