Winter is an exciting time to be a rancher! Cold weather and early sunsets make for the perfect time to really dig into your business numbers. These conditions also allow you to analyze your numbers using different time frames. During the beginning of a new year we are recording actuals for the prior year, while also making projections using today’s market prices for the upcoming year. Each time frame has its own purpose, so let’s look at each one.
Last Year’s Actuals:
It is critical to know your actual incomes and expenses for multiple purposes. First and foremost, knowing our actual finances is what keeps us as the business owner in the driver’s seat. If we don’t like where we are headed, we have the ability to make corrections before it is too late. There is also this thing called income tax reporting that needs accurate records to stay compliant with. Recording actuals includes cash balances that reconcile down to the penny with supporting documentation like bank statements, capital purchases, and 1099s or other tax documents. Keep track of important animal performance and crop production metrics that are tied to the cash recordkeeping and balances. Then tally up carryover inventories like animal head counts and crop/feed inventories on hand. Those will be important for estimating next year’s cash flow. Be careful not to get stuck in the weeds recording actuals, they are what they are, we are just using the information to move forward. It’s always easy to pick on repair expenses here; too many times I see books that split out repairs by individual pickup or four wheeler or tractor. Most of the time, that just adds extra lines to your financial reports without any additional information for you to use. Keep track of what is necessary for you to make good, timely decisions and the rest is just supporting information.
Next Year’s Projections:
Here we don’t need to worry about reconciling to the penny. In fact most businesses could round to $10,000 increments and have a great set of numbers to make those good, timely decisions with. The appropriate term might be “accurate within reason”. Sometimes I like to use a percentage rounding error, each month that we get closer to the end of the year we should be that much closer to our actuals. So you start off at a 10-12% rounding, then by mid-year 5-6%, and by Halloween we should be within a couple percent. Practice makes perfect, the more time you spend comparing projections to actuals, they will get closer and you will have more confidence in your decisions.
While doing your projections it is so important not to get stuck looking back at last year’s numbers. I know this is hard but those numbers are done and gone. Now we have older cows or new cows into the herd, crop rotations may or may not repeat, the weather pattern has changed, markets have adjusted, and everything is just unique to this year. This will be the same situation next year and the year after, every year is different. We can’t control that, but we can always control our attitude, behavior, and response. We can also stress test our economics by reducing incomes and increasing costs. If the numbers work under those test conditions, then that planning event took a lot of stress out of the upcoming year. If not, let’s build contingency plans and dates to go along with it.
Today’s Markets and Information:
When we are figuring out what decision to make during our planning process we use today’s markets and information to make the best decision we can, then we move on to the next decision. I know that is easier said than done, but that’s where our focus needs to be. We can all but predict the future by knowing our past numbers, today’s markets, and our willingness to change when an opportunity presents itself. This approach allows you to avoid guessing on future markets or anything based on what the media or experts are saying, no one has a crystal ball. We also need to address our emotional tie to the decision as well. Using today’s markets and knowing our costs will help us make more of an objective decision rather than a subjective decision that is biased towards our feelings and preferences.
Once we get comfortable with spending time working with recorded actuals and how they relate to your projections, you will honestly enjoy it. The Pareto Principle will probably ring true to your time spent doing this work: 80% to future planning and opportunities, and 20% recording actuals and comparisons. As we like to say at the Ranching for Profit School “We don’t want to drive down the road using the rear view mirrors,” but we want to keep a pulse on what is actually happening too. If we are big dreamers, but the projections are way off, that will show up in the actuals. With agricultural seasons, we could break the year down into thirds or quarters just like the feedback loop: plan, monitor, manage. Winter is the time of year to plan; we know the assets on hand, and the liabilities due this year. Now we must produce the value needed to meet those and our profit targets. Mid-summer is the period to monitor your operation; are we staying close to plan or have we scrapped the original plan and onto something different. Fall is the season to manage; let’s make sure we finish the year strong, and we have enough information at hand to start next year’s plan too.
I know this is all a lot to take in and financial planning can be overwhelming, but I encourage you to sit down next week and run your numbers for both years. Compare 2024 actuals to what you projected, then use that information to work on 2025. If you didn’t do a projection for 2024, what a better time to start in 2025 than right now! For additional resources check out these past ProfitTips articles and a quick video:
Financial Record-Keeping, A Rancher’s Favorite Chore
