How do i figure gross profit
The sheer complexity of the knowledge presented in the previous chapters provides insight as to why grazing management is largely a heuristic art rather than science. In the first 9 chapters of this book, we have attempted to sequentially present the basic concepts that we believe are critical to transforming grazing management from a heuristic to an analytical decision process. Chapter 1 focused on principles and concepts of grazing management relative to ecosystem structure and function with special emphasis on energy flow. Chapter 2 focused on nutritional aspects of livestock production as affected by various management tactics, while Chapter 3 provided insight as to how animals react to their environment and subsequently adjust their foraging tactics to maintain their health and well-being. The impact of herbivory on growth and development of plants was examined in Chapter 4 and its integrated effects on various plant assemblages was examined in Chapter 5. In Chapter 6. specific attention was focused on the impact of herbivory on quantity and quality of water and soil. The integrated short and long-term effects of herbivory on livestock and wildlife production were examined in Chapter 7 and Chapter 8. Finally, in Chapter 9 the potential impact of social and economic factors on man's ability to meet his goals through grazing management was discussed. In this chapter our objective is to provide insight as to how man can most effectively use this broad knowledge base to meet personal goals.
The Decision-Making Environment
It is impossible to separate grazing management from ranch or firm management since resources utilized and derived are integral parts of the ranch firm. Grazing management must be viewed in the context of a system comprised of interacting components which can be and are manipulated (Fig. 10.1 ). Interrelationships among ranch resources, such as people, finances, land, vegetation, climate, animals, and time, as well as activities and external influences must be understood and taken into account by the decision maker. The impact of each decisive action must be evaluated in advance and the outcome monitored. The manager must also be able to anticipate and implement timely changes to optimize decisional outcome. As Wilcox (1982) stated "the successful rancher is that one who can, firstly identify the different factors which will affect operation of the ranch, and secondly, can anticipate the changes in them that will influence his success. This successful rancher is the one who avoids crisis in the running of his enterprise. " No operator should allow himself to get into the crisis situation, but should arrange his management style to anticipate the changes which will be necessary in the operation and make those changes affecting in a timely manner." Likewise, White et al. (1987) stated "This [anticipating change] is an impossible task if the ranch has not developed a logical and practical approach for analyzing information, evaluating plans, and directing daily operations. It is doubtful that any person can accurately assimilate the mass of information and predict the overall ranch outcome without detailed planning and evaluation."
The Nature of Expertise
The effectiveness of a manager in using available information (i.e. expertise) has a psychological basis deriving from memory, perception and problem solving skills and exists only in the social context in which the manager functions. The level of acquired expertise relates to learning and assimilation of knowledge in the cognitive processes, judgmental behavior, social behavior backed by social knowledge, creative behavior, analytical behavior and ability to establish and pursue firm practices when necessary (Greenwell 1988).
Decision making in grazing management as in any other management occupation requires a strong foundation of technical (cognitive) knowledge enveloped in a functional social knowledge of his/her cultural environment. The quality of the decision depends on the analytic and judgmental skills of a manager. Analysis is a particular type of thinking which transforms one representation into one or more different representations making it easier to perceive particular meanings which were not readily evident in a previous representation (Greenwell 1988).
In an attempt to reflect the relative importance of mental states and behavioral components of decision making, we have constructed a matrix which ranks the relative importance of each of these factors in their relation to grazing management (Figure10.2 ). Judgmental skills coupled with the analytical and creative capacities of the individual manager have a critical impact on the quality of the decisions made relative to the grazing manager, while social skills are of lesser importance. Deep cognitive skills are also of importance in planning and implementing other closely associated actions such as herd health programs and livestock handling techniques.
Even though a great deal is often known that would assist managers in the making of quality decisions, many livestock production decisions are inappropriate and/or incorrect because the information base of the manager is incomplete and/or inaccurate. Unhappily the functional base is often incomplete because the manager has failed to either search out and/or assimilate all the available information on a given subject, or in some cases the needed information is simply not available.
The grazing manager's perception of the world is shaped by personal characteristics, experience, and education operating within the context of age, family status, beliefs and socio/cultural environments. Perception can be viewed as a mental filter that permits only certain facts to pass through to the analytical centers of the brain (Figure 10.3 ). Thus, perception is a major factor affecting a manager's decision-making ability because it is the mechanism through which the manager builds internal information bases whether accurate or inaccurate but generally incomplete. Perception plays a particularly strong role in the complex decision-making environment with which grazing management must work.
Functions Of Management
Several good books on agricultural business management (Kay 1981, Duft 1979, Koontz and O'Donnell 1977) are available which clearly describe and define in great detail managerial functions. All generally agree upon three to five managerial functions, depending on how the categories are defined. For our purposes, we use three categories: planning, operating and monitoring (see Fig. 10.4) (Conner 1984).
Planning is the primary function of management. If done correctly, it is an almost continuous process. It is a function that must be performed by everyone involved in management, from the land owner to the laborer. It is often helpful to think of planning as a stepwise process. The steps, in the order in which they must be performed, are: 1) Establish and prioritize goals. 2) Inventory and assess resources. 3) Identify and analyze alternatives. 4) Select the alternative(s) that most nearly achieves all goals and objectives.
Operations include those managerial functions relating to getting the job done. Most of the sub-functions in this category relate to organizing, selecting, directing and motivating people to implement and carry out the plans selected in the planning process. As in other aspects of the ranching business, there are alternative organizational structures, personnel incentive programs, etc. Thus, the selection of the best operating practices for any given ranch business should also grow out of the planning process.
The operation of a ranch business, like any other business, benefits from a well-defined organizational structure that delineates the areas of responsibility of all the people involved in the organization. A good organizational structure eliminates duplication and overlapping responsibilities, makes it easier to select the "right" person(s) for the jobs to be done and facilitates communication and motivation. The larger the business, the more formal the organizational structure should be. However, even the small ranch will usually benefit from a clear delineation of areas of responsibility.
Securing and retaining personnel is traditionally a troublesome function for ranchers. How frequently we all hear the complaint that "you just can't hire good hands any more." Most often, however, it can be shown that the problem results from poor, or non-existent, staffing and personnel programs, poor communication between the various levels of management and/or between management and labor and the failure of management to provide adequate motivation for employees. In many cases, lack of motivation is not the result of low monetary benefits, but rather it stems from the failure of the employer to provide a means for the employee to attain an acceptable level of personal satisfaction from his work.
Monitoring includes those managerial functions which are necessary to measure the performance of the ranch operation with respect to its progress toward achieving the goals and objectives delineated in the planning function. There are two general sub-functions included in monitoring. The first sub-function is the acquisition and maintenance of information. The acquisition and maintenance of information involves the maintenance of internal records and accounts such as expenditures and receipt ledgers, bank account balances and production records by pasture, herd and/or individual cow. It is also necessary to acquire and maintain information from external sources such as livestock and feed prices, market outlook reports, import/export regulations etc.
The second sub-function is the use of the information gathered using analytic and diagnostic techniques to measure performance. Typical analytical and diagnostic techniques include annual income and net worth statements and financial ratios such as debt-equity, annual rate of return on investment, etc. Also included are actual cash flow reports, production measures per hectare and per head and comparisons of prices received to monthly and annual average prices. All of these analytical and diagnostic methods are helpful in determining where adjustments are needed to more nearly achieve all the ranch goals and objectives.
By now, it should be obvious that none of these three functions, planning, operating and monitoring, go forward in isolation. In fact, they are all part of a continuous process with the monitoring function providing new information as to availability and capability of resources and the relative feasibility of alternative plans. In turn, each change in plans requires operating adjustments to implement and carry out those plans. In addition, since humans are intelligent, emotional animals, goals and objectives often change with time, thus necessitating reassessment of plans.
The Planning Process
Now, let us turn to the practical steps in the planning process and examine each of them in more detail.
The role of goals has been discussed extensively in the previous chapter (see Chapter 9 ), but another look, from a planning perspective, is warranted. The totality of ranch goals and objectives must be defined to serve as the measure against which success is to be judged. Goals establish the milestones that warrant achievement. They delineate the differences between where and what the ranch is now, and where and what the manager wants to be in the future. Yet, as absolutely essential as they are, failure to define and reevaluate goals and objectives is one of the most common failures and cause of failures in the ranching industry today. Many ranchers who do define goals fail to prioritize, or rank them as to importance, leading to other kinds of problems for ranchers.
Goals and objectives can be grouped in many ways: long-term - short-term, personal-financial, general-specific, etc. However, the most important and useful grouping should be based on order of importance. The most important goals are those of the resource owners; i.e. the land owner, livestock owner, etc. If all of these resources are owned by the ranch firm then this task is much easier than if the resources are owned by different entities, because there is less likelihood that goals will conflict. The important point, regardless of the nature of resource ownership, is that if the resource owner(s) do not clearly identify and communicate their goals, then there is little chance that the other people associated with the business can be very effective in helping the resource owner(s) achieve them.
Resources are the things used to achieve goals and objectives. Types of resources vary greatly but in the ranching business it is useful to group them into five broad categories: lands, animals (livestock and wildlife), finances, facilities and people. The organization and operation of a ranch involves all of these resources in some measure. But the specific combination of resources available to any one ranch differs from the combination available to any other. Thus, the resources available to each ranch must be carefully evaluated if the unique combination available is to be organized and used to best meet the totality of ranch goals and objectives.
The assessment process must be thorough enough to provide clear indications of the inherent capabilities and limitations of the resources. Most people in the ranching business are familiar with many of these assessments and find capability assessments easy. For example, most ranchers are able to estimate the "proper" stocking rates for their ranches and can generally estimate the productivity of their cow herd under normal conditions. Alternatively, many ranchers overlook, or incorrectly assess, the ranch business's financial capability to survive annual operating losses brought about by drought or prolonged low prices, or the capability of the labor and management of the ranch to adapt to and efficiently operate a new grazing system.
The important point in any resource assessment is that it must thoroughly evaluate all of the resources available to the firm. They are all important and the failure to use any one of them efficiently can be detrimental to the achievement of some or all of the ranch goals and objectives.
Identification and Analysis of Alternatives
The identification and analysis of alternative ways that a set of resources might be utilized to accomplish goals is the most difficult step in the planning process. The difficulty stems from the multitude of alternatives. That is, alternatives exist for not only enterprises like wildlife, cow-calf, mutton goats, ewe-lamb, combinations of all of these, but also production techniques such as range improvements, grazing systems, and supplemental feeding. In addition, there are marketing alternatives, such as selling direct for cash, forward contracting or sending to custom feedlots and then selling. To further complicate the formulation of a good plan, various combinations of all
of these enterprises, production and marketing alternatives must be examined.
For each alternative, or unique combination of alternatives, the planner must first evaluate resource requirements and costs to determine if the ranch's resources are sufficient to implement a practice, or if, for example, some of the financial resources would need to be used to acquire other resources, such as facilities or livestock. Next, the expected production levels, revenues and impacts on non-financial goals (free time, peace of mind, over reaching societal needs, etc.) likely to result from each alternative should be assessed.
Several analytical methods are available which the rancher may use in analyzing alternatives. Some of the more common methods used are enterprise budgeting, gross margin analysis, break-even analysis, cash flow analysis, investment analysis and linear programming. Whether the analytical methods chosen to be used in any given planning situation are sophisticated or simple depends on several factors, including the accuracy and reliability needed for the estimates, the length of time over which the plan will be in effect and how quickly the information is needed.
Finally, after all the alternative combinations are analyzed, the combination of alternatives which most nearly meets the totality of ranch goals and objectives is selected. Care should be taken to ensure that personal goals are not given undue emphasis over financial goals, and vice-versa, in the alternative selection process.
In practice, it is usually helpful to use the time dimension to establish hierarchical order to planning. First, long-term or strategic planning concerns the achievement of goals of the resource owners over several years. Long-term plans generally affect major changes in the way resources are used to achieve goals. Once implemented, plans at this level cannot be altered quickly. In terms of organizational structure they are usually under the control of resource owners and/or upper level management personnel.
Intermediate time periods require tactical planning. Most often tactical planning is the responsibility of middle to upper level management and is more closely related to the operating function than long-term planning. Intermediate term planning results in decisions of how to best effect or implement long-term plans. Decisions resulting from tactical planning are likely to be repeated at least annually.
Short term or operational planning is characterized by those many decisions that must be made in a short time-frame. Plans for the day's or week's activities are examples of operational plans commonly made.
A Model Plan
In the following sections we model some of the practical aspects of ranch planning relative to grazing management. We use the 2900 ha Texas Experimental Ranch (Figure 10.5 ) as the resource base. We chose to use the ranch in this work example because of our familiarity with the land resource as an ecological unit and the availability of long-term vegetation supply and livestock performance records.
Our analyses is developed around two broad ownership goals. 1. Maintain the quality of the natural resource in perpetuity. 2. Retain ownership
Strategic planning for grazing management requires an inventory of resources, the analysis and selection of optimum mixes of enterprises and an investment analysis for the improvements required by the given mix of enterprises.
Resources consist of vegetation (forage), animals (domestic/wild), land, facilities, finances and people. Forage inventory methods vary depending on the nature of the animal enterprises, entity doing the planning and country where the planner resides. In the United States, the most pervasive resource inventorying system is that developed by the USDA Soil Conservation Service which provides a comprehensive analysis of the ecological state and trend of the vegetation complex (i.e. see Chapter 5 ), rangeland condition, pasture/hayland suitability, grazeable woodland suitability, and grazeable cropland suitability as related to a soil series. A massive knowledge base has been assembled during the past 40 years relative to production potential of various soil series/range sites of a given ecological condition. Because this knowledge base has expanded rapidly over this period of time, reliance upon expert opinion and local knowledge (lore) has markedly declined. Animals are generally the resource best understood by grazing managers as they can be counted and their response observed in a relative short period of time. However, characterization of individual performance and nutrient inputs relative to individual output so critical to their management is rarely surveyed and so understood by the manager. This shortcoming can readily be remedied through the use of relatively simple procedures and recording practices as individual animal identification, records of performance (conception, weight, fiber intake) and monitoring by way of pregnancy palpation, body condition scoring, and weighing scales.
An inventory of facilities is critical for effective proportioning of fixed costs by enterprise and identification of excessive overhead costs associated with maintenance of various possible grazing enterprises. So for example, labor costs are often intertwined with facilities when on-ranch housing is provided. Therefore, selection of enterprises and investment strategies which affect grazing management must consider the division of labor and utilization of facilities which have both fixed and variable costs.
Finally, an inventory of financial and human resources is important because they impact the amount of capital, labor, expertise, etc. that can be effectively mobilized/utilized in the enterprise.
The first step in our working example analyses is to examine the forage resource relative to its suitability as a grazeable resource. Previous research at the ranch has shown the area is dominated by a mixture of highly palatable, warm-season short - and midgrasses and Texas wintergrass, a highly preferred cool-season perennial. These grasses grow under a light to moderately dense stand of honey mesquite, an unpalatable woody tree (Heitschmidt et al. 1985). Annual and perennial forbs are not a major component other than occasional infestation of the highly unpalatable annual forb, Texas broomweed. The region is particularly suited for cow/calf enterprises because: 1. The warm-season grasses provide a suitable forage complex during late spring, summer, and early fall. 2. Texas wintergrass provides a creditable forage during late fall, winter and spring often of sufficient abundance to eliminate the need for winter feed supplementation for the mature cows. 3. Climatic extremes are well within the tolerance levels of cattle. Thus, to meet our established ownership goals, the major enterprises we will consider are (1) cow/calf and (2) stocker cattle.
Figure 10.5 is an aerial photo of the ranch delineating fence lines, water impoundments, working pens, roads, etc. and associated soils. Table 10.1 is a pastures summary by soil series. Table 10.2 is a pastures summary of potential carrying capacities. In this instance, estimated carrying capacities are based on USDA-Soil Conservation Service recommendations, historical records and experience in light of the ownership goal of maintaining quality of resources in perpetuity.
An inventory of facilities reveal adequate headquarters, working pens, equipment, etc. are available for proper management and care of the livestock. Analyses also indicate adequate capital, labor, personnel, etc. to meet management goals.
Once an accurate resource inventory has been completed, the manager must determine which animal production enterprises are feasible (i.e. cow/calf, stocker or a combination), the relative efficiency of each and the net contribution each might make to overall goals. One tool for accomplishing this task is an enterprise budget which provides detailed information on resources required, costs and estimates of production levels and product prices (Conner and Chamberlain 1985).
Figure 10.6 exhibits the data requirements and the classification of annual costs and net returns information that can be obtained. The enterprise budget is developed to project the expected costs and net returns for a typical one year period within a planning horizon of several years. It is analogous to an annual profit and loss statement for a business firm except that it typically represents only one production enterprise and includes only the annual costs and returns attributable to that single enterprise. Capital costs represent the opportunity cost to the rancher of having his operating and investment capital tied up in cattle, fences, pens, etc. instead of having it invested in other investment opportunities, such as a savings account, where it would earn an annual return in the form of interest. Ownership costs reflect the annual depreciation expenses of the purchased assets. Land is excluded because its productive potential is not used up in the annual production process and raised cows are excluded because their replacement cost is reflected by not selling a portion of the heifer calves and putting them back in the herd each year. Annual taxes and insurance costs are also included in ownership costs. Residual, or net, returns to the unpaid resources are calculated after each of the major categories of cost have been developed and deducted from gross income. Residual returns to land, management and profit represent what remains for the rancher to pay the opportunity cost of land use, his management time and expertise and to claim as profit.
For example, Table 10.3 is an enterprise budget for a 1215 ha cow-calf operation at a moderate rate of stocking. The budget is based on performance data collected at the Ranch under a year-long continuous grazing strategy (Heitschmidt et al. 1990). Table 10.4 is a similar budget for a stocker operation. Similarly, budgets can be developed for other livestock and/or wildlife enterprises as well as other grazing strategies. By comparing the net returns per acre for each, the rancher can select the one providing the highest return.
For example, Table 10.5 is a summary of cow/calf enterprise budgets for 4 grazing strategies based on livestock performance data collected at the ranch (Heitschmidt et al. 1990). Development of such budgets is appropriate in most grazing management analyses because of the potential impact of various rates of stocking and grazing systems on rangeland resources (Chapter 5 and Chapter 6 ), livestock (Chapter 7 ) and wildlife (Chapter 8 ) production and economic stability (Chapter 9 ).
A major tool utilized for identifying the effect of various enterprise mixes on management goals is linear programming. Linear programming (LP) may be used to select the level and mix of enterprises to maximize the rancher's goals subject to the specific set of resources available (Glover and Conner 1988). For example, Whitson et al. (1982), using livestock performance data from the Texas Environmental Ranch (Heitschmidt et al. 1982) determined that although year-long continuous grazing at a heavy rate of stocking resulted in 27% more net income/ha than a 4-pasture, 3-herd moderate stocked, deferred rotation system, it also increased economic risk (see Chapter 9 ).
More detailed information on the inventory of resources and resource requirements of the various animal enterprises can be effectively used in the LP analysis to better match animal needs to available resources. For example, the resource inventory and the enterprise budgets could be supplemented with detailed information on classes of forage (grasses, forbs and browse) available by season (summer, fall, winter and spring) and intake of the same forage classes by season for each animal enterprise. These data, combined with other resource parameters, enterprise requirements and product prices in a LP solution algorithm could provide explicit information on the best combination of enterprises to use with the available resources (Fig. 10.7 ). Furthermore, if product prices change, or if the forage resource were to be modified by a resource improvement practice, the model could be re-formulated and an optimal solution obtained for the new situation.
Another strategic planning factor involves the question of making major investment and/or operational changes such as the installation of new livestock water facilities or cross fences necessary to implement an alternative grazing system. The appropriate analytical technique for determining whether such practices will result in significant positive contributions toward the rancher's goals is investment analysis.
Brush control practices, fences, water facilities, etc. are all potential investments which require a relatively large initial capital outlay and produce variable annual returns over severalyears. Other investment opportunities always exist so money invested in a particular improvement practice or program cannot be used for such alternatives. Any resource manager must insist that any improvement practice earn a return on the money invested in it at least as large as the return that could be earned in alternative investments (i.e. opportunity cost).
One way to compare the annual income earning potential of different investments is to use the "average annual rate of return" which is the average annual net earnings or profits divided by the total amount of the investment with the quotient expressed as a percentage. For example, and as a standard against which to measure an investment, is an investment in a savings account earning 9% interest which is an average annual rate of return of 9%.
To calculate the addition to total annual net profit derived from a specific rangeland improvement practice, one must calculate the changes in annual costs of production and revenues from products and/or service produced solely as a result of the resource improvement practice. Since costs and revenues derived from improvement practices differ drastically in the years after the practice is implemented, these changes must be estimated for each year for several years into the future (Scifres et al. 1985).
Because the costs and returns associated with the resource improvement practice occur at different times in the planning period they must be adjusted to reflect their present value before being compared. Present value is the worth today of a sum of money that is to be available sometime in the future. The idea that there is a difference is based on the time value of money. Revenue received a year from now is not worth a dollar today because the use of it is foregone for one year. To equate the two, i.e. to estimate the present value of currency that is to be received a year from now, simply multiply the currency by the discount factor.
The discount factor for each year into the futureSource: cnrit.tamu.edu