#19 A Dollar Saved Stays In Your Pocket

Hello, I am Jim Elizondo from Real Wealth Ranching and today we will discuss ways to save money without hurting our profits.

Why is it so important to differentiate between savings that do not hurt your profits and so-called savings that hurt your profits? Have you heard of penny wise and dollar foolish? It means that one can get so enthusiastic about saving that you start losing potential profits!

I have a lot of experience with this as I started my own medium sized business, a cheese and yogurt factory, to be able to buy my first farm. Learning how to calculate if a dollar can give you much more, when wisely invested, than if kept in your pocket can be the difference between profits and losses.

Sometimes this will be easy and plain to see, but other times not so easy. Today we are going through the 5 steps to make decisions, so you are certain it is profitable to spend a dollar on something or if it's better to keep it in your pocket.

Please remember that grazing livestock is, normally, a low margin enterprise, so we need to be very careful with how we manage our money and business.

So, if you know somebody who is trying to improve their profitability in their operation, maybe they are just starting out or maybe they have hit a rough patch and they are thinking “How can I make this work?”, introduce them to this podcast, please. I know that I can help them, and I would love to help as many ranchers as possible to build an operation that they absolutely love.

Step #1: Cash flow vs capital gains

Sometimes we can confuse capital gains with cash flow

This is very important as if we do not have cash to pay for expenses, we are broke. We need to differentiate capital gains from cash flow.

Example: Buying a pot load of steers that will take time, maybe 9 months to market and get paid, while maintaining our ongoing expenses covered. We may get very good daily gains and profit when we market the steers but if we do not have actual cash to pay for expenses we are out of luck. Is the same as holding your breath for too long! The increase in value of the steers is the capital gain and the money in cash you generate in the meantime is the cash flow.

Always, always consider cash flow without losing sight of capital gains.

Step #2: How much will I get in direct return?

This means, how much short-term money will I make from my investment? 

Example: One wire high tensile electric fencing to build paddocks to further subdivide with temporary fencing.

You may invest, let’s say $2,000 which divided by the 20 years the fence should last is around $200 per year plus interest, maybe $270 total.

If investing in the fence saves you much more than $270 in labor costs, it is reasonable to do it because you will have the added benefit of less time spent building temporary fences which ensures it will be done, plus the electric fence will be hotter to contain your livestock.

Prices of inputs and prices of what we sell can change so we need to make our numbers every year to know if it is convenient to do something or not.

Step #3: Every action or decision we make has an impact on the rest of the business

We need to consider how one action or expenditure impacts other parts of the farm or ranch. Sometimes, just by spending a little money, per cow per day, in a minimum amount of a high protein supplement we can increase our stocking rate to double, maintaining good body condition, while using stockpiled forages, and with time, to a much higher stocking rate, while we improve our land faster with our livestock. Many cattlemen decide to not do this minimum supplement of protein due to dogma, or do not know how to do it properly and at low cost. And they lose on the potential savings on hay and improvement of their land which can be achieved at a lower cost than with a lower stocking rate or feeding hay.

 It is normal to save from $100 to $200 dollars in favor of offering a minimum quantity of a high protein supplement when compared to full hay feeding.

By digesting the stockpiled forage through the livestock, in site, we can recycle the nutrients much better, while saving on hay, and improve the land much faster IF the manure and urine are evenly distributed like in Total Grazing.

We need to do a marginal analysis in every new enterprise or decision in our business, the same with mowing to create a better leaf to stem ratio, moving the cows 4 times a day on average to improve their body condition and soil, and others. We need to treat our farm/ranch as a business which needs to be profitable for success.

Step #4: Make sure what you want to buy makes economic sense, especially when just starting the business, before making the decision to spend hard earned money.

If we spend money on a whim or a wish, without calculating if it is going to give a good return and you cannot sustain the cash flow to wait for that return, it may be a problem.

Things like a newer truck, ATV, a side by side, new equipment, or any other, if they do not give a good return, should be postponed until we have the extra cash to indulge in what we desire.

Step #5: Consider all the alternatives before spending money in something.

Many times, we can do a certain project with less money if we lease machinery than if we buy it. Other times, we can wait a little longer and many times what we thought was so important to do fast can be done cheaper if done slower.

I often tell my students when asked about a project: what do you have the most? Time? Or money? My Total Grazing students know I always ask this question.

Then I explain, if you need it fast it will cost you more money but if you can wait and use biological processes it will be much cheaper.

If you have taken one of my Total grazing or adapted genetics/selection guidelines online courses, you know that I always point out that changes need to be gradual. Now you know this is one of the many reasons for that.

Conclusion and recap:

Step #1: Cash flow vs capital gains

Step #2: How much will I get in direct return?

Step #3: Every action or decision we make has an impact on the rest of the business

Step #4: Make sure there is a good return before making the decision to spend hard earned money.

Step #5: Consider all the alternatives before spending money in something.

There you have it, if you follow these 5 steps you will be ahead of the herd in making good economic decisions. Never forget why you do things and don’t lose sight of your goals!

Goodbye, make sure you subscribe to the podcast in Spotify, iTunes or YouTube, you can also join us on the weekly email at www.rwranching.com/join