"I am not doing this as a business--it is my hobby." That is one of the saddest comments I hear, and I hear it often. It may well be the total lack of any business plan and a full surrender right at the very first. This person has no plan to make any profit. Normally they won't be around long.
When I hear this "surrender statement" it appears this person needs a new consultant or a better psycho-shrink. Someone is feeding this person some very negative--bad information. Perhaps his County Extension Agent has splinters in his wind mill.
Every business should be a business. Even IRS demands that. For over 40 years I have written books and articles all with some profit-business direction. The ranch site www.texaslonghorn.com has over 400 articles on every possible spin available to Texas Longhorn producers. If you are one who has missed the spin, this article is for you. The spin-offs in the registered cattle business are many and can be very profitable. It can be done with a minimal amount of taxes--and that can be totally legal.
JAMES COFFELT is a friend of the ranch. He is the second largest land owner in the state of Ohio, OHIO LAND AND CATTLE. James is a student of the economics and business of ranching and every possible spin-off. Most of the following is an article James wrote which has great insights on ranch profit. Read this to get some business pointers for increased profit. Profit is good. Hobbies are fun, but profit pays the hobby-bills.
James Coffelt. Hunting is one of the land-spins aside from cattle profits.
Building Wealth VS. Income
A favorite book, and great education, is “Knowledge Rich Ranching”, by Allan Nation. Building wealth is different from income. Income is used to live. It is the cash flow. Without it, we are out of business. Cash flow, or lack there of, sinks ships. It is required. All income above what is required to live can be rolled into appreciating assets. There is no better business than this business for accumulating appreciating assets, pretax.
Ranching is remarkable from a pure business standpoint, with its wealth building abilities.
There are three financial tools that are critical, an income statement, balance sheet, and a personal financial statement. The income and balance sheet are used for the tax man. They include depreciation and a variety of items that change the true picture of wealth building. The personal financial statement is the correct picture of wealth building. Every bank will provide a blank form, update it twice per year to measure progress.
If a spouse complains that there is no money in the checking account, that is a cash flow issue. It is possible to have a great year of wealth building, with poor cash flow, and a great cash flow year with diminished wealth. Building wealth is measured on the personal financial statement. It is possible to have a year or more with negative wealth building, it is not possible to have long periods of negative cash flow, as the cash and borrowing ability evaporate, and you’re out of business.
As I think back over 30+ years of business, each ten-year period might have two years of losses, two years of “out of the park” earnings, and six years of good enough. Had we not been in the game when it mattered, the two great years would have been missed.
Examples:
Land appreciates, and that additional wealth is not taxed until the land is sold, or never taxed, depending on strategies. Land wealth increased. The cattle herd is larger and better, livestock wealth increased. That appreciation is real wealth. That wealth is not in the checking account, but it could be via financing or selling land and livestock.
Selling will prompt taxes, financing does not, and with financing, you still own the land.
Many are averse to debt.
It is a financial tool, which can be used well, or not used well. We are comfortable with up to 50% leverage, with the comfort that if things went south we could take the hit. Money at the moment is almost expensive, that is, 7.5%, which is in turn deductible from income. Effectively it is 7.5% less your upper tax bracket. Meanwhile, pastureland has appreciated 15% in our area.
What is well managed debt? It is the available liquidity to pay the debt if things went south, via cash, stocks, and livestock, all of which are highly liquid. Cash is available today, stock/equities are available tomorrow, cash from livestock is available within a week.
Land wealth grew by 8%+/-, after interest. The land produces cattle income, hunting income, gas and oil income, timber income, pipeline income, solar income, maybe mining, and so on.
Cash sitting in a bank or under a mattress will devalue with inflation: in 20 years at 3% inflation it will reduce in value by half; at 2% inflation it will reduce by one third. I shudder to think about the effects of current inflation.
If you do not already own the land when gas and oil, mining opportunities, etc. appear, it is too late, which is a benefit to owning the land when possible. You must be in the game before it starts.
The recent tax bill increases the estate deduction to $22.5 million. Most will be able to move assets to the next generation, tax free. Taxes are an enemy of building wealth.
Buying appreciating assets, cattle/livestock and land, in that order, with the income above what is required to live comfortably, is the model. If costs are high, there is no cash to buy, borrow, or accumulate wealth.
Become fully stocked first, as the largest driver of profit is stocking rate. It is a production per acre model, not production per head. With high turnover, and good bulls, genetic improvement is advanced quickly.
The less equipment the better. We run this 8500 acre ranch with one 100 horse John Deere tractor, two diesel trucks, a stock trailer, and side by sides.
In short, invest in appreciating assets, livestock first, land second. Avoid spending on depreciating assets and labor.
Taxes
If a ranch made some money, buy appreciating livestock, which can be expensed, do not buy equipment unless absolutely necessary.
Many accountants capitalize and depreciate livestock as opposed to expensing; this is a mistake. Livestock is income when sold, expensed when bought.
Use 1031 exchanges: if you sell land, place the money in a 1031 exchange, tax free. Assuming it takes 90 days to close, you will have 6 months to identify and buy other land with pretax funds, for a total of 9 months to purchase. Buying with pretax money increases the capacity to buy by the amount which would otherwise have been paid in taxes. It is also possible to buy first and sell later, tax free, using a reverse 1031. Taxes are the enemy.
Peter Drucker, the famed business writer said, ‘‘Every idea, every activity, every employee, and every business model, should be on trial for its life, every single day’’.
OLC uses paddle fish caviar production as a profit spin in lakes that have low income returns per acre compared to grass lands. Lake-acres cost the same loan interest and tax as land acres.
