It's All About Balance

(Part 1)

 
I love winter. I love it because nature is beautiful and we can escape into it to find peace, but also because it's the season where beef producers are more readily available to discuss strategies, which often have a major impact on their businesses.
One topic that is always good for conversation is profitability. Despite good steer and veal prices, above last year's going rate, many farmers admit that they've been working harder than ever to keep their businesses above water.

Are there reasons for this paradoxical situation? As my colleague Jean Laroche used to say, we need "to step away from the tree to notice the forest." So let's back up a few meters to get a better look at reality.

Although I am not an economics expert, I was still able to learn that four basic principles must be respected. I will introduce you to two of these principles this month; the next two will be addressed in the next issue.

The first is that a business must have revenues that exceed its expenses! Obviously. And yet… Take the case of a farm with 70 cows, very little debt and a record fodder harvest. Since there were 1,000 extra bales in stock at the end of the summer and fodder was being given out in his region, the farmer purchased 50 cows in September. On paper, everything seemed well: stocks of fodder, installations, availability, etc. However, expenses increased: payment for the cows, bedding, fuel, minerals, veterinary costs, etc.

He felt rich but had no money. His financial situation would be tight until the end of 2014 and he regretted his purchase. Does this remind you of anything? Let's walk a little farther from the tree.

Second principle: profitability and cash assets are essentially adversaries. One of the best illustrations is paying off a loan: the shorter the term the less interest is paid overall. However, to achieve this, we either need to use existing cash assets or sell certain obsolete or non productive assets (reduced guarantees). In both cases the margin for manoeuvring is smaller despite increased profitability! In the end, long term wealth requires short term hardship. Hmmm…

A good manager wants to optimize cash assets and profitability while aiming for maximum profitability in the long term. For example, if considering the purchase of a chaff-cutter that will save him $300 per month over the next five years, monthly payments cannot exceed $250 if he wants to preserve a 10% margin of error based on his plans and increase his cash assets at the same time. Otherwise, it's basically "switching four quarters for a dollar." The reverse is never acceptable, but it could be worse!
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