It's All About Balance

(Part 2)

 
In the last issue I presented my point of view on the economics of cattle farming and consequently on how an owners' income is affected by four basic principles. The two most obvious principles presented in the last issue are the necessity of having a record of your income and disbursements that is in the black as well as liquidity vs. profitability results. Here are two more principles that, from my perspective, are just as critical.
Financing and Assets Types
The possibility of acquiring assets is part of our daily lives. In the past our society has seen more radical means, but for the most part it now depends on monetary transactions. This is a fact that applies to individuals and to the business world.

To better convert a possibility into a reality, a specific implement was developed based on trust (history), the capacity to reimburse and guarantees: financing, also referred to as "credit"! A powerful tool that is too often misused and can make the difference between success and failure! But why? Firstly, business development without financing would be almost impossible. Without the availability of financing we would need to have the entire sum required before entering into any kind of transaction. This is an uncommon and rarely accomplished feat! That is the first rule of financing.

Secondly, the type of financing is directly related to the type of asset to be acquired. We don't use the same type of loan to purchase land that we would to buy a tractor, and yet both are long-term assets. Another financing example is the credit margin, which provides an opportunity to acquire assets used in the short-term when liquidity is not immediately available. In theory, it should be this simple.

It gets complicated when the cost of certain acquisitions is relatively low. In practice, we often see a bad choice of financial solution. For example: The purchase of 10 cows – a long-term asset in cattle production – with current liquidity or with the credit margin? The issue in this case is the risk of "hitting the wall", sooner or later, the credit margin should have first served to pay for the cow's maintenance while preparing for the sale of its calf. Like one of my clients once told me: "It's not the purchase that's hard to bear, it's the activity it generates…"

Brimming with Optimism?
I recently heard on the radio that people who are pessimists-realists had a life expectancy that was 10 years longer than people who were optimists! Why is that? According to researchers, who do not tend to focus on "magical thinking", it seems that pessimists-realists resort to means that are increasingly precautionary, thus allowing them to live longer.

This principle, when applied to business, would be the equivalent of using realistic budgets and scenarios before proceeding with expenditures. To avoid having to one day say: "I got in deep during one of my better years!" In other words: first prioritize non-recurring expenses that improve net revenue, this will then help finance acquisitions. By the way, La Coop is very well equipped to help you find the leverage that will produce a greater positive impact for you in the short term.

To summarize, to go forward business must maintain a balance: revenues and expenses, profitability and liquidity, efficient use of credit and justification of technico-economic expenditures and investments. This holds particularly true in cattle farming. With these words I will not wish you "good luck!" but rather "Cheers to your success!"
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