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Holistic Ranching: Financial planning

Holistic Management offers a very robust financial planning process. It differs from traditional bookkeeping in several key areas:

  1. We are always planning in the future. We would complete our financial plan before the year begins.
  2. We set our profit before the year begins.
  3. We spend our expense money more wisely.
  4. We monitor our plan monthly.

Steps to financial planning

9. SUCCESS!!!!
8. Monitor, control, replan.
7. Ending net worth.
6. Do a cash flow.

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5. Plan and sort your expenses.
4. Identify the weak link.
3. Set your profit.
2. Plan your income.
1. Start with net worth.

1. Start with net worth. This is a statement of your assets and liabilities at a given point in time. This would normally be at the start of your fiscal year. It is important to know where you are so that you can track changes in your net worth. There are a few things to watch. Assets that will be sold in the current year should be listed at a realistic value. When dealing with assets that are not likely to be sold very often (land and cows) it might be wise to list these at a relatively low constant dollar value for a period of years. By doing this you will be measuring real change in your net worth not just tracking inflation. If for any reason you want to use current values for your land and cows that is fine. If you do this be aware of how much of the increase in your net worth is due to the operation of your business and how much is due to inflation.

2. Plan your income. At this point you plan a full year’s income. You require a date, a weight and a price. When planning use realistic projected prices. A general rule of thumb might be to plan your income realistically but somewhat conservatively. Write down the information you used to plan your income. Every number should be backed up on a worksheet. This will be of great value when it’s time to monitor your financial plan.

3. Set your profit. Now is the time to set your profit. We do this before the year even begins. Profit is defined as an increase in net worth. It is a return on your investment and a return to your management skills. The classic example in H M is to hold your expenses to half your projected income. This leaves half of your projected income as profit. This is a lofty goal. Don’t let this discourage you, it is meant to motivate you to be serious about achieving profit. Let me share a personal story. A producer had taken the six-day course with us. He was keen and wanted to achieve a healthy profit. He was determined to reach the 50 per cent mark. I saw him a year later. His first comment was, “I am so frustrated, only 30 per cent of my total income is profit.” My comment was, what percentage of your income would have been profit if you weren’t challenged to shoot for 50 per cent? Chances are that without the challenge his profit would have been low or non-existent.

4. Identify the weak link. At this stage you identify the weak link in each enterprise in your business. There are three basic steps to each enterprise: resource conversion (growing), product conversion (harvesting) and market conversion. At a given point in time each enterprise will be weak in only one area. This is where you need to focus your time and energy. By strengthening the weak link you strengthen your entire business. Identifying the weak link will allow you to sort your expenses.

5. Plan and sort expenses. Sort your expenses into three categories: the “W” expenses (things that fix the weak link), “I” expenses (things that are essential and a constant dollar value) and “M” expenses (all expenses that aren’t “W” or “I”). Money spent on “W” expenses will strengthen your business. Money spent here is like an investment. Try to give “W” expenses all the money they require. “I” expenses are a short list and a set amount so just accept them and don’t spend any time trying to reduce them. “M” expenses are the ones to challenge. The more you reduce “M” expenses the more money you will have to shore up the weak links. Once your expenses are sorted budget actual dollar amounts, just as you did when planning your income. Document each expense with a date and dollar amount. Be realistically and somewhat liberal. By planning your income conservatively and your expenses liberally you are likely to do better than your plan.

6. Do a cash flow. At this stage you transfer the income and expense numbers from the worksheets to the cash flow sheet. This summarizes your income and expenses per category. It also gives you monthly income and expense totals. You are now able to see if you can cash flow your business or if you will require an operating loan. If a loan is needed the cash flow will show the amount required and how it will vary each month.

7. Ending net worth. You now list your assets and liabilities as they will be at the end of the year in light of the transactions you have planned. Now is the crunch time.

Does your increase in net worth match the profit number you set in Step 3? If the numbers match or are close enough for your liking you proceed to implement your financial plan. If the numbers don’t match you go back and redo the plan until you achieve the profit you desire.

8. Monitor, control, replan. This is one of the most critical steps in the entire process. By monitoring monthly you give yourself 12 opportunities each year to see how your plan matches up with reality.

Financial planning is one way to relieve some of the stress and worry in your life and help you create the future you desire.

Happy trails.

About the author

Columnist

Don Campbell ranches with his family at Meadow Lake, Sask., 
and teaches Holistic Management courses.

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