As I listened to the budgeting conversation at a large ranching operation here on the west coast of the United States, where the Jefferson Center for Holistic Management was consulting, it suddenly hit me: scale doesn’t matter. The underlying patterns, habits and perceptions about managing finances on a farm or ranch are the same regardless of the size of the operation.
Thinking back to a conversation I had recently with a close friend and market gardener on a two-acre farm, I realized that we were having the same conversation. There were just a few more commas and zeros added to the budget here on this large ranching operation.
As the budget conversation continued, I tested my theory. Yep. It was proving true. If we either added or subtracted dollars from the cash flow in the budget, the number of acres managed, people employed and equipment owned, then at the core, we would be having the same conversation about a two-acre market garden and a three-million-acre ranching operation.
It doesn’t matter if we are managing a $10 million annual expense budget or $10,000 — the profit margin can be the same. It’s so liberating to realize, I thought, that we don’t have to spend tons of money, or have tons of land (but it’s OK if we do too) to be a profitable farmer or rancher. We can have the life we desire, at the scale of farming or ranching we desire, with some pretty basic planning procedures (something we call Holistic Financial Planning), a positive relationship with money and a few good habits when it comes to monitoring expenses.
Holistic Financial Planning
Holistic Financial Planning is a simple, cash-based planning procedure that allows farmers and ranchers to be profitable while maintaining the quality of life they desire and improving the health of their land base. This planning procedure creates an annual projection budget and then a plan for monitoring planned versus actual expenses monthly, controlling expenses and re-planning when needed. In Holistic Financial Planning, we think of expenses differently. Like other principles in Holistic Management, it takes commonly held truths and turns them on their head.
In most households, farms, ranches and businesses, we think of the relationship between income, expenses and profit in one of two ways. Let’s consider this from a perspective of a salaried employee managing her household budget. Let’s say her name is Sarah. She chose a high-paying job at a marketing firm because it supported the lifestyle she wanted. As her salary increased through the years, she allowed her expenses to rise along with it, so the money she was able to save, or set aside as profit, never actually changed. For Sarah, this is just “how it was” with money. Profit wasn’t something she believed she could control; it was just what was left over after all the bills were paid. She is a diligent financial planner and monitors her expenses. Sometimes she has to cut back on expenses to make sure she doesn’t exceed her income, but profit is never something she thought to plan; only income and expenses were ever planned.
In Holistic Financial Planning, profit is planned first. Then expenses are controlled to allow for the desired profit margin, given the income of the operation. Considering the farmers and ranchers I’ve worked with, there is usually a similar response to this concept. It ranges from discomfort to disbelief that this is even possible.
The beauty of planning for profit is that it allows the farmer or rancher to make intentional annual investments in their long-term land plan for the farm or ranch, or other investments that meet their Holistic Context and desired quality of life.