How to Be Profitable: Tips from the Most Successful Leaders in the Hardest Industries on Earth
From The Chairman's Desk

One of the hardest industries in which to achieve profitability is agriculture—particularly cattle ranching. It is the oldest, most matured market on the planet. With the average ranch only reaching a profit once every ten years, what tips can we derive from the world’s most accomplished ranch managers to help us be more successful in our own businesses?

Many years ago, when I was in my first of two rounds of college, I had the privilege of spending a few days on a large cattle operation that achieved profitability every year. Not only did they reach profitability, but they managed to achieve a good margin as well—every year. What was their secret? I spent two days in presentations with the manager who taught us how to do it.

Know every expense as a per unit cost – How much meaning do you put into your sales figures? You sell something and you have expenses. If you deal widgets, or if you sell services, what are your expenses in terms of each unit? You must first list out all of your expense categories and order them in terms of greatest to least. You should know the per unit cost of your light bill. Once you have all your expense categories in front of you on paper, you and your team can be looking at ways to reduce your per unit cost expenses. Can we reduce power costs from $0.25 to $0.14 per unit by turning lights off, using better bulbs, or changing services? One airline saved over $40,000 in annual expenses by dropping one olive off of the salad served in flight. Remember also that your purpose is to find profits not cripple the organization.

Bust the myths in your business – What procedural aspects of your business are done just because everyone has done it that way? My ranching friends discovered that feeding cattle during the winter was the number one expense. After some brainstorming, they concluded that buffalo did not have hay to depend on through the winter. They studied the winter feeding habits of buffalo and discovered that they dig through the snow to get at the feed. Our ranching friends put cattle in a pen, buried the hay under snow, grew taller grass in special pastures, and taught their cows to dig for food. They busted the myth that cattle must be mechanically fed through the winter and reduced several cents per pound from the expense column.

Focus on your real profit centers – What really makes the money in your company? Too often we allow ourselves to be distracted from our core offering. By veering from our core, we unknowingly consume cash resources as we alter our systems to accommodate the new task. Our ranching example shifted the focus of the operation from beef production to grass production. They knew how many pounds of beef they could produce off an acre of land and they went to work to protect and improve the land and its yields. Most ranchers focus on the cattle and over graze, which reduces production capacity. How about you? Are you focusing on the true harvest of your business, or are you over grazing?

Calculate your real worth – Some ranchers assume that if they grow and harvest their own hay, they will save money and increase profits in their cattle. The truth of the matter is that the hay has a market value. If it costs $30 per ton to grow hay and the market is paying $75 per ton, then your actual cost is $75 per ton. Even though the cash does not leave the bank account, you are actually experiencing a $35 per ton loss in cash flow. The same is true for people. How much would you be paid for your skills and expertise if you were employed by someone else? You must calculate your actual value into your company’s expenses to get a true picture of profitability; otherwise, you may be losing money in the form of lost opportunity costs. By not calculating your true market value for your labor, you may be only transferring profit from one entity (you) to make the other (your company) only look like it is reducing expenses. Besides, who wants to lose money? You’re in business to make money by creating value aren’t you? Why work for free in an extreme risk scenario? You had better have a good expectation and plan for a larger reward for your sacrifices.

Buy customers on a fixed cost – In order to bring more cash into your company, you must correctly allocate your marketing budget; you must begin by knowing the life-time value of a customer. You should calculate how long a customer stays with you and the net profit they yield. This number will let you know how much you can afford to pay to acquire a new customer. For example, if your average customer stays with you for two years and they spend approximately $500 gross sales and it costs you $300 to provide that customer with goods and services, then the life-time value of your customer is $200. You could technically spend up to $200 to acquire and retain a customer. Have you considered directing parts of your marketing budget to customer retention? How would you respond if you did business with a company that thought of you on your birthday or other personally important events—like your anniversary? Create a fixed cost that you will spend to acquire a customer, and then continuously monitor your marketing activities to make sure you are on budget, spending enough, and not wasting money on ineffective campaigns.

Let’s learn from the pros in the hardest industry on earth. Nasty little expenses are the bane of profit making. Drill down to the molecular level of your financials and discover the hidden pockets of profit that exist in your business.

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This is a common concern. It surfaces so frequently that I've devoted this weeks article to this topic. See our article: "How to Be Profitable."

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