Editor's Note: The following article is from IN PRACTICE, HMI's bi-monthly publication. It features one of the key components of Holistic Management® Financial Planning--planning profit before expense. As Jeff it explains, this critical paradigm shift has helped many farmers with their financial planning. To subscribe to IN PRACTICE or get a free introductory subscription, click here.
ecently the ole light bulb came on when I had a financial epiphany of sorts. Before I dive into the epiphany let me provide some background. Recently Ginny and I attended a two-day financial workshop taught by Holistic Management International as part of their Future Farms series in the Upper Piedmont of Virginia. This is a course that challenges many of my farm paradigms.
The two day course revolved around a simple accounting formula known to many:
Income – Expenses = Profits
Many of you may have seen this formula on more than one occasion. The thing is Holistic Management turns this traditional formula on its head. Math is math and math allows the change so that the new formula is:
Income – Profit = Expenses
There is even a third version of the formula that I have never seen, but as long as you have two of the variables you can determine the third:
Expenses + Profits = Income
The first formula is a line in a 1960 presidential campaign by then Senator John F. Kennedy, who said: “the farmer is the only man in our economy who buys everything at retail, sells everything at wholesale, and pays the freight both ways.” This line sums up the traditional commodity farmer. A commodity farmer is in a position of acceptance. These farmers often work under contract to large multi-national corporations. They accept whatever prices the large corporation’s demands they work for. The corporation is concerned for the corporation and doesn’t care about the farmer’s plight.
You purchase many of these products from the grocery on a weekly basis, you know them: milk, poultry, beef, corn products, wheat products, etc. Let me explain. If you look at a typical dairy operation, the farmer sells his milk to a creamery who converts the raw product into a gallon of milk on the grocery self. The creamery sets the price on both ends. The creamery gives the farmer a price that he can take or leave. 99.9% of the time the farmer is forced to take the price, to keep a roof over his head. What you may not know is that in this arrangement the farmer generally losses money on every gallon of milk he sells. The creamery is the middle man, and the middle man is making the money. This is why so many dairy farmers go out of business every year.
Commodity farming is defined by:
Income – expenses = profits.
If you made it this far, here is the epiphany. Under this type of farming the farmer is a slave to the formula. The farmer can’t control his income, and by and large he can’t control his expenses—sad but true. When I take my calves to the sale barn I have two basic choices: 1) accept the bid price or 2) carry the calves back home. This really isn’t a choice because the tractor payment is due tomorrow.
This is true throughout the commodity exchange. But I am not a commodity farmer. The formula Holistic Management is teaching puts me in the driver’s seat. It is a formula of control not a formula of acceptance.
Income – Profits = Expenses
By selling at farmer’s markets I control my income, and the course has given me the tools to sharpen my pencil on expenses. No longer will I sit back and accept. This epiphany has my mind going a thousand miles per hour. It has given me a boost of much needed energy. I am looking at so many changes on the farm because of a simple formula change—it is unbelievable.
Before I always accepted expenses never understanding that I could control expenses; not in little ways but in big ways. Gone are the days of trying to lower an electric bill by $5.00, when I should look at seriously reducing a $40,000.00 feed bill. Bigger bangs mean bigger bucks.
In the back of my mind I must have known about the formulas, but I couldn’t see the proverbial forest, because of the proverbial trees. But it does explain why I would turn people down offering to make a purchase at lower than listed prices.
It took a week to have the epiphany, but I am so grateful to Seth Wilner, our instructor, and HMI for opening my eyes to a simple life changing formula.