Key Performance Indicator #5: Operating Expense as a Percentage of Total Revenue — Less Than 75 Percent

Is your business profitable? What does a profitable ranch even look like?

There are many ways to arrive at the answer, but Stan Bevers, a long-time economist with Texas A&M AgriLife Extension Service and popular speaker at Cattle Raisers Conventions, has identified 13 of what he calls Key Performance Indicators (KPI) for Beef Cow-calf Operations.

So far this year, we have looked at the first 4 KPIs. This month, we address KPI 5 — operating expense as a percentage of total expenses. The number should be less than 75 percent.

According to Bevers, “Controlling expenses can be one of the most important exercises for ranch owners and managers. Managers should target operating expenses at less that 75 percent of total revenue. Operating expenses include all expenses except interest and depreciation. If operating expenses are less than 75 percent of the ranch’s total revenue, the ranch can use the remaining 25 percent to:

1. Pay interest
2. Hold in escrow to cover depreciation expense, or
3. Retain as net income

“Clearly, a ranch will suffer a net loss if operating expenses plus interest expense and depreciation is greater than total revenue.”

Whether you have thousands, hundreds, a few or no cattle at all, this exercise just makes sense. If you don’t know what is going out in relation to what is coming in, you will always wonder how and if the bills will get paid. Ranching or living below your means equals a profitable situation with room for the unexpected surprises of life.

Bevers recently launched Ranch KPI, a ranch management consulting business, specializing in building ranch management information systems that allow for ranch accounting, analysis and finding efficiencies measured as Key Performance Indicators. In order to have useful analysis, the data must be accurate, while also being simple in the data entry process. To find more information about KPIs, what it takes to be a successful rancher, or to schedule a consultation, visit ranchkpi.com. ❚