Friday, April 18, 2014

Starting a New Business

This isn't the first time that I've found myself involved in a new business startup.  In fact, I have been involved in three at different levels. 

The first was a local Veterinary supply business which was started in 1991.  I was hired as the first manager and I had lots of guidance and input from the owners.  It was successful and profitable and is still in business.

The second was a new division within a large company.  It utilized new technology and was very capital intensive.  It required developing a working prototype of a computer driven system for delivering small amounts of feed additives and then from that prototype, creating a business around the supply and delivery of those feed additives to customers.  It is a continuing operation today although that company was "swallowed" by merger into another company in recent years.

The third was a service company built around new technology.  I was essentially handed the keys by the partners and asked to build it from "scratch."  It was profitable the first full month of operation, became the largest in its very specialized field and served customers from coast-to-coast and border-to-border in the U.S.  In 2012 it was purchased by a global bio-tech company that, just this year, was acquired by an even larger global bio-tech company.

So, here I am again.  Sigh.  You would think that I would be excited -- and I am -- but, this one has some challenges that are very different than the previous ones and yet includes elements of all of the previous startups. 

I like a challenge.  The biggest issue is limited resources.  Hmmmm.....that's what I studied in college -- Agricultural Economics with an emphasis on Farm & Ranch Management.  By definition (mine), I studied the art of the efficient allocation of limited resources to achieve a specific business purpose related to a successful farming or ranching endeavor.

Specifically, I am starting a new ranch.

We (I use "we" and "I" interchangeably because, being married, it is a "we" investment/endeavor.) bought land In August, 2012, and turned cows on it in late September of that year.  We sold our first calf crop last year and they made the land payment and recovered all of the operating costs for the first year.  No, they didn't recover all of the depreciation from capital invested in equipment or the cows.  So, technically, we operated at a loss.  However, I consider the first year to be a very successful one.  It was a solid launch.

By making some operational adjustments related to seasonality of forage availability, we were able to cut our hay usage by about 40% this winter from what it was the previous one.  We also have changed the genetics of the calf crop and tightened the calving window significantly.  The uniformity of calves this year is much improved over last year.  So, we are moving things in the right direction operationally.  The issue now is scale.

Scale is related to the efficiencies of the capital investment.  A great example is a tractor.  A tractor is necessary whether you are running 10 head of cows or 1,000 head of cows.  The cost of that tractor is spread through depreciation over its lifetime but also over the number of revenue producing units that it serves -- in our case, cows.  A $35,000 used tractor depreciated over 10 years is $3,500/year just for depreciation.  Divided by 10 cows is $350/cow/year.  Divided by 1,000 cows is $3.50/cow/year.  So, the point is to utilize equipment and other capital items at a level near maximum capacity.  The cost per producing unit is then minimized.

I need more land and more cows.  Land costs lots of money to purchase.  The best scenario would be to obtain a long-term lease, however, there is none available to lease that I can find near to me.  That is the dilemma.  How do I achieve scale for maximum capital utilization if I can't expand my operation?  Any suggestions would be appreciated.  Any "sugar daddy's" out there that want to buy a ranch as a long-term investment and then lease it back to me?  If so, comment with a way to contact you.

It's amazing how many things just take money to solve.....