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Enterprise Analysis

Understanding Ranch Businesses

Effective management of ranch businesses requires a clear understanding of the ranch business itself. Unlike most businesses, ranches typically are composed of multiple profit generating centers called enterprises.

Each enterprise makes a contribution to overall ranch profitability, but is only a part of the bigger overall picture. Examples of ranch business enterprises include grazing livestock enterprises such as cow-calf enterprises, stocker cattle enterprises, ewe-lamb enterprises, feeder lamb enterprises, doe-kid and feeder kid enterprises, as well as various non-grazing livestock enterprises such as feed lotting, boarding, poultry, swine, etc. There may also be farming enterprises such as haying, crops, fruit trees, etc. as well as service enterprises such as events, hunting clubs, “dude ranch” hosting, custom harvesting, etc.

Ranch Vision divides the ranch business into enterprises to promote better decision-making. This is important because not all enterprises are equally profitable, and each must be individually assessed in order to make informed decisions regarding resource allocation.

Evaluating a ranch business by component enterprises is called “enterprise analysis.” During enterprise analysis, each enterprise is examined to identify its contribution to ranch profit. This requires the differentiation of ranch costs as being either fixed (overhead) or variable (direct).

Overhead costs are costs that remain relatively fixed and constant regardless of the production taking place. Overhead costs are not assigned to a particular enterprise but considered separately as expenses which must be covered by the ranch business as a whole. Examples of overhead costs typically include rent, fuel, utilities, wages, repairs, depreciation, insurance, professional fees, etc.

The following graph displays overhead costs as related to production level.

Unlike overhead costs, direct costs, or variable costs, increase or decrease according to the level of production within an enterprise. (Examples of direct costs for livestock enterprises typically include feed, medicine, veterinary services, consignment fees, freight, interest on capital invested in livestock, etc.). The following graph illustrates the direct costs of an enterprise at different levels of production.

The income generated by an enterprise is called the gross product for that enterprise.The difference between an enterprise's gross product and its direct costs is called the gross margin for that enterprise.

Gross Product - Direct Costs = Gross Margin

The overall profit for the ranch business is found by adding the gross margins for the various ranch enterprises and then subtracting the ranch's overhead costs.

(Gross Margin 1 + Gross Margin 2 + Gross Margin 3 ) - Overhead Costs = Ranch Profit

It's difficult to overstate the importance of performing enterprise analyses for the success of your ranch business.

An enterprise analysis enables a ranch manager to accomplish three crucial functions:

  1. See the individual contribution of each enterprise toward overall ranch profitability

  2. Individually manage each enterprise toward best efficiency and profitability

  3. Reallocate resources away from less productive and toward more productive enterprises

By conducting enterprise analysis, a ranch manager can achieve major improvements in ranch profit! Ranch Vision prepares enterprise analyses of all grazing livestock enterprises.

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