Few industries are immune to economic downturns. When your customers confront rising prices or uncertain or falling incomes, they might have less left to spend at your stable. These consequences translate into lower revenue for the stable.
You know how that impacts your operations. Your costs don’t go down just because you are receiving less revenue. The cost of running a barn rises along with the prices of consumer goods. Fuel surcharges add to the expense of feed and bedding. Everyday use and the natural elements continue to take their toll on equipment and structures. And horses are certainly not about to curtail their destructive habits as the cost of maintenance blows yet another hole in the barn roof.
Prudent business managers, however, are both creative and diligent in their efforts to manage business expenses. How can you do the same, while at the same time provide a pleasant and safe facility for boarders to enjoy their horses, and still run a profitable business? A few financial management fundamentals can help you pull off this delicate balancing act.
Identifying Costs and Their Drivers
All business expenses can be allocated under broad categories such as mortgage, labor, and insurance, among others. Some small businesses take the simple view and recognize expenses as either fixed or variable. Accountants for major corporations become skilled at categorizing and sub-categorizing expenses into dozens, even hundreds, of categories. Regardless of your own approach, as a business manager you must have a clear understanding of where spending takes place, and which expenses you can control.
As you create an expense budget, you can identify your operating expenses to whatever level of detail you choose. Regularly reviewing your actual spending against your budget will tell you whether you anticipated expenses accurately. (These are concepts that will be discussed in more detail shortly.) However, to have a clear understanding of your expenses, you need to discover what measurable outputs or activities lead to, or drive, your expenses. Identifying your cost drivers reveals why you spend money, not just where it is spent. Further, by understanding the actual cost drivers, a business manager can change costly processes and practices and reduce operating expenses.
How do you apply this concept? First, single out a specific expense. Next, figure out a way to measure the use of resources required to accomplish activities involved with that expense.
Consider this example: Basic daily feeding at your stable requires 60 flakes of alfalfa, twice a day. Your staff uses three workers to accomplish this task—one to drive a tractor and two to deliver the flakes to stalls. Cost drivers for this activity include the type of hay used, labor hours, and tractor hours, which include the costs of fuel and maintenance.
As a manager, you might decide to continue feeding alfalfa, but direct your staff to only use two workers in the feeding process. If fuel prices are particularly high, you might continue to employ three workers, but deliver the hay by wheelbarrow. Creativity, experimentation, and analysis will reveal the most relevant cost drivers and, ultimately, the most effective means of controlling costs.
Diligent Budgeting and Review
Ann Taylor, owner of Woodland Stallion Station in Woodland, Calif., has remained in business for over 26 years by maintaining a budget for current operations and analyzing plans for the growth of her stable. As the overall economy deteriorated over the past year, Taylor increased the frequency of budget reviews with her bookkeeper from quarterly to monthly. By doing so she is able to identify changing expenses before they spin out of control. She also has regular discussions with her stable foreman, so that he understands the impact his spending has on the stable’s budget.
Many stables engage in some mix of formal and informal review. Another example: Funding for the University of California, Davis (UCD) Equestrian Center comes from students’ registration fees and is allocated annually as a component of the university’s operating expenses. Manager Julie Smith performs a cost analysis each year to prepare an annual budget. She must be conscious of all expenses associated with ongoing operations as well as the cost of any enhancements she plans for the facility. The Equestrian Center’s financial performance against budget is reviewed by various levels of management on a monthly and quarterly basis. Smith faces the additional challenge of operating on a zero-base budget—a system that requires expenditures be justified yearly. Despite—or perhaps because of—this constant oversight, Taylor’s effective planning and budget adherence have enabled her to renovate the UCD Equestrian Center facilities.
Additions or renovations to your facility and significant maintenance projects should appear in your expense budget. How to prioritize? Cost-benefit analysis helps managers choose among multiple projects and identify which is likely to be most advantageous. As the name implies, cost-benefit analysis compares the expected cost of a project with the anticipated benefits (usually, the revenue potential) associated with completing that project. This tool can help expose unprofitable ideas. But this isn’t all about profits; in some instances, you might choose to pursue an action that would result in a non-monetary business advantage, such as customer satisfaction, if the cost is reasonable.
Taylor undertook a cost-benefit analysis when looking for creative ways to reduce operating expenses for her stallion farm. She knew that placing mats in every stall would decrease the amount of bedding consumed by the stable. Taylor also found that stalls with mats could be cleaned in less time that those bedded entirely with shavings. After the initial investment, the decreased material expense and the increased labor efficiency added up to a savings of 30 percent.
As a barn manager, you owe it to yourself to know the costs of running your business, whether it’s breeding, training or boarding. They will ultimately help you understand the activities behind your expenses and where savings can be had. That knowledge allows you to make informed decisions about changes or investments that will yield the greatest benefits. With regular reviews you will also know where you stand at any time and avoid reacting at the last minute to business developments and scrambling to remain competitive—or even in business.