One of the running jokes in the horse world is this:
Question: What is the only way to end up with money after working in the horse industry?
Answer: Start out with a lot of money.
This isn’t necessarily true. I have several clients who run profitable horse businesses, live in nice houses, and take nice vacations.
What is their secret? They understand that 80 percent of horse businesses fail for four major reasons and they take the necessary steps to avoid these pitfalls.
1. They don’t have a business plan.
2. They don’t know how to market their services effectively. (If you don’t have a Web site and email address, GET THEM!)
3. They don’t legally understand their potential exposures so they don’t protect themselves.
4. They don’t understand the business/financial side of the business (in other words, they don’t know how to manage their money.)
Each of these topics requires an in-depth discussion, but since my expertise is in finance, I will focus on the last (but definitely not last in importance) reason for failure: the inability to understand the financial aspects of the business.
The Internal Revenue Service LOVES horse businesses. In fact, 27 percent of all small businesses audited in 2007 by the IRS were ranchers or farmers. On average, in each of these cases, equine business owners had to pay the IRS in excess of $40,000.
Why? Due to poor record keeping.
The easiest mistake to make is to mix personal and business expenses. Make sure you have separate accounts for your business and personal expenses and “pay yourself” by moving money from your business to your personal account to pay for personal expenses. Don’t pay personal expenses from your business account or vice versa. Intermingling funds is the first thing an IRS auditor will search for.
The first key of understanding the financial side of a horse business is to keep accurate financial records and documentation that supports them.
The second key is to understand profitability.
When I ask a horse business owner if their business is profitable, the most common answers I get are:
· “I think so.”
· “We do OK.”
· “We can pay our bills.”
· “Things are a little tight.”
What a business owner should be able to say is: “We made XXX dollars in profit this month/year.”
Unfortunately, most equine business owners don’t know this basic information.
To make money in the horse industry, you must understand your expenses. You should be able to identify the absolute cost of keeping each horse in your stable. The absolute cost includes all costs associated with providing for the horse including:
· Land and building
· Building and property upkeep
· Grain and hay
· Shavings and arena flooring material
· Veterinary care
· Manure disposal
· Employees and contractor laborers
· Barn supplies
As the stable owner, you should be able to say each horse in our stable costs $XXX per month. And most importantly, you should never take on additional horses if those costs aren’t covered and increased to add profit to your business.
Another important aspect of understanding the financial aspects of the business is to know which of your services is profitable (or not). For example, you may provide lessons, clinics, summer camp and a show program. Do you know which of these is the most profitable for your business?
One of our clients came to me at the end of the year and told me she wanted to stop offering summer camps because it was a lot of work and she didn’t really enjoy it. I pulled the data we had compiled and pointed out that three weeks of summer camp made her eight times (800 percent) what her lesson program made all year long.
Of course, she decided to keep summer camp and actually doubled the number of camps she offered. Because she didn’t really enjoy facilitating them, she hired a teacher to run the camps. By understanding where her profit was coming from, she was able to focus her sales and marketing efforts on a specific service which improved her financial position.
The third key to financial success is to create a monthly budget and to measure your budget against your performance. Did you have the revenue you expected? Were your costs in line with the budget? Did you forget to plan for the load of shavings that you received? Remember it is OK to deviate from the budget if you know and understand the consequences.
For example, a great opportunity for advertising may arise in March you didn’t know about when you created the budget. So you spend additional funds on advertising that month. Now, you can either adjust your budget or reduce advertising you had previously budgeted for later in the year.
A budget isn’t concrete. It can be changed. It can be adjusted.
The last key to success I want to discuss is the idea that it is OK to fire your clients.
“Acme is my largest customer, there’s no way I can afford to lose them.” This is what I recently heard from one of my clients. Then it became my responsibility to educate him on why he needed to end the relationship with that particular customer.
There are various things to consider when handling a customer relationship. A few of these are:
· Is the relationship profitable?
· Is there a strategic reason to do business with this customer?
· Does this client represent the morals and ethics of your company?
· Do you, and your staff, enjoy working with this customer?
Recently, one of our horse trainer clients turned away a new customer because he didn’t have space in his barn or time in his schedule to train another three-year old. It bothered him a little, but it bothered me a lot.
Why? Because he has a couple of clients who aren’t as profitable as they need to be. After all expenses, his time, and the time of his staff, the gross profit on this client who has six horses in training (at a discounted rate) is only $600 per month. He could replace this $600 with only three horses in training at full rates. If he were to add three more horses, he would double his profit.
So, the bottom line is that it is possible to operate a profitable horse business!
About: Jennifer Foster, CMA, CFM is President of EQ Bookkeeping LLC, a firm offering specialized bookkeeping/accounting services for the equine industry. She is a family owner of Arabian horses and her husband and children ride competitively. She's been riding horses since the third grade. Her recreational time is spent at shows, including the Youth Nationals in Albuquerque, New Mexico, and the U.S. Nationals in Tulsa, Oklahoma. Her company, EQ Bookkeeping provides specialized bookkeeping and accounting services for the equine industry. In addition to full service virtual accounting and tax preparation, they provide consulting services focused on improving profitability for their horse business clients. For more information, visit www.eqbookkeeping.com.