PROFIT AND LOSS

FARM AFARM B
Gross Revenue4,000,0003,000,000
Variable Costs2,200,0001,140,000
Whole Farm Gross Margin1,800,0001,860,000
GM %45%62%
Overhead cost @ 12%640,000360,000
Family drawings - Wages180,000180,000
Deprecation @ avg 15%360,000142,500
Operating Profit (EBIT)620,0001,177,500
EBIT %16%39%
Finance Costs219,375-
Net Profit Before Tax (NPBT)400,6251,177,500
Taxation @30%120,188353,250
Net Profit After Tax (NPAT)280,438824,250
NPAT%7%27%


Getting your farm financially organised by review and
reconstruction of your chart of accounts to accurately
reflect your farming enterprises.

An increase in costs is not always a negative thing, provided the increase in yield results in a higher gross margin/profit. The message here is if
someone recommends you add in additional input, don’t just think about the possible yield benefit – check how much it will return to you in profit.

DO YOU KNOW WHERE YOUR MONEY IS GOING?

DO YOU KNOW YOUR BREAKEVEN PRICE AND YIELD?

FARMING FINANCIAL MANAGEMENT

For example, if you were to increase yield resulting in an increase in
variable costs i.e. purchase/lease machinery, fertilisers or chemicals,
do you know what impact that would have on your gross margin (i.e.
revenue less variable costs)? See the example below where changing
inputs impacts on how much profit per tonne is made.

BALANCE SHEET - FARM B
ASSETS
LIABILITIES
Cash on Deposit350,000Overdraft-
Debtors25,000Creditors25,000
Farm Stock45,000Total Current Liabilities25,000
Total Current Assets420,000Non Current Liabilities


Hire Purchase Liabilities-
Non-Current Assets
Business Loan-
Plant and Equipment950,000Total Non Current Liabilities-
Land and Buildings6,000,000Total Liabilities25,000
Total Non-Current Assets6,950,000



EQUITY
Total Assets7,370,000Owner's Equity7,345,000


Do you know the interest rate your farm is returning to you? Also known as ROCE – return on capital employed. This basically shows how much
profit each dollar of assets used in the farm generates. A return of at least 10%-20% is advisable, otherwise one may as well keep their money
in the bank and have no risk.


Consider the example below, Farm A & B. WHICH IS THE BETTER FARM?

Beginning of Farm Season

If this has raised some questions around your farming business FSC can help answer your questions.


FSC’s philosophy is about educating and empowering business owners so that they have an understanding and control about the direction of
their farm.


FSC achieves this by:

Top farm businesses understand their expenditure in five key costs
areas; variable, overhead, financial, personal and capital costs.
Sound cost management is an integral part to running a profitable
farming business. This means not only reducing costs but also
about understanding the returns these costs generate. It’s important
to understand why costs are grouped into categories, what each
category means and the impact they have on profit and cashflow.

• Monitor Cashflow
• Monitor Profit i.e. Gross
  margins actual vs budget
• Monitor Overheads i.e.
  actual versus budget

DO YOU TRACK YOUR FARM'S BUSINESS PERFORMANCE?

BALANCE SHEET - FARM A
ASSETS
LIABILITIES
Cash on Deposit30,000Overdraft85,263
Debtors12,291Creditors45,000
Farm Stock103,900Total Current Liabilities130,263
Total Current Assets146,191Non Current Liabilities


Hire Purchase Liabilities1,250,000
Non-Current Assets
Business Loan2,500,000
Plant and Equipment2,400,000Total Non Current Liabilities3,750,000
Land and Buildings8,500,000Total Liabilities3,880,263
Total Non-Current Assets10,900,000



EQUITY
Total Assets11,046,191Owner's Equity7,165,928


-Farm A has a greater turnover than B however Farm B is
much better at managing it’s costs resulting in a greater
gross margin and EBIT (earnings before interest and tax).


-Farm B has no debt.


-Farm A has capital employed i.e. assets used in their farm
of $11,046,191 and Farm B has $7,370,000.


-Farm B has a greater ROCE of 16% versus Farm A of 6%
meaning that Farm B receives 16 cents for every dollar
invested in its capital employed (assets) whereas Farm A
only 6 cents.


-Even though Farm A has a greater turnover and a greater
asset base it is not an efficiently run farm. Further Farm A
is highly geared at 54% - meaning that more than half the
farm has been funded by debt.



-Farm A can cover it’s interest cost nearly 3 times its EBIT which demonstrates it can fund its debt. However with a ROCE of 6% it clearly is not using these assets efficiently in the farm as the return is low, and it is costing approximately $220,000 in interest alone.


The above example is simply to demonstrate that it’s important to have financial indicators to track your farm’s performance. Much like a tractor has indicators so you know how it’s driving and when it needs servicing and repairs. Do you have indicators in your farming business to indicate when things aren’t going right so adjustments can be made to put you back on track?

Evaluate Season

Working with you closely through the farming season as
follows:

Performance Indicators
• Profit
• Cashflow
• Equity
• Gross margins
• Net worth
• Return on capital
(profit/farm assets) >8%
• Industry benchmarks

WHEATSCENARIO 1SCENARIO 2SCENARIO 3SCENARIO 4SCENARIO 5
Price ($/t)
250250250250250
Yield (t/ha)1.52.02.52.753.00
Total Revenue
375500625688750
Variable (VC) ($/ha)
400500550610666
Gross Margin ($/ha)
(25)-757874
GM %
-6.67%0.00%12.00%11.27%11.20%


Can you confidently say that you know:


• How much is maintenance per/tonne                

• How much is leasing and maintenance per/tonne
• How much are chemicals per/tonne                  

• How much fuel per/tonne
• How much is interest per/tonne

• How much tax per/tonne
• How much depreciation per/tonne

• How much is the overhead charge per tonne
• What is your breakeven


If you don’t know these how do you know if you are making money, where to improve or to vary the commodity mix?
Usually the owner’s wages (commonly known as drawings) are not included in calculating the cost per tonne. Owner’s wages should be
included. If you were not doing the work someone else would need to be paid which would impact the cost per tonne.


Additionally knowing your costs will assist in the farms marketing as your marketer will know the price required in order to achieve adequate returns.

Meeting with you to understand your business needs

Each Month

Ensuring your Agrimaster (or other farming software) is
set up correctly to produce relevant, reliable and accurate
reports for you and your bank

End of Season

• Set goals
• Project: 1. Profit and Loss
                2. Cashflow
                3. Balance Sheet
                4. Gross Margins


Must ensure accounts are
structured correctly to give
accurate & reliable information
​for these reports to be of use

FSC PHILOSOPHY

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