|PROFIT AND LOSS|
|FARM A||FARM B|
|Whole Farm Gross Margin||1,800,000||1,860,000|
|Overhead cost @ 12%||640,000||360,000|
|Family drawings - Wages||180,000||180,000|
|Deprecation @ avg 15%||360,000||142,500|
|Operating Profit (EBIT)||620,000||1,177,500|
|Net Profit Before Tax (NPBT)||400,625||1,177,500|
|Net Profit After Tax (NPAT)||280,438||824,250|
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.
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|
|Cash on Deposit||350,000||Overdraft||-|
|Farm Stock||45,000||Total Current Liabilities||25,000|
|Total Current Assets||420,000||Non Current Liabilities|
|Hire Purchase Liabilities||-|
|Non-Current Assets||Business Loan||-|
|Plant and Equipment||950,000||Total Non Current Liabilities||-|
|Land and Buildings||6,000,000||Total Liabilities||25,000|
|Total Non-Current Assets||6,950,000|
|Total Assets||7,370,000||Owner's Equity||7,345,000|
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
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
|BALANCE SHEET - FARM A|
|Cash on Deposit||30,000||Overdraft||85,263|
|Farm Stock||103,900||Total Current Liabilities||130,263|
|Total Current Assets||146,191||Non Current Liabilities|
|Hire Purchase Liabilities||1,250,000|
|Non-Current Assets||Business Loan||2,500,000|
|Plant and Equipment||2,400,000||Total Non Current Liabilities||3,750,000|
|Land and Buildings||8,500,000||Total Liabilities||3,880,263|
|Total Non-Current Assets||10,900,000|
|Total Assets||11,046,191||Owner's Equity||7,165,928|
-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 $220,000 in interest alone.
The above example is simply to demonstrate that it’s important to have financial indicators to track your farm’s performance. Much like a tractor has indicators so you know how it’s driving and when it needs servicing and repairs. Do you have indicators in your farming business to indicate when things aren’t going right so adjustments can be made to put you back on track?
Working with you closely through the farming season as
• Gross margins
• Net worth
• Return on capital
(profit/farm assets) >8%
• Industry benchmarks
|WHEAT||SCENARIO 1||SCENARIO 2||SCENARIO 3||SCENARIO 4||SCENARIO 5|
|Variable (VC) ($/ha)||400||500||550||610||666|
|Gross Margin ($/ha)||(25)||-||75||78||74|
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
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
3. Balance Sheet
4. Gross Margins
Must ensure accounts are
structured correctly to give
accurate & reliable information
for these reports to be of use
Request a free meet and greet
Ph: (08) 6113 1211