Dairy Business Analysis benefits and pitfalls Camden, 2 nd March 2016 Kerry Kempton – Technical Specialist Dairy Peter Havrlant – Development Officer Dairy NSW DPI Dairy Business Discussion groups – 2016

What is a Dairy Business Analysis? Dairy Farm Monitor Project Separating business performance into cash, profit and wealth helps understand: 1.How well the business is performing in terms of economic efficiency (Profit) 2.Whether the business can meet its financial commitments (Cash) 3.The estimated change in net worth (Wealth )

Dairy Farm Monitor Project

Key Performance Indicators –Cash KPIs compare within in a business between years Can I pay the bills? –Profit (cash + non-cash) KPIs Compare performance within a business compare performance across businesses CASHCASHADJUSTMENTS(NON-CASH)ADJUSTMENTS(NON-CASH)PROFIT ( CASH + NON-CASH ) PROFIT

KPI’s - Cash –Cash is primarily about ‘can we pay the bills’ –Key ‘tools’ include Annual Cash Budget Total Cash income Farm Working Expenses Operating Surplus Net Cash Flow Cashflow Budget Monthly income and expenses Peak finance requirements

KPI’s - Profit –Profit measures how ‘efficiently’ we use the resources to grow net worth Annual Profit Analysis EBIT Return on Total Assets Net Farm Income Return on Equity Risk Variability in profit

KPI’s - Wealth –Wealth is concerned with whether the owners of the business ‘own more at the end than they did at the beginning’ –Equity –Liabilities –Change in Net Worth

CASHCASH NON-CASH ADJUSTMENTS +/- Livestock & Feed Inventory +/- Livestock & Feed Inventory Less: Lease Interest & Principal Capital Expenses Taxation Drawings Plus: Other Income Funds & Capital Intro Less: Lease Interest & Principal Capital Expenses Taxation Drawings Plus: Other Income Funds & Capital Intro Less Farm Working Expenses (FWE) Earnings Before Interest & Tax (EBIT) Net Cash Income + Imputed Labour + Depreciation + Imputed Labour + Depreciation Dairy Gross Farm Revenue Operating Expenses Farm Cash Operating Surplus = = Calculate RoE PROFIT ( CASH + NON-CASH ) PROFIT Net Cash Flow Less: Interest & Lease Less: Interest & Lease Calculate RoTA Net Farm Income = = Change in Net Worth Change in Net Worth

Adjustments Need to make adjustments to fully capture the profit position and to benchmark against other farming businesses Livestock Feed inventory Imputed Labour Depreciation

Livestock Adjustment Stock Numbers Increased –Stock numbers  means potentially less stock income, so we need to account for the extra stock on hand. Stock Numbers Decreased –Stock numbers  means potentially more stock income due to sales and less stock on hand.

Feed Inventory Adjustment Feed Inventory Increased –Feed Inventory  means potentially more feed expenses, so we need to account for the extra value of feed on hand. Feed Inventory Decreased –Feed Inventory  means less feed on hand.

Imputed Labour Adjustment Imputed labour is calculated at an agreed industry standard rate, currently $25 per hour. A standard full-time equivalent (FTE) is based on a person working 48 weeks x 50 hours per week = 2,400 hours $25/hr x 2400hrs = $60,000 In the past an annual rate per cow has also been used to estimate imputed labour. Typically the higher of the two values was used.

Why do it?  There are many ways to run a dairy farm, and every farm is different.  DFMP shows a wide range in profit levels  The main key to success in dairy farming is to be a really good manager! –This means having the skills to bring together all the resources available to operate the business –There will be many factors conspiring against you, and they change constantly

How switched on are you to management?  Self assessment quiz

Self Assessment 1.Do you enter your own financial data in accounting software? a)Yes b) No 2.Do you use herd management software? a)Yes b) No 3.Do you record and monitor production data (milk production, feed, water etc)? a) Yes b) No

Self Assessment 4.Do you produce cash flow budgets? a)Yes b) No 5.How often do you produce a new budget? a)With significant changes to operating parameters and or annually b)Annually 6.Can you calculate your Cost of Production? a) Yes b) No

Self Assessment - Results  Add together all questions you answered a) –Total 1-2: Making Sense –Total 3-4: DairyBase preparation –Total 5-6: Doing great. What can you refine?

How do you do it?  Dairy industry has combined resources to create and promote a standard way to analyse business.  Dairy Base now available, based on the Dairy Farm Monitor project.  Everyone talking the same language and using the same way to generate reports.  Standard Chart of Accounts now available – set up your own record keeping system

Preparing to analyse…  Most important to get your books in order first  You need physical and financial records up to date  Accurate inventories, especially livestock and feed numbers  Look at a financial year, and match income and expenses for that year.  See Checklist

Have a go…  More information on using Dairy Base in next presentation  Get someone else who knows the business to check over your data entry

Understanding it all  DA and RDP’s are rolling out some excellent courses to help farmers  Making Sense of Business Performance –Part 1: the basics of setting up your records and organising all the information. –Do your own analysis –Part 2: understanding the analysis reports, identifying SWOT for your business, strategies and planning ahead

For more information: Kerry Kempton, NSW DPI, Tocal