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Overview of areas to cover  Variable, overhead, capital costs and receipts  Depreciation  Gross margin and net margin  Focus on individual farm enterprise rather than whole farm business 2

 Purpose of tax accounts - to calculate the farm business profit, which determines the amount of tax due  Purpose of management accounts – to measure efficiency of individual farm enterprises and whole farm  Neither tax or management accounts include VAT 3

EXPENSES (Money flowing out of the business) Variable Costs Overhead Costs Capital Costs 4

 A farm enterprise is a component of a farm business. E.g. A farm may include an arable enterprise and a dairy enterprise.  Variable Costs relate entirely to a particular enterprise and vary in direct proportion to the size of the enterprise e.g. meal. 5 Examples:  Concentrate or meal  Vet and medicines  Bedding materials  Dairy chemicals  Ear tags  Liners (routine replacement)  Forage costs (fertiliser, spray, silage additive)  etc.

Costs that cannot easily be allocated to a specific enterprise and do not vary proportionately with changes in the output of the farm. Sometimes referred to as Fixed Costs. Examples:  Machinery running costs  Contractors  Farm Electricity and Water charges  Wages, National Insurance Contributions (NIC).  Conacre  Property repairs, minor land works including drainage  Finance charges (not the capital portion)  Depreciation (will be covered in more detail later) 6

Assets purchased that last over a long period of time Examples:  Buildings  Machinery purchase  Laneways  Land improvements e.g. Fencing, drainage, planting hedges  Purchase of land 7

 Spreads the initial cost of a capital item over it’s economic lifetime.  Shown in year-end accounts as an overhead cost to the business but is not physically paid out.  Two methods: ◦ Reducing balance e.g. machinery ◦ Straight line e.g. buildings and land improvements 8

The item’s value is continually reduced by a fixed percentage each year.  Used for machinery – two rates used for CAFRE Benchmarking ◦ 25% for self-propelled machinery (tractors, quads etc.) ◦ 15% for non self-propelled (trailers, tanker, mower etc.) 9

A tractor is purchased at £50,000 The value is reduced (depreciated) by 25% each year. YearOpening Value Dep. RateDep. Amount Year 1£50,00025%£12,500 Year 2£37,50025%£9,375 Year 3£28,12525%£7,031 Year 4£21,09425%£5, Closing value £37,500 £28,125 £21,094 £15,821

The item’s initial value is reduced by a fixed percentage each year.  Used for buildings and land improvements ◦ 10% per year ◦ i.e. Asset is “written off the books” after 10 years 11

e.g. A new silo built at £40,000 The initial cost is reduced (depreciated) by 10% of the initial value each year for 10 years (e.g. £4,000) YearOpening ValueDep. Cost p.a.Closing value Year 1£40,000£4,000£36,000 Year 2£36,000£4,000£32,000 Year 3£32,000£4,000£28,000 Year 4£28,000£4,000£24,000 Year 10£4,000 £0 12

 Depreciation is a notional expense  The actual cash payment may have to be covered in 1 year, while the depreciation is spread across several years. (Difference between Cash and Profit covered next week) 13

 The following items are examples of common expenses on the farm. Decide which type of cost it is and record your answer by ticking the appropriate box. 14

Variable Cost Overhead Cost Capital Cost Milk liners Concentrates Farm Insurance Repairsto roadway Vet bill AI Costs Machinery repairs Purchase of Landrover Grassland sprays Auctioneer’s fees Telephone bill (farm) Purchase of Milking Parlour 15

RECEIPTS (Money flowing into the business as income) Capital Receipts Enterprise Receipts Sundry Receipts 16

E xamples: Enterprise receipts  Milk cheque  Money for calves sold at market  Cheque received for cull cows sold  Money for replacement heifers not needed and sold off Sundry receipts  Cheque from neighbour for contract work e.g. spreading slurry, cutting hedges etc.  Single Farm Payments, CMS, LFACA Capital receipts  Cheque for sale of tractor  Money from sale of land/site 17

 To see if my farm business is financially viable  To identify the most profitable enterprises  To make better management decisions 18

Enterprise Gross Margin  Enterprise output less variable costs  Used to identify individual enterprise performance i.e. technical efficiency  Takes account of; ◦ enterprise expenses ◦ enterprise receipts ◦ transfers ◦ valuation changes  It is NOT a measure of profitability as it does not include overhead costs 19

This year 2013/2014 PPL£/Cow£/Ha Output Milk Output ,7235,612 Calves Less Replacements Total Output ,7155,596 Variable Costs Forage Costs Concentrates ,383 Vet/Medicine Breeding Costs Sundry Costs Total Variable Costs ,0892,248 Gross Margin ,6263,348 20

This year 2013/2014 PPL£/Cow£/Ha Output Milk Output ,7235,612 Calves Less Replacements Total Output ,7155,596 Variable Costs Forage Costs Concentrates ,383 Vet/Medicine Breeding Costs Sundry Costs Total Variable Costs ,0892,248 Gross Margin ,6263,348 21

Milk sales 210,000 Calf sales/transfers +£15,000 Less Replacement costs - £17,500 = Total output £________ VARIABLE COSTS Forage costs £15,700 Concentrate costs £70,000 Vet & medicine costs £7,100 Breeding costs £3,000 Sundry costs £9,500 TOTAL VARIABLE COSTS£________ ENTERPRISE GROSS MARGIN£________ 100 Cow herd – divide by100 GROSS MARGIN PER COW£________ 22

Milk sales £245,000 Calf sales/transfers +£15,000 Less Replacement costs - £17,500 = Total output £242,500 VARIABLE COSTS Forage costs £15,700 Concentrate costs £70,000 Vet & medicine costs £7,100 Breeding costs £3,000 Sundry costs £9,500 TOTAL VARIABLE COSTS£105,300 ENTERPRISE GROSS MARGIN£137, Cow herd – divide by100 GROSS MARGIN PER COW£ 1,372 23

Machinery and building depreciation£19,000 Machinery running and contractor costs £16,500 Property repairs£3,500 Electricity, Water Rates£4,000 Business admin costs£2,000 Paid Labour£4,500 Conacre£6,500 Finance£1,500 TOTAL OVERHEAD COSTS £57, Cow herd – divide by100 TOTAL OVERHEAD COSTS per cow£

 Enterprise Gross Margin minus enterprise Total Overhead Costs  Indicates the profitability of the dairy herd enterprise e.g. If total overheads are £575 per cow the Net Margin per cow in our example would be: GROSS MARGIN PER COW£1,372 Less Total Overheads per cow £ 575 NET MARGIN PER COW £

 The sum of all farm enterprises’ Net Margins  Should also include subsidy payments  Gives an overall farm profit figure  Out of this profit the business must cover; ◦ Tax ◦ Drawings ◦ Reinvestment 26

 Variable costs: Relate entirely to a particular enterprise and increase in direct proportion to the size of the enterprise e.g. dairy meal.  Overhead costs: Costs that cannot easily be allocated to a specific enterprise and do not vary proportionately with changes in the output of the farm, e.g. Machinery running costs.  Capital costs: Costs spent on assets that last over a longer period of time e.g. Major building renovations, land purchases.  Depreciation: Spreads the initial cost of a capital item over it’s economic lifetime. Land and buildings - straight line depreciation over ten years. Machinery reducing balance method either 25% or 15% annual reduction. 27

 Profit can be split down into enterprise gross margin and enterprise net margin which can benefit decision making on the farm for the individual enterprise.  Gross Margin: output – variable costs (feed, fertiliser, vet & med etc.)  Net Margin: Gross Margin - overhead costs  Overall Farm Profit is when all receipts and costs have been accounted for all farm enterprises. This is what the farm has left to pay tax, drawings and reinvest. 28

Benchmarking Gross and Net margins are the basis for the benchmarking report. A good understanding of these is essential in understanding and analysing a benchmarking report Cash and Profit While business performance is important, businesses also need to ensure cash is available to pay the bills. Planning and control of cash flow is an essential part of business management 29