1

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

EXPENSES (Money flowing out of the business) Variable Costs Overhead Costs Capital Costs 3

 A farm enterprise is a component of a farm business. E.g. A farm may include an arable enterprise and a poultry enterprise.  Variable Costs relate entirely to a particular enterprise and vary in direct proportion to the size of the enterprise e.g. meal. 4 Examples:  Concentrate or meal  Vet and medicines  Bedding materials  Vermin control e.g. Rat poison  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) 5

Assets purchased that last over a long period of time Examples:  Buildings  Machinery purchase  Laneways  Land improvements e.g. Fencing, drainage of ranges  Purchase of land 6

 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 7

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 (power washer.) 8

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%£5,273 9 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 10

e.g. A general purpose shed£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 11

 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) 12

 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. 13

Bedding Vitamins and minerals Variable Cost Overhead Cost Capital Cost Disinfectant Meal Farm Insurance Repairsto roadway Vet bill Vermin Control – rat poison Machinery repairs Purchase of vehicle Telephone bill (farm) Building a shed 14

RECEIPTS (Money flowing into the business as income) Capital Receipts Enterprise Receipts Sundry Receipts 15

E xamples: Enterprise receipts  White meat  Eggs 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 16

 To see if my farm business is financially viable  To identify the most profitable enterprises  To make better management decisions 17

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 18

/2014 Pence/dozen Output Sales74.00 Less Pullet13.50 Total Output60.50 Variable Costs Concentrates42.19 Miscellaneous3.00 Total Variable Costs45.19 Gross Margin/dozen15.31 Misc. Costs include electricity, water, insurance, repairs, maintenance and sundries

20 OutputPence/dozen Sales Less pullet TOTAL OUTPUT p______________ Variable Costs Concentrates50.11 Miscellaneous 6.00 TOTAL VARIABLE COSTSp______________ GROSS MARGIN/DOZENp______________

21 OutputPence/dozen Sales Less pullet TOTAL OUTPUT Variable Costs Concentrates50.11 Miscellaneous 6.00 TOTAL VARIABLE COSTS56.11 GROSS MARGIN/DOZEN27.89

 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 22

 Variable costs: Relate entirely to a particular enterprise and increase in direct proportion to the size of the enterprise e.g. 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. 23

 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. 24

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 25