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

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

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

5.  An enterprise is a component of the whole business. E.g. an arable enterprise and a top fruit enterprise.  Variable Costs relate entirely to a particular enterprise and vary in direct proportion to the size of the enterprise e.g. Pesticides. 5 Examples:  Herbicides  Seed  Fertiliser  Fungicides  Compost

6. 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  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

7. 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

8.  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

9. 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, sprayer, etc.) 9

10. 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 10 Closing value £37,500 £28,125 £21,094 £15,821

11. 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

12. e.g. A cold store 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

13.  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

14.  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

15. Fertiliser Variable Cost Overhead Cost Capital Cost Herbicides Farm Insurance Repairsto roadway Seed Fungicides Machinery repairs Purchase of Landrover Slug Pellets Packaging costs Telephone bill (farm) Purchase of Sprayer 15

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

17. E xamples: Enterprise receipts  Apple sales  Soft fruit grade A sales Sundry receipts  Cheque from neighbour for contract work e.g. cutting hedges etc.  Single Farm Payments, CMS, LFACA Capital receipts  Cheque for sale of tractor  Money from sale of land/site 17

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

19. 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

20. This year 2013/2014 £/Ha Output Marketable Output3900 Out grades546 Total Output4446 Variable Costs Picking costs1100 Herbicides60 Fungicides582 Fertiliser189 Sundry Costs80 Total Variable Costs2011 Gross Margin2435 20

21. Marketable sales£43,000 Out grade Sales +£11,000 = Total output £_______ VARIABLE COSTS Fertiliser£ 1,824 Herbicide£ 3,800 Fungicide£ 6,700 Picking Costs£11,015 Other Variable Costs£ 500 TOTAL VARIABLE COSTS£_______ ENTERPRISE GROSS MARGIN£_______ 10 Ha Enterprise - DIVIDE BY 10 GROSS MARGIN PER HECTARE£______

22. Marketable sales£43,000 Out grade Sales +£11,000 = Total output £54,000 VARIABLE COSTS Fertiliser£ 1,824 Herbicide£ 3,800 Fungicide£ 6,700 Other Sprays£11,015 Other Variable Costs£ 500 TOTAL VARIABLE COSTS£23,839 ENTERPRISE GROSS MARGIN£31,161 10 Ha Enterprise - DIVIDE BY 10 GROSS MARGIN PER HECTARE£3,116/Ha

23. Machinery and building depreciation£3,000 Machinery running and contractor costs £2,500 Property repairs£1,500 Electricity, Water Rates£1,600 Business admin costs£1,300 Paid Labour (pruning)£4,400 Finance£ 500 TOTAL OVERHEAD COSTS £14,800 10 Ha Enterprise - DIVIDE BY 10 TOTAL OVERHEAD COSTS Ha£1,480 23

24.  The net margin is the Gross Margin minus Total Overhead Costs.  Indicates the profitability of the Apple enterprise e.g. If total overheads are £1,480 per Ha the Net Margin per Ha in our example would be: GROSS MARGIN PER Ha£3,116 Less total overheads per Ha £1,480 NET MARGIN PER Ha £1,636

25.  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 25

26.  Variable costs: Relate entirely to a particular enterprise and increase in direct proportion to the size of the enterprise e.g. Fungicides.  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. 26

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. 27

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 28