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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

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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

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EXPENSES(Money flowing out of the business)

Variable Costs

Overhead Costs

Capital Costs

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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.

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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)

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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

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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

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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.)

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A tractor is purchased at £50,000The value is reduced (depreciated) by 25% each year.Year Opening

ValueDep. Rate Dep.

Amount

Year 1 £50,000 25% £12,500

Year 2 £37,500 25% £9,375

Year 3 £28,125 25% £7,031

Year 4 £21,094 25% £5,273

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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

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e.g. A new silo built at £40,000The initial cost is reduced (depreciated) by 10% of

the initial value each year for 10 years (e.g. £4,000)Year Opening 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 £4,000 £0

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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)

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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.

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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

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RECEIPTS(Money flowing into the

business as income)

Capital Receipts

Enterprise Receipts

Sundry Receipts

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Examples:

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

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To see if my farm business is financially viable

To identify the most profitable enterprises

To make better management decisions

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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

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This year 2013/2014

PPL £/Cow £/Ha

Output      

Milk Output 33.23 2,723 5,612

Calves 1.95 160 331

Less Replacements -2.05 -168 -347

Total Output 33.13 2,715 5,596

Variable Costs      

Forage Costs 1.49 122 252

Concentrates 8.19 671 1,383

Vet/Medicine 1.71 140 290

Breeding Costs 0.51 42 87

Sundry Costs 1.39 114 236

Total Variable Costs 13.29 1,089 2,248

Gross Margin 19.84 1,626 3,348

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Milk sales 210,000Calf sales/transfers +£15,000Less Replacement costs - £17,500= Total output £________

VARIABLE COSTSForage costs £15,700Concentrate costs £70,000Vet & medicine costs £7,100Breeding costs £3,000Sundry costs £9,500TOTAL VARIABLE COSTS £________

ENTERPRISE GROSS MARGIN £________

100 Cow herd – divide by100

GROSS MARGIN PER COW £________

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Milk sales £245,000Calf sales/transfers +£15,000Less Replacement costs - £17,500= Total output £242,500

VARIABLE COSTSForage costs £15,700Concentrate costs £70,000Vet & medicine costs £7,100Breeding costs £3,000Sundry costs £9,500TOTAL VARIABLE COSTS £105,300

ENTERPRISE GROSS MARGIN £137,200

100 Cow herd – divide by100

GROSS MARGIN PER COW £ 1,372

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

100 Cow herd – divide by100

TOTAL OVERHEAD COSTS per cow £ 575

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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 £1,372Less Total Overheads per cow £ 575

NET MARGIN PER COW £ 797

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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

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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.

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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.

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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

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