Week 2 - Management Accounts 3.8MB

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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 farm enterprise rather
than whole farm business
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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.
Examples:
 Concentrate or meal
 Vet and medicines
 Bedding materials
 Mineral licks
 Ear tags



Forage costs (fertiliser,
sprays, silage additive)
Clipping
etc.
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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 £50,000
The value is reduced (depreciated) by 25% each
year.
Year
Opening
Value
Dep. Rate
Dep.
Amount
Year 1
£50,000
25%
£12,500
£37,500
Year 2
£37,500
25%
£9,375
£28,125
Year 3
£28,125
25%
£7,031
£21,094
Year 4
£21,094
25%
£5,273
£15,821
Closing
value
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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 £40,000
The initial cost is reduced (depreciated) by 10% of the
initial value each year for 10 years (e.g. £4,000)
Year
Opening Value Dep. 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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Sheep shearing
Concentrates
Variable
Cost
Overhead
Cost


Farm Insurance
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Repairs to roadway
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Vet bill
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AI Costs
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Machinery repairs
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Purchase of Landrover

Grassland sprays

Auctioneer’s fees

Telephone bill (farm)
Building a new silo
Capital
Cost


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RECEIPTS
(Money flowing into the business
as income)
Enterprise
Receipts
Sundry
Receipts
Capital
Receipts
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Examples:
Enterprise receipts
 Cheque for cattle/sheep sold to the abattoir
 Money for calves/lambs sold at market
 Cheque received for cull cows/ewes 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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2013/2014
£/Head
£/Ha
1,390
-10
1,380
1,529
-11
1,518
200
180
50
10
60
500
880
220
198
55
11
66
550
968
Output
Sales
Less Replacements
Total Output
Variable Costs
Forage Costs
Concentrates
Vet/Medicine
Breeding Costs
Other Costs
Total Variable Costs
Gross Margin
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Output
Livestock Sales
Less replacement costs
TOTAL OUTPUT
Variable Costs
Forage costs
Concentrate costs £18,000
Vet & medicine costs
Breeding costs
TOTAL VARIABLE COSTS
ENTERPRISE GROSS MARGIN
£102,000
-£2,000
£______________
£13,000
£5,000
£1,000
£______________
£______________
100 Cow s – divide by 100
GROSS MARGIN PER COW
£______________
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Output
Livestock Sales
Less replacement costs
TOTAL OUTPUT
£102,000
-£2,000
£100,000
Variable Costs
Forage costs
Concentrate costs
Vet & medicine costs
Breeding costs
TOTAL VARIABLE COSTS
£13,000
£18,000
£5,000
£1,000
£37,000
ENTERPRISE GROSS MARGIN
£63,000
100 Cow s – divide by 100
GROSS MARGIN PER COW
£630
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Overhead Costs
Machinery running and contractor costs
Electricity, rates & water
Machinery and building depreciation costs
Paid labour
Conacre
£19,000
£3,000
£15,000
£2,000
£4,000
TOTAL OVERHEAD COSTS
£43,000
100 Cow herd – divide by100
TOTAL OVERHEAD COSTS per cow
£
430
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
Enterprise Gross Margin minus enterprise Total Overhead Costs

Indicates the profitability of the suckler-beef enterprise
e.g. If total overheads are £430 per cow the Net Margin per cow in our
example would be:
GROSS MARGIN PER COW
Less Total Overheads per cow
£ 630
£ 430
NET MARGIN PER COW
£ 200
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2013/2014
Output
Average lamb sales
Wool sales
Replacement costs
Total Output
Variable Costs
Forage Costs
Concentrates Costs
Vet/Medicine
Sundry Costs
Total Variable Costs
Gross Margin
£/Ewe
£/Ha
141
4
-10
135
1,410
39
-100
1,349
20
5
15
10
50
85
200
50
150
100
500
849
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Output
Livestock Sales
Wool Sales
Less replacement costs
TOTAL OUTPUT
Variable Costs
Forage costs
Concentrate costs
Vet & medicine costs
Sundry Costs
TOTAL VARIABLE COSTS
ENTERPRISE GROSS MARGIN
£40,000
£1,000
-£5,000
£______________
£6,000
£4,000
£5,000
£2,000
£______________
£______________
300 Ewes – divide by 300
GROSS MARGIN PER EWE
£______________
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Output
Livestock Sales
Wool Sales
Less replacement costs
TOTAL OUTPUT
Variable Costs
Forage costs
Concentrate costs
Vet & medicine costs
Sundry Costs
TOTAL VARIABLE COSTS
ENTERPRISE GROSS MARGIN
£40,000
£1,000
-£5,000
£36,000
£6,000
£4,000
£5,000
£2,000
£17,000
£19,000
300 Ewes – divide by 300
GROSS MARGIN PER EWE
£63
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Overhead Costs
Machinery running and contractor costs
Electricity, rates & water
Machinery and building depreciation costs
Paid labour
Conacre
£2,000
£1,000
£4,000
£1,000
£2,000
TOTAL OVERHEAD COSTS
£10,000
300 Ewe flock – divide by 300
TOTAL OVERHEAD COSTS per ewe
£ 33
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
Enterprise Gross Margin minus enterprise Total Overhead Costs

Indicates the profitability of the sheep enterprise
e.g. If total overheads are £33 per cow the Net Margin per ewe in our
example would be:
GROSS MARGIN PER EWE
Less Total Overheads per EWE
£ 63
£ 33
NET MARGIN PER EWE
£ 30
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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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