Dairy Business Management - Week 2

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1
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
3

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
4
EXPENSES
(Money flowing out of the business)
Variable
Costs
Overhead
Costs
Capital
Costs
5


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
 Dairy chemicals
 Ear tags



Liners (routine
replacement)
Forage costs (fertiliser,
spray, silage additive)
etc.
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
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)
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
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
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, tanker, mower etc.)
10
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
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
12
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
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)
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.
15
Milk liners
Concentrates
Variable
Cost
Overhead
Cost


Farm Insurance

Repairs to roadway

Vet bill

AI Costs

Machinery repairs

Purchase of Landrover

Grassland sprays

Auctioneer’s fees

Telephone bill (farm)
Purchase of Milking Parlour
Capital
Cost


16
RECEIPTS
(Money flowing into the business
as income)
Enterprise
Receipts
Sundry
Receipts
Capital
Receipts
17
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
18

To see if my farm business is financially
viable

To identify the most profitable enterprises

To make better management decisions
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
20
This year 2013/2014
PPL
£/Cow
£/Ha
Milk Output
33.23
2,723
5,612
Calves
1.95
160
331
Less Replacements
-2.05
-168
-347
33.13
2,715
5,596
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
Output
Total Output
Variable Costs
22
Milk sales
Calf sales/transfers
Less Replacement costs
= Total output
210,000
+£15,000
- £17,500
£________
VARIABLE COSTS
Forage costs
Concentrate costs
Vet & medicine costs
Breeding costs
Sundry costs
TOTAL VARIABLE COSTS
£15,700
£70,000
£7,100
£3,000
£9,500
£________
ENTERPRISE GROSS MARGIN
£________
100 Cow herd – divide by100
GROSS MARGIN PER COW
£________
23
Milk sales
Calf sales/transfers
Less Replacement costs
= Total output
£245,000
+£15,000
- £17,500
£242,500
VARIABLE COSTS
Forage costs
Concentrate costs
Vet & medicine costs
Breeding costs
Sundry costs
TOTAL VARIABLE COSTS
£15,700
£70,000
£7,100
£3,000
£9,500
£105,300
ENTERPRISE GROSS MARGIN
£137,200
100 Cow herd – divide by100
GROSS MARGIN PER COW
£
1,372
24
Machinery and building depreciation
Machinery running and contractor costs
Property repairs
Electricity, Water Rates
Business admin costs
Paid Labour
Conacre
Finance
TOTAL OVERHEAD COSTS
£19,000
£16,500
£3,500
£4,000
£2,000
£4,500
£6,500
£1,500
£57,500
100 Cow herd – divide by100
TOTAL OVERHEAD COSTS per cow
£
575
25

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
Less Total Overheads per cow
£1,372
£ 575
NET MARGIN PER COW
£ 797
26

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
27




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.
28

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.
29
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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