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Understand the difference between cash flow and profit Understand and explain the principle and application of benchmarking using worked examples.

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Presentation on theme: "Understand the difference between cash flow and profit Understand and explain the principle and application of benchmarking using worked examples."— Presentation transcript:

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2 Understand the difference between cash flow and profit Understand and explain the principle and application of benchmarking using worked examples

3  Recap on last week  Cash and Profit  Benchmarking  Assessment

4 Education for children A decent standard of living Provision for retirement A healthy business to pass on to next generation Top-class herd, flock, crop

5  Last Week: ◦ Be able to calculate gross margins and net margins for an enterprise ◦ Know how to categorise receipts and expenditure for an enterprise  Accounts – Planning and Control  Enterprises  Costs (Variable, Fixed, Capital)  Depreciation  Margins (Gross and Net)  Cash – Can you pay your bills this month?  Profit – can you fund private drawings and business growth?

6 Cash Flow Budget (Liquidity) Planning “A forecast of money going into and out of a business over a specific period of time” Control Compare actual payments with expected. “Can you pay your bills this month?”

7 Overdraft not being repaid

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10  Not reinvesting in the operation or selling assets  Low drawings ◦ Off farm income reducing the need for drawings to fund family expenses  Borrowing money  Not paying bills

11  An expanding business with increasing assets, but few sales  High withdrawals for family living  Repaying debt rapidly  Buying next year’s inputs from this years cash ◦ e.g. prepay on fertiliser)  Increase in accounts receivable ◦ have not been paid yet for product sold

12  Vital to plan and review bank borrowing  A means of adjusting the timing of payments and income  Shows if it is worth while (or possible) growing or continuing the current farm business Poor Cash flow & ProfitPartial Budget

13  How healthy is the farm business?  What information do you use to make management decisions?  Which enterprises are making money?  BENCHMARKING

14 CASHFLOWPROFIT ££ Sales+150,000Sales+150,000 Variable costs-75,000Variable costs-75,000 Business overheads-30,000Business overheads-30,000 Telephone bill (2/3rds to farm) -4,000Telephone bill (2/3rds to farm) -2,667 Land purchased (no loan)-50,000Increase in livestock value+10,000 Drawings & tax paid-20,000Depreciation (buildings & machinery) -10,000 CASH SURPLUS/ DEFICIT (after drawings & tax) -£29,000PROFIT£42,333

15 “Helps farmers to assess their own business performance and compare their physical and financial results with other similar farms”

16  Collect data  Analyse data  Compare your results  Identify reasons for variation  *Formulate action plan*  *Implement plan*

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18  Output ◦ Sales ◦ Value of product grown but not yet sold  Variable costs ◦ Costs associated with production that vary depending on scale  Gross margin – (Output – Variable costs) ◦ this will show how efficient you are with raw materials needed for the enterprise e.g., Seed, fertiliser, Sprays and other variable costs  Fixed Costs – costs that do not vary with scale ◦ looking at the whole business. What is needed after variable costs. The biggest variation between farms is the amount spend on fixed costs  Labour, conacre and finance ◦ Value of your own labour, rent for land and interest and capital loan repayments  Gross Margin – (Fixed costs + LCF) = Profit!!!

19 A. Enterprise reports on Physical performance B. Enterprise reports on Financial performance

20  Group Exercise – Enterprise specific  4 or 5 key performance indicators for  Physical performance  Financial Performance  Include some figures about what good performance might be

21 Physical performance is a measure of the quantity and quality of what you produce on your farm. These will differ between enterprises, e.g.: ◦ Grain/Crop yield Tonnes/Ha ◦ Straw Yield (T/Ha) ◦ Tonnes / Labour Unit ◦ Seed Rate Kg/Ha ◦ Fertiliser Rate Kg/Ha

22 B.Financial performance is a measure of how much money it took to achieve the quantity and quality of product sold from the farm. This financial performance will be broken down into output, variable costs, overhead costs and capital costs. This will then produce various performance indicators e.g.: ◦ Gross Margin/Ha ◦ Gross Margin / Tonne ◦ Total overhead costs ◦ Overhead costs/Ha ◦ Total cost of production/Tonne ◦ Machinery Costs as a % of Total Costs These are only a few examples. On the next few slides we will study a real benchmark report and see the different physical and financial performance indicators

23 Spring Barley report 2013/ years ago1 year agoThis year 2013/2014Average all Accounts£/Ha £/t£/Ha Output Grain Output1,1401, Straw Total Output1,5811,6871, ,089 Variable costs Seed Fertiliser Herbicide Fungicide Other Sprays Total Variable Costs Gross Margin1,3151,3351, Specialist Machinery Costs Specialist Contractors Depreciation Specialist Machinery Specialist Machinery Running Cost00006 Specialist Machinery Fuel Cost Total Specialist Machinery Costs General Machinery Costs Contractors Depreciation Machinery Machinery Running Costs Fuel Costs Total General Machinery Costs General Overhead Costs Property Repairs Electricity Water & Rates Business admin costs Miscellaneous Costs General Building Depreciation Total General Overhead Costs Total common overhead costs Net Margin Paid Labour Conacre Finance00006 Net profit

24 Spring Barley report 2013/ year agoThis year 2013/2014Average all Accounts£/Ha £/t£/Ha Output Grain Output1, Straw Total Output1,6871, ,089 Variable costs Seed Fertiliser Herbicide Fungicide Other Sprays Other Variable Cost0006 Total Variable Costs Gross Margin1,3351,

25 Spring Barley report 2013/ year agoThis year 2013/2014Average all Accounts£/Ha £/t£/Ha Specialist Machinery Costs Specialist Contractors Depreciation Specialist Machinery Specialist Machinery Running Cost0006 Specialist Machinery Fuel Cost Total Specialist Machinery Costs General Machinery Costs Contractors Depreciation Machinery Machinery Running Costs Fuel Costs Total General Machinery Costs General Overhead Costs Property Repairs Electricity Water & Rates89210 Business admin costs Miscellaneous Costs General Building Depreciation Total General Overhead Costs Total common overhead costs Net Margin

26 Spring Barley report 2013/ year agoThis year 2013/2014Average all Accounts£/Ha £/t£/Ha Total Output1,6871, ,089 Total Variable Costs Gross Margin1,3351, Total common overhead costs Net Margin Paid Labour Conacre Finance0006 Net profit Family Labour Value Total Cost of Production (including family labour) 1,4791, ,338

27 Physical performance1 year agoThis year 2013/2014 Average all Land in Spring Barley (Ha) Yield per ha (tonnes) Straw Yield per ha (Small 17Kg bales) Straw yield per ha (Round 4x4 – 180kg bales) Straw yield per Ha (tonnes) Tonnes Grain/Labour Unit Total Tonnes Grain % of Farmland in Combinable Crops % of The Above Crop in Combinable Crop Enterprises Total Machinery Costs as a % of Total Costs Overall seed rate Kg/ha N fertiliser kg/ha

28 Wheat Barley Cattle Existing land Total Farm Gross Margin Gross margin

29 Less Gross margin Wheat Barley Cattle Existing land Overheads Profit Total Farm Gross Margin =

30 Wheat Barley Cattle Existing land ( 1 ) Total Farm Gross Margin =Less Gross margin Overheads Profit

31 Wheat Barley Cattle Existing land ( 1 ) ( 2 ) Total Farm Gross Margin =Less Gross margin Overheads Profit

32 Wheat Barley Cattle Existing land ( 1 ) ( 3 ) Total Farm Gross Margin =Less Gross margin Overheads Profit ( 2 )

33 + = Wheat Barley Cattle Existing land Other income ( 1 ) ( 3 )( 4 ) Total Farm Gross Margin Less Gross margin Overheads Profit ( 2 )

34 Benefits of Benchmarking Assess your own current performance Allocate ALL current production costs (Gross margin is a good starting point) Control fixed costs Identify strengths and weaknesses Information for farm planning and decision making


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