understanding your accounts and business planning - …
TRANSCRIPT
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UNDERSTANDING YOUR
ACCOUNTS AND BUSINESS
PLANNING - SAMPLE
December 2016
Farmer Workshop Sample
By:
Richard King
Michael Haverty
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WORKSHOP AGENDA ~ 1
1. Introductory Quiz
2. Why is this topic important?
- what do you want to get out of this course?
3. How do you know how you are doing?
- bank account, tax accounts, management accounts, balance sheet
- key terminology
- non-cash costs – depreciation, family labour, land costs
4. Review of accounts
- basic ratios and analysis
5. Going deeper
- Cost of Production (CoP) analysis and benchmarking
- Key Performance Indicators (KPI)
6. Return on Capital
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WORKSHOP AGENDA ~ 2
1. Business planning – why bother?
2. Goal setting – longer-term plans
- where do you want to be in 10-years time?
- time management and work:life balance
3. Achieving you goals – one year at a time
- budgeting ahead
- sensitivity analysis
- using the budget- monitoring, adapting
4. Future actions
- what am I going to start doing?
- what assistance might I need
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BEEF SECTOR QUIZ
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THIS COURSE
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IMPROVING RETURNS
Welcome to this training program which aims to help you
improve your understanding of accounts and business
planning.
Throughout this course we will be looking at the tools
used in accountancy, what they mean, and how to use
them to drive your business.
It does not matter if you or someone else physically does
the accounts in your business, but it is vital that you
understand them and know what they are telling you
But more important is using that information to plan
ahead.
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IMPROVING RETURNS
• Around 70% of the difference in financial returns
between farms is down to the quality of management
• High-performing businesses share the following
features;
- use of management accounting, including budgeting and
benchmarking
- an open attitude to gaining and sharing information
- a willingness to improve skills – both of managers and staff
- greater use of information technology
- risk management techniques such as forward contracts
- greater attention to detail – the best farms do a lot of things
a little bit better rather than a few things massively better
than the norm
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Manual tasks
(stock-keeping, tractor
driving etc.)
Operating management(feeding and fertility planning, etc.)
Strategic management(long term planning,business management)
Value of 1
hour work£10 £50 £500
Key message: Time spent on management provides
higher return.
WHAT IS THE VALUE OF YOUR LABOUR?
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2016 2031
Average Price
Cost of Production
THE NEXT 15 YEARS
Beef Price versus Cost of Production
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ACTIVITY: WHAT DO I
WANT TO ACHIEVE?
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YOUR AIMS FOR THE COURSE
Take 5 minutes to write down why you are here and what
you want to take away from these sessions
1. Personal
2. Business
3. Financial
Improve my knowledge and skills
Feel more in control of the farm
Make more profit
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HOW AM I DOING?
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HOW DO YOU MANAGE?
• Look at bank balance;
- is cash situation better / worse than last month
- have things improved / worsened since this time last year?
- am I running out of cash?
• Tax accounts
- better or worse than last year?
- better than 5-year average?
• Management accounts
- information you can use in your business
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Financial Accounts
• External (tax)
• Historic
• Legal requirement (set
format)
- capital allowances on
machinery for tax
• Whole business
• Purely financial
Management Accounts
• Internal (management)
• Current / future
• By choice (what works
and is relevant)
- machinery depreciation
to show actual cost
• More detail – by
enterprise
• Physical (yields) and £s
Financial accounts are only of limited help in knowing
what is going on in a business
FINANCIAL & MANAGEMENT ACCOUNTS
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KEY TERMS - PROFIT
• What is it?
• How do we calculate it?
Note: this slide is content
demonstration only. Actual P & L
session would encompass multiple
slides and take one or two hours to
cover.
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LIVESTOCK PROFITS
Farm Business Income, England – 2007/08 to 2016/17
Source: FBS / Andersons
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Grazing Livestock (L'land) Grazing Livestock (LFA) Specialist Pigs
Farm
Bu
sin
ess
In
co
me -
£ p
er
farm
2016/17
Diversification
Agri-Environment
BPS/SPS
Agriculture
Ave 07/08 to 2011/12
12/1
3
13/1
4 14/1
5
15/1
6
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CASH AND CASHFLOW
• How does it differ from profit?
• How can I be profitable, but run out of cash?
Content demonstration only
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CAPITAL AND THE BALANCE SHEET
• Difference between capital and trading expenses
• Valuations, debtors and creditors
• What does the balance sheet show me?
Content demonstration only
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NON-CASH COSTS
Why they are important
1. Depreciation
2. Unpaid (family) labour
3. Land costs (imputed rent)
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BRINGING IT TOGETHER
• Source and disposal of funds (or source and application
of funds)
- where has money come from and where has it gone?
- linking P & L and Balance Sheet
Content demonstration only
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ACTIVITY: BUILDING A
P & L
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REVIEWING
ACCOUNTS
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£m 2012
Total Output 25,598*
Direct Costs 9,031
Labour 2,373
Power & Mach 4,582
Overheads & Admin 1,785
Property 2,376
Rent & Interest 748
TIFF (Profit) 4,702
%
100
35
9
18
7
9
3
18
Target %
100
30-35
12-15
15-17
3-4
3-4
12-15
15-19
Yours?
Source: DEFRA / Andersons
Adjustments: TIFF labour does not include proprietors’ manual labour; (up to £4,300m?)
Full rental charge might be £3,000m. Would be offsetting reduction in interest
(mortgage costs) and property (landlords repairs).
* Includes £1,012 of non-farming income
PROPORTIONAL ANALYSIS
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KEY RATIOS
• Net Worth: Total Assets – Total Liabilities
• Business Equity: Net Worth ÷ Total Assets × 100
• Gearing: Medium and Long Term Liabilities ÷ Net Worth
× 100
• Current Ratio: Current Assets : Current Liabilities
• Why are these important?
Content demonstration only:
actual session includes worked
example and more detail on
each ratio.
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ACTIVITY: RATIOS
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EXERCISE
• Use the following data to complete the balance sheet
on the next page and
• Then work out the Net Worth, Equity, Gearing Ratio of
this business.
• What does this tell you about the business
- 300 acre farm valued at £8,000 per acre
- Farm house and bungalow valued at £500,000
- Plant and machinery at £150,000
- 200 suckler cows at £1,500
- 50 Heifers at average of £1,000
- 3 Bulls at £2,500
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EXERCISE – CONT.
- Machinery: Tractor Loader, 2nd Tractor, Fertiliser Spinner,
Mower, Bedding Machine, plus miscellaneous (roller, trailers
etc.) at £60,000
- BPS entitlements valued @ £200/Ha
- 2,000 tonnes of silage @ £25/tonne
- 10 tonnes of cow cake @ £190/tonne
- cheque due from auction mart @ £5,000
- 1 month of creditors @ £10,000
- Current Account: £32,000
- Bank Loan: £125,000
- HP: £26,000
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COST OF
PRODUCTION
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COST OF PRODUCTION
• For beef expressed as
- per head or
- pence per Kg of meat
• Compare to likely market prices
• 3 or 5 year averages for long-term sustainability
• Benchmark against others to highlight areas for
improvement
• Not always easy to produce
- problem in apportioning costs
- how to treat non-cash costs
- must be prepared on a consistent basis to be meaningful
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PROFITABILITY RANGE
Profit per Head
-30
-20
-10
0
10
20
30
-300
-200
-100
0
100
200
300
Lowland
Sucklers Store Rearers Lowland Flocks Upland Flocks
Store Lamb
Finishing
£ p
er
head
(sh
eep
)
£ p
er
head
(catt
le)
14/15 Average 14/15 Top Third
Source: AHDB / Andersons
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BENCHMARKING
• Benchmarking is a starting point, a health check
• Identifies strengths and weaknesses
• Evidence for an Action Plan
• Annual review
• Accountability of external advice
“Looking Backwards to Move Forwards”
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KEY COSTS
Four costs explain 70% of variation between top and
bottom producers:
• Feed cost
- especially % of feed from forage
• Labour cost
• Power and machinery cost
• Depreciation
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KEY PERFORMANCE INDICATORS: BEEF
• Calving %
• Culling % and mortality
• Stocking rate – LU/Ha
• Fertiliser use – kg/Ha
• Feed use – kg/Hd
• Days to slaughter
• Daily liveweight gain - g
• Carcass classification
Group Ave
92%
15%
1.6
26
400
?
?
R4L
Target
92%
15%
1.6
26
400
?
?
R4L
Your Figs.
?
?
?
?
?
?
?
?
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RETURN ON CAPITAL
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RETURN ON CAPITAL
• The key measure of business success
• How to calculate
- tenants capital or everything?
• What do you require?
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Source: DEFRA / Andersons
Average Tenants RoC and Range 2009/10 to 2014/15
RETURN ON CAPITAL
-40
-35
-30
-25
-20
-15
-10
-5
0
5
1 0
1 5
20
25
2009/1 0 201 0/1 1 201 1/1 2 201 2/1 3 201 3/1 4 201 4/1 5
Retu
rn o
n C
apit
al -
%
Cereals
Dairy
LFA Livestock
Lowland Livestock
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BUSINESS PLANNING
AND GOALS
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ACTIVITY: GOALS
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WHERE DO I WANT TO BE?
Where would you like to be in 10 years time?
1. Personal
2. Business
3. Financial
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BUSINESS PLANNING
• A few clear goals are all that any organisation needs
- avoid complicated and extensive ‘wish lists’
• It is better to keep your eyes on your goals rather than
on your competition
• Goals should be realistic
- they need to be ‘stretching’, but not impossible
• Break the journey down into small steps
- how do we get there from here?
- turn those small steps into the budget
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IMPORTANT OR URGENT?U
rgen
cy
High
Low
ImportanceLow High
25%<60%
15% 20%
15%2-3%
<1% 65%
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BUDGETING
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FROM BENCHMARKING TO BUDGETING
• Use benchmarking figures to draw up a budget
• Identify costs that could be decreased
• Understand how you can decrease them
• Set a realistic target for relevant costs
• Draw up an annual budget for 2016/17
• Monitor performance regularly to keep to the budget
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Family values
Cash requirements
Benchmarking
Setting the Target
Planning
ImplementationRecording & monitoring
Review
CYCLE OF BUSINESS MANAGEMENT
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HOW DOES IT STACK UP?
Costs = Income – Profit
Profit = Drawings + Tax + Loan repayments +
Rent
Profit target should be set first, then Costs need to be
managed to achieve the profit we need.
Profit = Income – Costs
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WHAT PEOPLE FOUND
• Benchmarking identified strengths, weaknesses and
areas where performance could be improved
• Knowledge exchange
• Helped to identify the right business strategy
• Cost control across the board, profit was down to
managing costs
• Feed cost and strategy have a huge impact on profit
• The importance of taking a step back from day to day
work to manage the business
• Need to plan, budget and use Key Performance
Indicators (KPIs)
• Get better before getting bigger!
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FUTURE ACTIONS
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WHAT’S STOPPING YOU?
List any factors that you think may prevent you adopting
some of the things discussed today
What can we do to help you achieve the objectives you
have set out?
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WHAT AM I GOING TO DO DIFFERENT?
Take 5 minutes to write down what you are going to
change (if anything) in your business in . . .
1. Today
2. The next week
3. The next month
4. The next year
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CONTACT INFORMATION
Richard King
01664 503208
01664 503219
Michael Haverty