Articles, Blog

Optimizing your dollars – Farm business management tools to help your farm business. – Mike Krause

August 31, 2019

I’m really excited to be here with you
this morning and helping to release the book called farming the business it’s a
manual on farm business management and I just want to run a little short video to
advertise it ok that’s a short little clip on the
farming the business manual GRDC approached me about two
years ago and said look we don’t have a manual on farm business management and
so we’ve put together what we think is a really useful tool it’s broken into
three modules the first module talks about the overview of farm business
management and both on the financial side of things and the people side of
things it’s really there to help give an
overview and people would they go to the manual might say well this is part of my
farm business management I want to improve so once you’ve done that then module 2
goes through a lot of the how to how do I measure profitability how do I measure return on capital how do i do this sort of budget and a lot of the talk that i’m
talking on this morning is also encapsulated in module 2 of this book module 3 goes into more advanced type topics things like risk management succession planning different budgeting analytical
tools we have available to us and the idea is that, that will be more of an
evolving module that feedback from you people as the years go on there might be
other topics need to be covered that will reissue the book with
additional bits and pieces to module three you might say why is GRDC
putting effort into farm business management and that’s really largely the
reason why we’re here today is that we’ve seen productivity in agriculture
rise quite significantly up until about the last eight to ten years where our
productivity growth is tapered a little and GRDC feel that the next frontier
for farmers to get on top of is to understand their profitability of their
business what drives their profitability their business and therefore drive our
agriculture further on its produced as a book there’s one book on each table
it’s also produced as an e-book and I wanted to put on my Steve Jobs hat and
just demonstrate that to you now if the technology if the user of the technology
works so I’ve just got an ipad here and i’m just touching bits and pieces of it
and I just want to illustrate once you’ve got the book downloaded on the
ipad what it looks like so I’m just going to put my finger on the iBooks app
and it’s opened up the different books I’ve got on my iPad the module comes
down as the book comes there’s three modules that green one there the yellow and the orange one at the end
i’m just going to hit one of the modules and it will come and open up so you can
see we actually have video avaliable to us in the IBook which adds a lot more
dimension to the learning we have available to us rather than just a
tactile physical book we have all the texts and all the examples in the book are
also a part of the ipad or the e-book and you can see up here i’m just going
to use my finger I’m just going to touch one of the sheets and it opens up and
you just use your finger you flick over the ipad and you can see the different
pages going past what we’ve done in the ibook ebook is actually have six
specialists apart from just me with little short videos talking about that
element of the book so if you wanted to listen to someone talking about
profitability or cash flow they’re there and also what we’ve done is put in we’ve
done 10 case study farms from right around Australia who are deemed to be
doing elements of good farm business management there about four minute clips
and you can get to have a look at them see what be invited on their farm and
see what they’re doing so here’s where the farms are located and it’s an
interactive thing you can click on Tony and Vicky Geddys and it gives a
little bit more information on them or Michael and Fiona Chilvers in Tasmania so it’s quite an interactive activity and I just wanted to when it comes back to me just to
illustrate a couple of those videos no I’m sorry that’s not what I’m
trying to do let’s go down here ok if you click on that page you get
interactive stuff you can get quotes coming at you just hitting the
little icons you’ll see elements so if you see an example like that this is a
Associate Professor Bill Malcolm and he’s talking about farm performance you click
on it and it opens up a very short video when a family are running a farm business a big question that they always want to know the answer to is how well are we going
how is our farm performing to measure the performance of a farm business you
start with the family goals because it’s them the measuring stick that is what the
family trying to achieve. So thats elements available to you and if you come across
diagrams you can’t quite read about that one up the right you just tap on it and
the diagram opens up there’s a little cross so i can close that down and this
is an example of the start of one of the New South Wales case study farms that we have down the southern parts of New South Wales here Yallock we live twenty kms east of Holbrook in high rainfall Southeast New South Wales we farm four thousand acres
of cropping and mainly merino sheep i grew up here at Yallock so I’ve been here for 40 years i have had the great opportunity to go away to school and
went away to university up at the university of new england in Armidale did
the agricultural economics for years I had a couple of years in on farms and
research stations in Europe which was so there we go that’s just a sample of what
is available to us now on the ebook which is available on iTunes and the
book itself if you wanted more copies of it go to the back page of your
proceedings today and you’ll see a color sheet that says farming the business
if you want to get access to it you contact can print and I think for ten
dollars handling postage you get a copy in the mail if you’re an accountant and
you think it might be worthwhile for a lot of your clients the ten bucks will actually buy you 20 copies of it so let can print know it’s 50 cents a copy
if you want the e-book that’s freely available no charge from itunes when you
go into itunes just search farming the business or my name as the author and
you’ll see the three modules come up download it now the challenge is that
some it’s quite data-rich because of the video embedded in it so if you’re om
ASL two and you’ve got a reasonable connection it might take you
20-30 minutes per module to download if you’ve got mates that are close by have an
NBN connection just invite yourselves in get a cup of coffee and say do you mind if I downloaded it will be a lot quicker now one of the downsides I guess
is connectivity to download it and yes farmers and other advisors have had
challenges doing that the beauty is once you’ve gone through
the pain of downloading it then it resides on your iPad and you can use it
irrespect of your connectivity and it’ll work as I’ve demonstrated it there
so you can grab a book you grab an e-book or if you want PDF copies of each one of
the chapters you go to GRDC website and its chapter is available to in PDF
format which means you could bring it down on your android device or your
windows machines so there we go farming the business I hope you enjoy
that I like just to start my next one okay haven’t we had a good morning this morning we’ve had Saul talking about the economy and what the view of the future economy
is we’ve had Basil talking to us about what good management is and what good business management is the topic of mine is really optimizing the dollars it’s
talking about the business tools we have available to us so it’s more like how do
we measure our performance how do we go to measure actual profitability how do we
actually measure return on capital so that we know some of the important
numbers in our farming business because we’re not measuring it how can
we really manage it i just want to talk about some of the key drivers of
profitability and Basil touched on it quite a lot this morning this is an analysis I’ve done recently
of a continuous cropping operation where I took the business side I had a
spreadsheet and I measured the grain production a price to get as income with
all the costs to work out what the profitability of this business was and I
do this simple sensitivity analysis i said what happens if we changed each
component by five percent so we changed wheat prices by 5% what impact does that
have on this businesses profitability if I changed interest rates by five percent
what impact would it have on profitability and then I place them in order
importance so if you my paper on page 41 in the proceedings there is a picture of
this diagram in black and white so you can see up here I’ve got
accounting fees i’ve got telephone I’ve got electricity GRDC research liberties
right down to exchange rates and what that graph indicates straightaway is how
important exchange rates are to our rural businesses so it was great
to hear Saul talked this morning about our exchange rate being at 73 cents
about at the moment and he felt that there was more places to fall so
generally as a rule the lower interest rates meant that the world grain prices
are better in farm gate terms for Australia farmers and so the better it
is for us so you might say why is exchanged right so impacting on this
particular farm when you think about our production 80% of our agriculture
production is generally exported and all those commodities most of them are
priced in US dollars so regardless of what the market might be doing out there
in the world if we’re going down against the US dollar then that’s an improvement
in their farm gate price and hence that exchange rate will affect our grain
prices and wheat and barley canola lupins it will also have an impact on
our meat sales and also on our wool sales so hence exchange rates are quite
important what I did is put in red anything that was financial so exchange
rates wheat prices barley prices canola prices so you can see them at the bottom
of the list which indicates that they are relatively more important to driving
this businesses profitability and while your business at home might not be
continuous cropping it might have livestock in it i’d say the elements are
still the same that these prices are far more impacting on our profitability
the green is more productivity so we’ve got wheat yields barley yields canola
fields again they’re also important and interesting the blue the cost activities
so fuel prices fuel costs machinery ownership repairs and maintenance
interesting interest rates it’s because they’re relatively low at
the moment they’re not as in impacting on our profitability GRDC
grain levies for all those who pay levies in the room that’s great
investment GRDC levies is that not impact great impact on profitability or
changing it so you look at that and say okay it is a bit simplistic because we’re going to have grain prices
are going to vary greater than five-percent in a year and wheat prices will
probably do the same in yields where as our costs don’t vary greatly we know fuel prices can go up
and down but they tend to vary in a lesser regret and that’s the case that
effectively means those elements are those elements down here or even more
important to us so the old 80/20 rule i think 80% of our management
in our businesses should be focusing on our productivity and on our price
management and twenty percent on looking at our cost controls still important to
cost controls but they have less impacting on their profitability that’s
just one way of looking at it another way one of the key things that affect
profitability well its production multiplied by price less our costs and as the previous slide would indicate production and price was
important they had done a recent study in WA looking at farm businesses doing
collecting benchmarking data and they determined that of the two production
and price production was probably the most impacting on profitability the
variation that we experience in productivity is greater than the
variation in price and so really if you’re looking at those two while they look
equally weighted in that formula it’s really productivity is really important
to us and Basil gave us a great understanding of productivity relating
to profitability this morning so if I was to come on a farm business and want to
have a look at the farm operation the couple things I want to be interested in
and these are some of the tools we have available to us gross margins so I want
to look at the gross margins of each enterprise the gross margins is really
the income coming in for that Enterprise list the cash costs that Enterprise give
us a gross margin and this particular farm we’ve got wheat barley and sheep so I want to be looking
at all the enterprise’s on the business and gross margins give me an
indication of which businesses are more profitable relative to others in South
Australia we tend to have more profitability coming from our grain then our sheep all though sheep are
now coming up and i will just pause there because a lot of people use gross
margins for cost of production type indications and things like that you
shouldn’t just use gross margins for that because there’s a lot of costs like
overhead costs that are not included in gross margins things like living
expenses depreciation interest payments accounting fees electricity water rates and taxs those aspects at the end of the day what would like to see is looking at
the overhead costs and measuring aour net farm income or profitability that
actually is a positive number and not a negative number now gross margins by themselves will
give a relative profit between the enterprise’s but once we have this fuller picture of the farm business we can also then look at things like cost of
production breakeven yields breakeven prices and if you have this model in
your mind it’s a great model to say hang on I’ve had Basil come on and
advise me into doing various things what happens if i took the sheep out and
expanded the barley or the wheat what impact is that going to have at the end
of the day on my net profit because I want to make sure that all the business
decisions I’m making on my business are actually improving my
profitability there’s three words I want you to have in your mind
that you walk away from my presentation that i think are really important and
their three I guess leavers for a business to monitor one is liquidity the
second one is efficiency and the third one is wealth liquidity effectively is
cash flow so when’s the cash coming into the business whens the cash going out of
the business if we think of our business like a bucket of water it’s
when the water’s coming in when the water’s going out and we hope the level in
the bucket is above the bottom and we’re not running out and probably cash flow
is the most undertaken budget we have in Australian agriculture efficiency that’s
really measuring how well we are operating our capital and what returns we’re getting from it Basil this morning was
talking about the star average versus the top producers in the dairy industry
in Tasmania and he was talking about return on capital it’s a very good
number to sit back and compare the performance of that rural business and
you can then compare it to its neighboring business or the
fish-and-chip shop down street Dubbo or BHP it’s a figure that
used quite widely and the third one is wealth wealth is really what is the net
assets in this business and what are the trends been in this business because we
want to make sure that next year and the year after that’s growing not staying
the same or going backwards now some of the tools are available to us to measure
this so liquidity generally here we have cash flows most farmers from my experience and
South Australia might be different this neck of the woods they’ll do their monthly cash flow
because the bankers asked him for it because the banker wants to know how
much the overdraft is needed when is the overdraft going to max out and when is the
overdraft gonna be repaid a lot of the farmers I have worked with then grab their
cash-flow put it in the draw shut it until this time next year
when the banker ask them again to pull it out i think the challenges that we’ve
got to use cash flow budget as a tool continue to measure and monitor our
business efficiency essentially that’s done by understanding our profit
loss understanding by looking at our gross margins for enterprises and wealth
is done by balance sheets farmers come to me when I do the training they said no
we don’t do a balance sheet I’m never gonna sell the farm so why do I
need to do a balance. Balance sheet aren’t about selling the farm balance sheets are
about measuring the true wealth of the business and which way it has been going
over recent times so i would challenge them and say look we really should be
doing a balance sheet pick a day of the year that you do it every year to see
where the trends are there some of these terms you would have been introduced to in a tax return so tax return does two
elements for us one it does a profit and loss and secondly it has a balance sheet
in it what’s the main objective of doing a
profit loss in your tax return is it to maximize your profit to minimize your
profit general we’re doing it to minimize our
profit so we can minimize the amount of tax we have to pay to the ATO
generally the objective in your tax return of doing a profit loss is for the
wrong reasons when it comes to management and the
elements in the profit-loss don’t measure the proper profit/loss things
like depreciation there a little bit different than market activities and if
you think about the business entities they might be three or four different entities set up in the farming business to try to help manage this profitability and cash
and some are taken out of one entity and put into another so reading just one
entities profit loss may not give a true picture of the farm business in fact i
mentioned this to Bill Malcolm associate professor agribusiness in Melbourne Uni
said the text returns profit/loss the best thing you can do is probably
burn it so I’m challenging you to say don’t just
rely on the profit and loss in your tax return is your sole financial indicator
of how well your business is going and the same could be said with the balance
sheet a lot of assets in the balance sheet in the tax return are valued at the day
you purchased that asset so if you bought a block of land back in 1968 and
it was valued at forty dollars an acre it’s still in your balance sheet in the
text return at four dollars an acre so if i offered you $40 an acre for it today I’d say you probably weren’t happy to sell it to me
at that price so a lot of the assets in the balance
sheet aren’t reflective of what a true balance sheet should look like probably the only thing in a balance
sheet that’s really useful is it on the 30th of June measures the amount
of liability that is owed by that business to banks into finance companies
and things like that so if you want to go back and look at the last five tax returns as you can see whether this businesses
liabilities have been going up staying the same or declining so again I would
challenging you as a farmer or farmers in business don’t rely on your profit loss your tax
returns and don’t rely on your balance sheet in your tax returns to be your sole
measure of your financial performance but unfortunately from my experience in
south australia most farmers that’s all thy do and I think we need to do more than
that if we’re going to control our capital as Saul was saying the
opportunities around the corner for us in Asia if we don’t control our
businesses and drive our financial performances we will miss out on that
opportunity ok so the ideas that we should be
measuring our current performances and that’s what Bazil was talking about and
also i think once we’ve got good profit and loss good balance sheet and good
cash flow understandings we can use those for what if modeling so if we
decide to change the farming system around is that going to improve us we
use that as a modeling tool in the book we talk about the business cycle that I
think all professional farm businesses should use at the beginning of each
season we should set our goals of what we’re looking to achieve this year we
should look at our from those goals and plans project forward what our
profit loss is expected to be what cash flows expected to be what our balance
sheet is and what our gross margins are and make our decisions of how we’re
setting our businesses up for this next 12 months then as the year goes on we
monitor particularly our cash flow so are we ahead or behind our cash flow we
can use that as a good discussion point with our bankers to say look hang on this
year’s not going to well we will need a bit more cash being there three months before
your neighbors being proactive the bank is seeing you’re managing your risk and
their risk better and so effectively hopefully give you lower interest rates
for that and then at the end of the season we know exactly what production
we have achieved so we can measure our true profit/loss we know what cash we
have on hand we measure equity from our balance sheet
we look at our gross margins we look at our net return or net worth we measure our
return on capital and we do some various industry benchmarks once we build up a
good understanding of what that is we then have good information to go into
next year to repeat that cycle again and in good farm business management that’s
what we would say is a good action to do running our businesses professionally so
measuring performance that’s one of that the other one is what if analysis in
our company we have software program called plan 2 profit where we can sit
back and look at each individual farm business model where that farm
businesses today and one of the strengths is to look at what if analysis
what if I change is what if I buy the next door neighbor out what if i change my
farming system this is an example of a client that I was working with in a low
rainfall area in south australia in northern Mallee this farmer was a mixed
farmer and we can see we projected in 2015 with only have a profitability
about 30,000 we projected a poor season the year after just have a look at the
risk variation of this business and in a good season we can generate over 150,000 profitability and then we went back to averages again just look at the
variation this particular farmer was looking at they really love their
livestock and said look I’ve got dorpors I want to expand that I want to cut
my cropping program back what does it’s going to do for my
business and that’s where the orange or the pink line shows that ok we started
to change the business and we dropped cropping area down we started to pick
our sheep numbers up and took a while before our productivity and sheep
numbers start to pick up so you see we’re going to drop down quite a bit in
profitability in a couple years time before we broke even and then started to
move away so we’ll take us about 4 to 5 years to implement this plan so on paper
you’d say from a business perspective ok you might like your sheep and it might
be a good hobby but is it the best business shift for you to do the other thing we model also was the
equity so what would happen to the equity of this business if they did make no
changes the equity is a bit under seventy percent which is we’d like to
see they above 70 percent and you can see they’re just gradually crawling
above that towards the end of that four to five year period if they changed went
more livestock in their system we saw the equity is projected to fall down
in the order of that fifty percent and level off there and from a business
perspective that was too risky so I think once we have these tools of
profit loss and cashflow projecting forward we can use these tools to help
bounce off our ideas and continue to make better business decisions okay and
there’s some other tools that are available to us and you would have seen
Basil’s talk about them this morning there are some bank financial
performance ratios the banks will use between five to ten ratios it’s a good
idea that farmers know what those ratios are in their business so they can start to talk to the banker about those ratios because that’s what the banker speak is and the
the better the banker understands that the management is businesses on top of
it the better this business will be from a risk management perspective so we have
financial performance ratios there are other industry ratios and benchmarks to. Partial budgets that’s another tool that we have this is where you can just
look at that virtual shift we might say we’re going to buy a new header in this
business so partial budget is looking at the added income that we might get from
the new header and that could be we’re taking a crop off two weeks earlier so we are saving some losses from potential thunderstorms took some value of that
less the cost of that header and the idea is at the end of it we want to make
sure that that’s been a good decision to help improve our profitability cost of
production it’s good idea to know your cost of production unfortunately because of the variation of our seasons it’s really
hard to do a cost of production a year out but we can do a cost of production of last
year because we know what production we’ve had we know what costs we’ve had
therefore it’s a good idea to calculate that every year so then we’re doing our
marketing the decisions we know we’re selling as a
profit and similar sort of thing is breakeven analysis where effectively
know what yields we need to achieve and what prices we need to achieve for our
profitability to be broken even and finally there’s a grain and graze 3
which is a GRDC project are starting to use a tool called at risk it is a
probability tool that you can use with excel and it looks at risk so Basil
talked about risk this morning it looks at the probability distribution of
different profit outcomes of a particular comparing farming systems so
they are looking at systems where that was continuous cropping vs mixed farming
and finding that yes continues might give more
profitability but on less time so there was different risks associated with that
it tends to be a tool used more for research and advisors then individual
farm activities ok so if you wanted to do these things
at home how do we would we do them well one is
that you’ve got examples in the book and we were good at excel or spreadsheets we
can sit back and do spreadsheet analysis to do these budgets for ourselves or
cash flow we could use some of the accounting tools like AgriMaster and
Phoenix or you could use our software program called plan to profit
which grabs hold of data from the farm up and builds the gross margins builds
the profitability in cash flow and helps projected forward for five years and we
can use that as a tool now Basil talked quite a lot about training and getting
our skill levels up and how important those skilll levels are to farm
performance i just want to run through four training programs that my company
offers but also want to touch on some other training programs that GRDC have
been offering and you might be of interest to them the first one is farm business
management essentials this has been a one-day program that
we’ve developed for GRDC and we put over 200 farmers through it it’s
basically encouraging the farmers to bring their tax returns along for the day we teach them how to read
them what’s good in the tax return what’s not
so good in it turn it into a proper profit and loss proper balance sheet and
about seven different financial ratios and the booklet is also an informative
booklet that hopefully will encourage the farmers to do it every year and
they’ll be able to use with that so that’s a one-day training program
risky business is like a farming game if you have ever played squatter or
monopoly it’s a great way to learn how you operate with risk and uncertainty this comes out of wa uni it’s a one-day workshop where the
computer does all the number-crunching but we the participants manage the mixed
farm make decisions in the winner at the end of the day has the highest net worth
great for young farmers if you don’t want to give him the check book yet to
understand what risk is about plan to profit is a two day training
program we offer farmers farm business management and using our
software tool and we have a four day version of that for advisors where we
run advisors through software so few other things available Australian Rural Leadership Foundation that was in a pages of previous proceedings and
I’m not sure its this one Gavin but if you’re a farmer in the room and you’re interested
to think outside the square and put yourself in an area of learning more
broadly you can apply to this foundation and it gives you a bursary to do travel
for a year and my understanding is it’s not just farmers it’s also advisors
can do this GRDC I think offer two seats around a
table of about thirty same with Nuffield you’ve got a page in your proceedings of
Nuffield that’s money for farmers vary prestigious and highly thought of its
again a bursary you apply to it and i think you get about 20 to 30,000 to
travel the world to look at subjects that are interested you that you want to
research and then give those findings back to your fellow Australian farmers
AgProfit if you’re interested in doing something beyond your text return
this is a company based in Victoria help funded by GRDC where you can submit your tax returned to them they will add more information to it and provide
you with a quite a comprehensive list of benchmarks that come out of it so
that’s AgProfit if you interested right the website down and have a look resilient grain leaders rural directions
a company in South Australia are offering this one day program helping
grain farmers become more resilient in their business and I think it’s
focused on growing marketing PinG partners in grain is that something
familiar to you yeah okay they’ve got a grant now from
GRDC to run four different training programs my understanding is two of them it’s
about being a better boss so I had to manage people one is how to use
technology like iPads and computers better and I can’t think of the fourth
one grain and graze three have recently
produced a booklet on farm decision-making again i’m not sure
exactly where you get that from but it’s called farm decision-making and I imagine
if you go to the GRDC website or the grain and grazes 3 website you’ll be able
to get access to that gross margins guide now I’m not sure Gavin if we got
gross margins guide on the back table GRDC have funded a lot of gross
margins guides from around Australia and they are freely available again if
you’re a farmer I’d really encourage you to prehaps
pick one up have a look at it use the numbers as a guide but not absolutely
because there’s no substitute for doing these numbers accurately on your
business don’t just use industry indications but gross margin guides are
there and they’re also a number of fact sheets available i think the last count
there was about 30 or 40 fact sheets in the farm business management space some of them are on the table at the back alternatively head to the GRDC website
farm business management and you’ll see them there and they’re available in PDF
format so i just want to wrap up now again three things I think are really
good in leavers in a farming business there for us to understand continue to measure and manage our farm
performance as well as the risks that come through one is liquidity number two
is efficiency and number three is wealth from my experiences farmers tend to focus
on liquidity more than they do efficiency and wealth but i think we should equally
look at those three to help continue to manage your businesses and finally if
you’d like to get a copy of the book there is one on each table so first in best
dressed or go to the back page of your proceedings and grab hold of there

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