Sheep Industry Business Innovation Financial Intelligence Webinar Series

Sheep Industry Business Innovation Financial Intelligence Webinar Series Webinar 2 – Longer Term Financial Decisions Facilitated by Doug Watson

Webinar housekeeping

Programme overview Financial Intelligence webinar series 1. Financial basics 2. Longer term financial decisions 3. Medium term financial decisions 4. Short term financial decisions 5. Managing financial risks

Learning outcomes Determine your farm’s primary long term goal Identify long term financial strategies to guide shorter term decision making Benchmark yourself not others 4

A closer look at the profit and loss A Gross revenue B Less: Variable costs C Whole farm gross margin 1, 000 Based on enterprise mix 375, 000 Move with scale / mix of enterprises 625, 000 The total of enterprise gross margins D Less: Overheads 350, 000 Whole of farm costs that do not change with scale E Operating profit (EBIT) 275, 000 A measure of operating efficiency F Less: Finance costs 95, 000 G Net Profit before tax (NPBT) 180, 000 Interest and leases Taxable income H Less: Family Drawings 80, 000 What we would pay a farm manager I Less: Tax 25, 000 Tax will depend on business structure 75, 000 Growth in owner’s wealth for the year J Net profit after tax 5

A closer look at the balance sheet $ Current assets S V $ Current liabilities Accounts receivable 15, 000 Overdraft 91, 000 Trade lambs 62, 000 Accounts payable 47, 000 Grain on hand 46, 000 Equipment lease 8, 000 Fodder 33, 000 Total current assets 156, 000 Total current liabilities 146, 000 W Non-current liabilities Term loan 850, 000 Plant and equipment 710, 000 Equipment lease 70, 000 Land buildings 3, 500, 000 Total non-current liabilities Total non-current assets 4, 210, 000 Total liabilities 1, 066, 000 Y Total assets 4, 366, 000 Owner’s Equity 3, 300, 000 Z Non-current assets U 6 920, 000 X

Financial health check Ratio Formula Liquidity 1. Current ratio S/W 2. Working capital S-W Efficiency Revenue to asset 3. ratio (A / V)* 100 4. Input cost ratio (B / A)* 100 Profitability 5. Operating profit ratio (E / A)* 100 6. Net profit ratio (G / A)* 100 7. Plant to gross income (U / A) : 1 8. Return on assets (G / V)* 100 9. Return on equity (G / Z)* 100 Debt 10. Equity to assets (Z / V) * 100 11. Interest cover ratio (E / F)* 100 Result Weak range Strong range >1. 5 times ? Positive ? 1. 1 $ 10, 000 <1. 1 times Negative 22. 9% 37. 5% < 15% > 40% > 30% ü < 25% ? 27. 5% 18. 0% 0. 7: 1 4. 1% 5. 5% < 15% < 20% >1: 1 < 2. 5% > 30% <0. 8 > 5. 0% 76% 2. 89 < 70% < 1 times ü × ? ü ü > 90% ? > 2 times ü 7

Limitations of financial benchmarking Consistency of measurements Availability of comparisons Scale of operations Seasonal variations Time of year Not your farm 8

Making comparisons worthwhile Many people use trends and averages over several years Compare within your region if possible Align to your own business plan and goals Focus on continuous improvement over time rather than absolutes Use ratios as a starting point for discussion, not to define specific problems in isolation Add to your understanding with other financial information 9

Sustainably growing owner’s wealth ? ? ? How much of your profit should you look to “re-invest” in the farm? What “reinvestment” options are available? Does the answer to the first two questions depend on the life cycle of the farm? 10

5. Retire 4. Maturity 3. Consolidating 2. Growing 1. Emerging Equity ($) Consider your business life cycle Time 11

Building financial health Improving productivity • Input cost ratio Capital investments Growing scale • Plant to income ratio • Revenue to asset ratio 12

Using financial health Buying assets Debt reduction Re-draw equity • Return on assets • Interest cover • Equity to assets 13

Investing in plant and equipment ? When should you buy / not buy new plant and equipment? ? What considerations should be taken into account when selecting the right machine? ? What do you include in estimating the full costs of owning plant and equipment? ? How do I prioritise the purchase of different items of plant? 14

The risks in purchasing machinery Buy / don’t buy • Buy when the cost of new machinery in $/ha is cheaper than existing machinery • Look across the business and identify ways to get more from your investment Full cost of ownership • Depreciation • Interest • Insurance and rego • Repairs, maintenance and fuel • Labour • Cost of downtime • Compare to contractors Selection criteria • Strategic business need • Productivity • Coping with breakdowns • Ease of use, functionality and OHS • Budget • Upgrade frequency Prioritising • Divide the total cost of ownership by the total benefits of ownership to give a “payback period” • The shorter this payback period the better the option 15

Protecting financial health Tax management options Clearing debt Off farm investments

Impact of longer term decisions Discretionary cash ($000) < 20 Priorities for allocating profit Repayment of term debt 21 – 40 Upgrade plant 41 – 50 “Performance” bonus to family 51 – 80 Superannuation – older owners 81 - 100 Farm Management Deposits (FMDs) – younger owners 101 – 140 New plant 141 – 160 Repayment of term debt 161 – 170 Employee bonus 171 – 200 Bonus to family – perhaps a special holiday >200 Superannuation and FMD contributions 17

References and further reading A review of farm balance sheets grdc. com. au/__data/assets/pdf_file/002 7/159345/8136 -farm-financial-toolbalance-sheet-fs-pdf. pdf A more extensive list of ratios and their interpretation grdc. com. au/__data/assets/pdf_file/001 6/117322/8116 -key-financial-ratios-fspdf. pdf Home page for this series of webinars agric. wa. gov. au/sheep/businessinformation-sheep-enterprises Tools, training and information specifically aligned to sheep farming mla. com. au/extension-training-andtools/making-more-from-sheep/ grdc. com. au/__data/assets/pdf_file/002 Using profit to manage volatile business 0/117254/grdc_fs_fbm-profitperformance allocation_hr. pdf 18

Webinar wrap up Summary Questions Homework