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Financial and Business Management
  Cameron Smith, Farmanco Pty Ltd
        Strathallan, Victoria
          Why Plan?
• Fear of the unknown is almost always
  worse than the outcome.

• Options that are available today may
  disappear tomorrow.

• Not only do you have to convince
  yourself, you need to be able to
  communicate with family, staff, lenders
  and creditors.
       Where to from here?
     What decisions need to be made?

•   How do we manage cash flow?
•   Will we need to borrow more?
•   Can we borrow more?
•   Are we willing to borrow more?
•   Do we milk more or less cows?
•   Do we feed more or less?
•   What about the future?
        There are no
• Every farm will be different.

• There are processes that can be
  followed that will help to provide

• Many questions are difficult and
  complex. Don’t be afraid to ask for
  help as you ‘bounce ideas’ around.
           The Process

1. Establish the facts.
  a. Balance sheet.
  b. Cash flow.
  c. Reserves of energy.
2. Look for options.
3. Make decisions.
4. Act.
   Listing points 1 to 4 may seem to imply
   that this is a linear process, IT ISN’T.
                The Process
       Estimate          Get an income
       production        estimation

NO                           Estimate operating
Look for                     costs
plan B, C, D…

           Is the plan       Look at cash flow
           possible?         * peak debt
                             * working capital

           What needs
           to be done?
Estimate Production
Estimate Income
Estimate Operating Costs
Cash Flow Budget
         Production Costs
1.   Herd Costs
2.   Shed Costs
3.   Feed Costs
4.   Overhead Costs - Labour

•    Production Costs can only be
     trimmed to a certain extent
•    Trimming production costs may
     have an impact on future income
•    This impact may occur in the short
     term or may occur in the longer
           Herd Costs
•   My average client spent
    $121/cow on herd costs last
•   My two most frugal clients
    spent $40/cow and $41/cow
•   My two most frivolous clients
    spent $220/cow and $223/cow
           Feed Costs
•   Expenditure on feed costs is
    where the rubber hits the road in
    terms of production costs.
•   Other speakers will discuss
    feeding regimes and fertiliser use
    in more detail later
•   My take home message is to
    seriously justify every item of
    expenditure in this area
    Overhead Costs - Labour
•    Expenditure on labour for
     2009/10 does need to be
•    Will reducing labour costs impact
     on the ability of the business to
     perform at the proposed level?
       Production Costs
•   Despite the best efforts in
    trimming production costs with
    the aim of producing the largest
    operating surplus possible, at
    opening prices many farm
    businesses are facing an overall
    cash deficit
•   We need to look at the other
    costs associated with running the
    Costs other than Production
•    Overhead Costs
•    Capital Costs
•    Finance Costs
    – Principal
    – Interest
•    Personal Costs
        Overhead Costs
•   In tight years expenditure on
    Repairs and Maintenance needs
    to be tightened up.

•   What hidden costs are included in
    your results that relate to
           Capital Costs

•   For me this is the no-brainer, we
    cut everything that can be
    possibly cut, unless there is a pay
    back in less than 12 months
    – An example in my area is
      expenditure that may reduce the
      wastage of purchased feeds.
    – Spending $12,000 to save $30,000
      on wastage is justifiable
           Finance Costs
•   Where are your finance costs
    – At <20% of farm income most
      businesses can operate comfortably
    – Finance costs of 25% are a bit of a
    – Finance costs at >25% and certainly
      above 30% need some immediate
          Finance Costs
•   It makes no sense to me to be
    repaying principal in a year of low
    or no profits
•   Under these circumstances we
    are paying off one debt (the farm
    loan) and funding it with another
    debt (the overdraft)
•   Talk to your lending institution
    about your options
         Personal Costs
•   This is an area that no advisor
    should dare to discuss without
    having a thick skin.
            Balance sheet
       what you own and what you owe

1. Realistic market values for:
  a. Land, water, improvements.
  b. Stock and plant.
2. Debt:
  a.   Mortgages, overdraft, other loans
  b.   HP’s, CM’s and leases
  c.   Factory advances
  d.   Creditors, contracts
             Balance sheet
•   While there are no general rules I will
    put down some general rules. If
    equity is -:
    –   <30% then the business is in somewhat of
        a risky situation
    –   30% to 40% then your lending institution
        is likely to continue to support the
        business at current borrowings
    –   40% to 50% then your lending institution
        is likely to support the business and there
        may be access to additional borrowings
    –   >50% then access to additional
        borrowings are likely
Balance sheet
       Reserves of Energy
•   The cash flow might be positive
    or negative
•   The balance sheet might be
    strong or weak
•   How are
    – Your energy reserves
    – Your families energy reserves
    – Your staffs energy reserves
There are Costs and Risks in
Changing Farming Systems
• Direct cash costs.
• The time taken to learn to
  operate the new system at high
• Most short-term responses
  should be about ‘tweaking’ the
  existing system.
Options – Plans B, C, D, ……Z

1. Increase herd size/decrease
   herd size
2. Cull poor performers.
3. Once-a-day milking.
4. Sell heifers.
5. Buy cheaper feed.
6. Feed less/feed more.
7. Other options??????
Increase/Decrease Herd Size
•   The marginal cow is the “last”
    cow in the herd
    – She is effectively likely to be
      consuming all purchased feeds
       The Marginal Cow
•   Our marginal cow is producing
    369 kg MS
•   Our marginal cow is likely to earn
    $1,292 of milk income
•   Our marginal cow is likely to need
    to eat 4.2 t DM over the year
•   At $250/t DM our marginal cow is
    likely to have feed costs of $1,050
•   Our MOFC is $242
        The Marginal Cow
•   Our MOFC is $242/cow
•   Our other production costs
    include -:
    – $92/cow of herd costs
    – $55/cow of shed costs
    – $190/cow of labour costs
•   Our MOPC is potentially -$95/cow
•   Interest on buying the cow?
              Feed Less?
  – YES?                – NO?
• Stale cows          • Fresh cows
• Poor marginal       • Good marginal
  response to extra     response to extra
  feed                  feed
• Low milk prices     • Higher milk prices
• High feed costs     • Cheap feed
              Feed More?
  – NO?                 – YES?
• Stale cows          • Fresh cows
• Poor marginal       • Good marginal
  response to extra     response to extra
  feed                  feed
• Low milk prices     • Higher milk prices
• High feed costs     • Cheap feed
         Once-a-Day Milking?
    – YES?                      – NO?
•   Stale cows               • Fresh cows
•   Low per cow production   • High per cow
•   Jersey or XB               production
•   Low milk prices          • Friesian/Holstein cows
•   High feed costs          • Higher milk prices
•   Cash labour savings      • Cheap feed available
                             • No labour savings
     More Radical Decisions
• Park part of or the whole herd

• Sell some assets (stock, equipment,

• Exit
               The Future?
  Taking some words of wisdom from Bill
  Malcolm - :
  “ Human nature generally gets it wrong, when
  its good we think it will get better and when its
  bad we think it will get worse when in reality
  the opposite occurs”

• Milk price?
• Production costs?
  –   Herd costs?
  –   Shed costs?
  –   Feed costs?
  –   Overhead costs?
 This all looks very complicated.
     Where can I get help?

• Lots of people can provide help (TIAR
  staff, factory field staff, consultants,
  rural financial counselors, other
  farmers, family, etc….)
• Any data set (e.g. ‘Taking Stock’ or
  RedSky) relating to your business is a
  good starting point.
• DairyTas has obtained funding for
  “Taking Stock” sessions.
  – Gather as much information as you can in relation
    to your business and the settings for the 2009/10
  – Factory field staff, TIAR staff, Rural Financial
    Counselors, accountants, consultant and neighbors
    can provide information
  – Know what your situation is, where you stand and
    what your plan of action is
  – Re-evaluate your situation and make appropriate
    decisions as required

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