FBM Flashcards
Average Agricultural Area Utilised (AAU)
Combined area under crops, silage, hay, pasture and rough grazing land in use
Standard Output of an agri product
The average monetary value of the agri output at farm gate prices
Farm Family Income (FFI)
Return from farming for farm family labour, land and cattle
Avg Farm Incomes 2023
Dairy - €49,432
Tillage - €21,399
Cattle - €7,425 to €14,735
National Average FFI 2023?
€19,925
National Average FFI 2022?
Just under €45,000
Contribution of Direct Payments to FFI 2023:
Cattle rearing – 231%
Dairy - 44%
Sheep - 161%
Tillage – 154%
Factors of farm management to contend with
Weather
Economy
Price volatility
Price-cost squeeze
Policy reform
New technologies
Shifts in global supply and demand
A very competitive environment
Types of decisions?
Strategic – long term eg. purchasing land
Tactical – day-to-day decisions eg. choice of concentrate feeding levels
Liquidity definition?
Ability to pay debts as they fall due
Solvency definition?
Ability to pay long term liabilities/obligations when they fall due
Liabilities > Assets = insolvent
Repayment capacity definition?
Ability to generate enough funds to make debt payments on intermediate and long term loans
Depreciation definition?
The calculated annual charge for the usage of fixed assets in the business
Straight line method and reducing balance method
Contra accounts
Where one side can pay the other a balancing amount (farmer owes supplier, but supplier owes farmer)
Trade Debtors
(Accounts Receivable) accounts owed to the business at end of financial year
Trade Creditors
(Accounts Payable) accounts owed by the business at end of financial year
Stock valuations for cattle, sheep, and harvested crops
Cattle 60% of MV
Sheep 75% of MV
Harvested crops 75% of MV
Straight Line Depreciation Calculation
(Original cost of asset - Estimated Residual Value) / Estimated life of the asset
Declining Balance Depreciation Calculation
WDV = Original Cost - Accumulated Depreciation
Bad Debt
Where a debtor is not recoverable
Net Worth
Net Worth = Assets - Liabilities
Capital
The owner’s investment in the business (so capital = net worth)
Assets = ______ + _______
Assets = Liabilities + Capital
Or Assets – Liabilities = Capital
Assets
All resources owned and controlled by the farm business which are of value
Liabilities
Money that is owed by the business
Net Worth = ??
Net worth = Assets – Liabilities
Profitability definition?
The ability of a business to make a profit
Efficiency definition?
How efficiently the business uses its resources
Gearing definition?
Represents the level of debt compared to level of equity in the business
Gross Profit Calculation
Sales - Cost of Sales
Farm debt = ?
Farm debt = Long term loans + Short term debt
Current ratio
(Current assets)/(Current liabilities)
Expressed as :
Acid test ratio
(Current assets-Closing stock)/(Current liabilities)
Expressed as :
Gross Profit Ratio/Gross Profit Margin Ratio
(Gross profit)/(Sales revenue) x 100 = __%
Return on farm assets/capital employed
(Net Profit+Interest)/(Total assets-Current liabilities) x 100 = __%
Fixed Asset Turnover Rate
Revenue/(Fixed assets) = ____ times
Asset Turnover Rate
Revenue/(Total assets-Current liabilities) = ___ times
Operating Expense Ratio
(Expenses-Depreciation)/Revenue x 100 = __%
Debt to Asset %
(Farm debt)/(Total assets) x 100= ___%
Net Worth %
(Net Worth)/(Total assets) x 100 = ___%
Debt to Equity %
(Farm Debt (Fixed Liabilities))/(Total farm equity(Capital @31 Dec)) x 100 = ___%
Debt to Total Capital % (Gearing Ratio)
(Total farm debt)/(Total farm debt+equity) x 100 = ___%
Bank reconciliation definition?
A comparison between the bank balance recorded in the books of the business and the balance appearing on the bank statement.
Why bank reconciliations are needed?
Check the accuracy of the bank account by agreeing balance to bank statement
Identify any bank account errors or omissions
Standing Order
A firm can instruct its bank to pay regular amounts of money at stated dates to persons or other firms
Direct Debit
A firm can allow creditors permission to obtain funds directly from the firm’s bank account – which allows the amounts collected to vary
BACs
Banks Automated Clearing System
A method of making payments electronically, with funds taking up to 3 days to clear.
Gross Margin (GM) accounts
Provide a statement of performance for each enterprise (profit centre)
Gross Margin Accounts – Procedure
Identification of items contributing to output of each enterprise
Allocation of the specific variable costs incurred in production
Enterprise GM = ??
Enterprise Output – Enterprise Variable Costs
Total Farm Gross Margin (TFGM) definition
Summation of individual GMs for all enterprises on the farm
Farm Profit = ??
TFGM - TFC
TFC is Total Fixed Costs (i.e. overheads)
Represents the reward to the farmer for their labour, management and capital investment
Comparative Analysis 2 approaches
Compare figures with data on managing standards (aka Benchmarking)
Within farm comparisons
Benchmarking
Compare figures with data on managing standards
Criticism of Benchmarking Approach
Difficulty of obtaining exact and fair comparison between farms due to differences
Problem defining the standard
Too many standards becomes confusing and messages may appear contradictory
Not anchored by production economics theory
Advantages of GM Accounts
Enables the performance of individual farm enterprises to be assessed
Detailed management information
Identifies strengths and weaknesses
Can be used to benchmark performance
Comparative analysis with similar farms
Encourages high quality record keeping
Limitations of Gross Margin Analysis
Confined by its inclusion of variable costs only.
Confusion and misinterpretation can arise unless the full gross margin calculation can be examined
Makes no allowance for the complementary interrelationships which often exist between enterprises
Outputs and costs vary between seasons/years.
Net Margins
Attempt to overcome limitation that GM ≠ Profit
The ‘Gross Illusion’
90% rule
Pay preliminary tax plus any balance due for preceding year: 90% of the final tax payable for the current year
Tax Credit 2023
€1,775
Calculating Tax Payable
Tax rates are applied to income ranges to calculate gross tax due
Applicable tax credits are then deducted to calculate net tax payable
PRSI Current Rate 2024
4.1% of all income
4.2% from 1st Oct 2025
USC payable when
Total income exceeds €13,000
Legitimate Ways to Potentially Reduce Tax Liability
Employing family members
Stock Relief
Young Trained Farmers Stock Relief
Capital Allowances
Averaging farm profits
Leased farm land exemption
Forestry
Personal Pension Contributions
Limited Company (rather than sole trader)
Revenue Audit
Must maintain tax records for minimum of 6 years
Farm Planning
A systematic and comprehensive framework for exploring ways of increasing farm efficiency and profitability
4 Ways to Increase Profit
Increase Gross Margin (GM) from existing enterprise
Substitute higher GM enterprises for lower GM enterprises
Cut back fixed costs
Introduce new element to the business
Budgeting definition
A calculated assessment of the impact of a plan on annual profit
Profitability budgets
Assess worthwhileness of plan
Enterprise budgets, partial budgets, complete farm budgeting
Cash flow budgets
Assess feasibility and viability of plan
Enterprise Budgets definition
Provide an estimate of the potential revenue, expenses and gross margin for a single enterprise
Structure of enterprise budgets
Enterprise output per unit (head or hectare)
Variable costs per unit
Gross margin per unit
Sometimes include fixed costs to calculate net margins
Advantages of enterprise budgets
Can provide useful projections of enterprise performance
Disadvantages of enterprise budgets
They don’t define a profit maximising situation
Fixed costs are often omitted
There could be many potential budgets for a given enterprise
Partial Budgeting
Examines effect on annual profit of a relatively minor change to the farm business
Examines the revenue and costs affected by a marginal change in the farm business
Shows the expected change in profit
Types of change in a partial budget
Expansion of existing enterprise
Introduction of a new enterprise or dropping a present activity
Substitution of enterprises
Changes in methods of production (factor substitution)
Sunk costs
Costs that have already been incurred and therefore cannot be recovered
Opportunity cost =
The return from the best alternative use of that capital
Budget cost associated with investment in a fixed asset =
Depreciation + Interest on Average Capital Invested
Capital invested =
(Average purchase price per head) x (number of head) x (P/365)
P = Length of production period in days from start to sale
Advantages of partial budgeting
Exploring possible changes to the farm
Identifying most rewarding alternatives
Clear benefits of application
Partial budget act as blueprint/roadmap
Relatively simple approach
Process of preparing budget is a useful discipline
Sensitivity analysis
Limitations of Partial Budgeting
Does not focus on the overall demand for resources
Can be a hit and miss approach
Evaluates the profitability of a project but not the cash flow (feasibility)
Danger of overlooking certain costs (e.g. fixed costs)
Whole farm budgeting used where…
Used where a decision will involve a major or minor change in farm organisation and structure
Typically about indentifying new ideas for the farm
WFB is estimated by the total expected farm profit
Ad Hoc Whole Farm Budgeting
A standard tool used by farm advisors for analysing/evaluating farm development plans
Whole farm planning objectives
Profit, growth, hand over to next generation, reduce risk, lifestyle
Whole Farm Planning - Internal analysis of the farm
Strengths and weaknesses
Resources: Land, Buildings, Capital, Management, Institutional, Location
Whole farm budgets must be laid out in detail with clear statement of:
Assumptions
Relevant technical information
Highlight figures that need to be monitored closely (e.g. milk production by month)
Advantages of Ad Hoc Budgeting
Provides a useful statement of the projected profit of the farm business
Can provide detailed information on expected technical and financial performance on the farm enterprises
Useful where actual performance is monitored against budget
Process of preparing the budget is useful in terms of identifying current strengths and weaknesses
Should encourage farmer to think strategically about the future
Supports application for bank finance
Limitations of Ad Hoc Budgeting
Time consuming to prepare
Absence of farm records often makes verification of performance data difficult
Misleading if carelessly prepared or if standard data used that is not representative of actual performance
May neglect to assess feasibility of plan in context of available resources
Sometimes prepared by financial advisor or accountant with minimal direct input from the farmer/decision maker
Cash flow budget
A summary of projected cash inflows and outflows for the business over a given period of time
Cash Flow Budget Preparation: Key Steps
Outline your projected production plans for year (e.g. milk, livestock, crops)
Take an inventory of all livestock and crops on hand at start of year
Estimate livestock feed requirements
Estimate you milk, livestock and crop sales receipts for the year
Estimate your income from other sources for the year
Estimate your farm production expenses
Allow for any stock purchases or on-farm investments to be made during the year
Other cash expenses
Include all loan repayments to be made during the year
Calculate the monthly (and annual) cash surplus or deficit (net cash position)
Review and revise the budget as necessary to ensure that the cash flow is adequate at all times during the year
Strategy
Plan of action designed to achieve a particular goal
Key stages in a strategic management process
Strategic planning
Strategy implementation
Strategic control
Strategy: Four Questions
What do we want to achieve?
Where should we put our efforts, and why?
What resources do we have available?
What do we need to do to compete, survive and meet our goals?
Strategic Management involves:
Planning/developing a strategy
Implementing the chosen strategy
Controlling the outcomes of the strategy implementation
Adjusting the chosen strategy over time as time and conditions change
Advantages of Strategic Planning
Helps keep the farmer/manager focused on what is important to the success/failure of the business
Can evaluate potential opportunities and threats for their ability to contribute to the strategic goals of the manager
The strategy can guide day-to-day decision-making
Without strategy the farmer/manager may drift along without any clear idea of where the business is heading in the longer-term
Internal stakeholders
Farmer, farm family, business partner(s), employees
External stakeholders
Bank manager/lender, customers, suppliers, government, wider community/public
Strategic Vision is…
Is what the stakeholders want the farm to look like 10 years or more into the future
Mission statement
Defines a farm’s current business direction(s)
SWOT analysis elements
Internal analysis: strengths and weaknesses within the farm
External analysis: opportunities and threats in the farm’s external business environment
SMART
Specific, Measurable, Achievable, Relevant, Time-scaled
Horizontal analysis
How costs have changed over time
Vertical analysis
Evaluation of costs by category to identify areas with largest potential for savings/improvement (e.g. fertiliser, sprays, contractor)
Value chain analysis
Breaks down the whole process by activity to analyse outputs and costs and to identify where efficiencies can be improved (use of enterprise gross margin accounts)
PESTEL
Political, Economic, Social, Technological, Environmental, Legal
LoNGPESTEL
consider Local, National and Global aspects
Porter’s “Five Forces Model” plus 2
Rivalry among existing firms
Threat of new entrants
Bargaining power of buyers
Threat of substitute products and services
Drivers of change, Government, Trade, etc.
Bargaining Power of Suppliers
Technology
Key Success Factors (KSF)
Technology-related
Production-related
Distribution/Marketing-related
Skills-related (e.g. organisational capability)
Others, e.g. reputation, location, access to capital and/or other resources
Crafting Strategy
Managerial process of deciding how to achieve the targeted results within the farm’s physical and economic environment and its prospects for the future
Generic strategies
Low cost leadership
Growth
Focus or niche
Reactor
Differentiation
Best-cost provider
Retrenchment
A strategic control system involves:
Choosing the key indicators that measure progress towards objectives
Establishing standards against which performance is to be evaluated
Creating recording systems for the key indicators
Comparing actual performance to the established standards/targets
Evaluating the results
Taking corrective actions as necessary
Common Problems in Strategic Planning
Planning under uncertainty
Ivory tower planning
Planning for present
Errors caused by cognitive biases
Examples of variable costs in an Enterprise Gross Margin Account
Feed costs, fertiliser, veterinary & AI, sprays
The depreciation method applied to a fixed assets is generally determined by:
The type of asset that it is
A dishonoured cheque can cause the farmer’s bank account balance to…
To be different to the bank statement’s balance
When a debtor can no longer pay their debt, what adjustments need to be made in the P&L account?
When initial sale was made, remove it as money is no longer recoverable, include amount as an expense and reduce remaining debtors balance by the amount of the bad debt
A lodgement of €505 is correctly recorded in the bank statement. This same lodgement is recorded as €550 in the farmers cashbook account in their books and records. How would you resolve the issue when preparing a bank reconciliation?
In the farmers cash book account record €45 on the credit side (ride hand side)
Ways a business would be selected for a revenue audit
Suspicion raised from tax returns
A business can be reported to revenue- “tip off” situation
A loan of 3 years duration would be included in the balance sheet as a:
Long term liability
The closing cash balance in a cash budget is calculated by:
Cash inflows minus cash outflows plus opening cash balance
Weaknesses/limitations of ratio analysis when analysing a farm account
Ratios do not allow for seasonal fluctuations
Incomplete as they fail to consider any non cash benefits that have accrued during the accounting year.
Fixed costs in an Enterprise Gross Margin Account
Farm admin costs, farm insurance costs, machinery running costs
What type(s) of data should be “normalised” for inclusion in a budget?
Price and yield data in profitability budgets
Prepaid income at the year end is recorded in the Balance Sheet as a
Current liability
List the steps involved in creating a partial budget;
Carefully define the option/plan to be budgeted
Extra/additional revenue
Revenue foregone
Costs saved
Extra/additional costs
Calculate the expected increase (or reduction) in annual farm profit
Identify the main uses of cash budgets
Provides an understanding picture of business and household financial situation
Allows farmer to estimate overdraft / financing requirements during the year
May identify cash surpluses that could earn interest on term deposit
Help prevent excessive borrowing
Should support a whole farm budget when evaluating a plan
Critical instrument in financial monitoring and control
Cash accounting systems
Record payments and receipts when cash is paid or received.
Measure business cash flow
Can be erratic, inconsistent measure of operational performance form year to year
Accruals accounting systems
Revenue and expenses matched to period in which they are incurred, regardless of when cash changes hands
Adjustments are made for: Creditors and debtors, Payments and accruals, Drawings
Depreciation of fixed assets are included in accrual accounting systems
Advantages of a cash flow budget
Determines when the farm business needs to borrow money during the year
Shows how the cash income of the farm is being spent for what use during the year
Shows when the farm business can increase its cash spending (purchases) without additional borrowing
Opportunity costs arise in farm production because…
Resources must be shifted away from producing one good in order to produce another
A direct debit of €2,300 has been recorded in the farmer’s income and expenditure account in respect of farm vehicle repairs (expense).
At the start of the year there was farm vehicle repairs (expense) due of €300.
At the end of the year there was farm vehicle repairs (expense) due of €1.200.
The value of the farm vehicle repairs expense, to be included in the Profit & Loss Account, for period is:
€2,300 - €300 + €1,200 = €3,200
Due @ start -
Due @ end +
Using the following financial data, calculate the correct value for the Enterprise Net
Margin for the Lamb Rearing Enterprise:
Opening stock valuation €20,000
Closing stock valuation €28,000
Lambs sold to factory €41,000
Lamb slaughtered for home consumption €210
Lambs transferred to breeding ewe enterprise €2,500
Total variable costs €25,750
Total fixed costs €12,450
Sales 41,000
+ Transferred out 2,500
+ Home consumption 210
+ Closing 28,000
- Opening (20000)
Gross margin 51710
Gross margin- VC- FC = Net Margin
51710 - 25750 - 12450 = 13,510
Receipts to the value of €1,800 have been recorded in the farmers income and expenditure account in respect of the rental income
At the start of the year there was prepaid rent income of £250
At the end of the year there was rent income prepaid of £800
The value for rental income, to be included in the Profit and Loss account for the period is:
€1,800 + €250 - €800 = €1,250
Prepaid at start +
Prepaid at end -
Barry’s Wheat enterprise for year ending 31 December 2011 (TABLE 1)
Opening Valuation €7,000
Closing Valuation €8,000
Grain Sold €5,000
Grain Transferred out to dairy enterprise €10,000
Straw transferred out to beef enterprise €4,000
Fertiliser €6,000
Contractor Charges-Cultivation €2,000
Seed, Sprays. Sundry €3,000
1. Using the information, what is the value of the Enterprise Output for Barry’s Wheat enterprise?
2. What is the value of the Enterprise Gross Margin for Barry’s Wheat enterprise?
- Output + Closing - Opening
5000+10000+4000+8000-7000 = €20,000 - Enterprise Output - Variable Costs
20000-6000-2000-3000 = €9,000
A farmer invested in a new building costing €20,000 in 2009. It is to be fully depreciated over 10 years using the Straight Line method. What is the Written Down Value (WDV) at the year-end 2011?
20000/10yrs = 2000 x 3yrs = 6000
20000-6000 = €14,000
Your are given the following information:
Cash received for milking €50,000
Opening debtors 31 March 2011€5000
Closing debtors 31 March 2012 €8000
What is the value for milk revenue to be recorded in the farmers profit and loss account for the year ending 31 march 2012?
Cash received + Closing - Opening
50000 + 8000 - 5000 = €53,000
Suppose you are given the following for Joe & Mary’s farm
3 enterprises: Beef Cattle (70 LU), Sheep (20 LU), Spring Barley (10 ha)
Total Area farmed: 60 ha
Total farm forage variable costs (grazing, silage, hay): €12,000
Calculate:
1.The forage variable costs to be allocated to each livestock enterprise
2.The farm stocking rate of grassland
- Beef 70LU = 78% x 12000 = €9,360
Sheep 20LU = 22% x 12000 = €2,640 - 60-10 spring barley = 50ha
90LU/50ha = 1.8LU/ha
Calculate the tax payable for a single farmer (self employed) without dependent children making a taxable farm profit of €60,000 in the year 2025 (use tax tables)
44000 x 20% = 8,800
Balance (60000-44000) x 40% = 6,400
Gross tax due = 8800+6400=15200
Less tax credit:
Single person tax = 2000
Earned income tax credit = 2000
Net tax payable = €15,200 - €4,000 = €11,200
Calculate the tax payable for a married farmer (self employed) making a taxable farm profit of €60,000 and assuming his/her spouse does not have an off-farm income in the year 2025 – no dependent children (use tax tables)
53000 x 20% = 10600
Balance (7000) x 40% = 2800
Gross tax due = 13400
Less tax credit:
Married person = 4000
Earned income tax credit = 2000
Net tax payable = €13,400 - €6,000 = €7,400
Partial Budget Assumptions
Enterprise budget data used to support/prepare partial budget
Technical performance does not change from current level of efficiency
Prices of inputs and outputs are projections and are subject to variability
Opportunity cost of capital is assumed to be (?)% (interest rate)
Average investment in variable input costs until point of sale
______shed costing €___ depreciated on a straight line basis over 10 years
Annual depreciation charge €25,000/10yrs = €2,500
Assuming no residual/scrap value
Cash budget advice
Try get more cash in at the point of sale
Farm shed is a lot of money - try spread out costs over a longer period
Could get a loan to spread cost but will consist of an interest charge
Delay investments on things such as machinery
