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

I'm really excited to be 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. Okay, 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, if 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 two 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, in module two of this book. Module three 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'll be more of an evolving module that feedback from new 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 10 years, where our productivity growth has 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 of their business and therefore drive our agriculture further on. It's produced as a book now there's one book on each table. It's also produced as an ebook and I wanted to put on my Steve Jobs hat and just demonstrate that to you now 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 an 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 down as three modules. That green one there, the yellow one and the orange one at the end. I'm just going to hit one of the modules and it'll come and open up. So you can see we actually have video available 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 text and all the examples in the book are also a part of the iPad or the ebook. 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 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 are about four, four minute clips and you can get to have a look at them, 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 Geddes and it gives you a little bit more information on them. Or Michael and Fiona Chuvas 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. Okay. If you click on that page, you get interactive stuff. You can get quotes coming up at you, just hitting the little icons, you'll see elements. So if you see an example like that, this is associate professor Bill Malcolm and he's talking about farm performance. You click on it and it opens up a very short farm family. Is 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 farm family goals because that's the measuring stick. That's what your farm family are trying to achieve. So that's elements available to you and if you come across diagrams you can't quite read like that One up the right, you just tap on it and the diagram opens up, there's a little cross, 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 at Yalloch. We live 20k's east of Holbrook in high rainfall south east New South Wales. We farm 4,000 acres of cropping and mainly merino sheep. I grew up here at Yalloc, so I've been here for 40 years. I have had the great opportunity to go away to school and I went away to university up at the University of New England in Armidale. Did agricultural economics four years. I had a couple of years on farms and in research stations in Europe which was. So there we go. That's just a sample of what is available to us now on the E book, 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 colour sheet that says Farming the Business. If you want to get access to it, you contact Canprint and I think for $10 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 10 bucks will actually buy you 20 copies of it. So don't let can print know. So it's 50 cents a copy. If you want the ebook that's freely available, no charge from itunes. When you go into itunes, just search Farming the Business or My name is the author and you'll see the three modules come up. Download it now. The challenge is that it's quite data rich because of the video embedded in it. So if you're on ADSL 2 and you've got a reasonable connection, it might take you 20 to 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 download it? It'll 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 irrespective of your connectivity and it'll work as I've demonstrated it there. So you can grab a book, you can grab an ebook, or if you want PDF copies of each one of the Chapters, you go to the GRDC website and each chapter is available to you 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'd like just to start my next one. Okay, haven't we had a good morning this morning? We've had Sol talking about the economy and what the view of the future of economy is. We've had Basil talking to us about what good management is and good business management is the topic of mine is really optimising 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 if 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 the business. I had a spreadsheet and I measured the grain production price to get as income with all the costs to work out what the profitability of this business was. And I did a simple sensitivity analysis. I said what happens if we change each component by 5%? So if we change wheat prices by 5%, what impact does it have on this business's profitability? If I changed interest rates by 5%, what impact would it have on profitability? And then I place them in order of 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 levities right down to exchange rates. And what that graph indicates straight away is how important exchange rates are to our rural businesses. So it was great to hear Sol talk 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 exchange rate so impacting on this particular farm? When you think about our production, 80% of our agricultural production is generally exported and of 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 our farm gate price and hence that exchange rate will affect our grain prices in wheat and barley, canola lupins. It'll 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 there at the bottom of the list, which indicates that they're relatively more important to driving this business's profitability. And while your business at home may 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 yields. Again, they're also important and interesting. The blue are the cost activities. So fuel prices, fuel costs, machinery ownership, repairs and maintenance. Interesting interest rates. Because they're relatively low at the moment, they're not as impacting on our profitability. GRDC grain levies. For all those who pay grain levies in the room, that's great investment. GRDC leverage is not great impact on profitability by 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 5% in a year and wheat prices will probably do the same in yields, whereas 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, sorry, those elements down here are even more important to us. So the old 8020 rule, I think 80% of our management, our businesses should be focusing on our productivity and our price management and 20% on looking at our cost controls. Still important to do cost controls, but they have less impact on our profitability. That's just one way of looking at it another way. What are the key things that affect profitability? Well, it's 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 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, a couple things I want to be interested in, and these are some of the tools we have available to us. Gross margins. So I wanted to look at the gross margins of each enterprise. Gross margins is really the income coming in for that enterprise, less the cash cost of 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 enterprises 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 and our sheep, although 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 taxes, Those aspects. At the end of the day, what we'd like to see is looking at the overhead costs and measuring our 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 enterprises. 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 they're three, I guess, levers for a business to monitor. One is liquidity, the second one is efficiency, and the third one is wealth. Liquidity effectively is cash flows. So when's the cash coming into the business? When is 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. 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 measure measuring how well we are ret 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 ship shop down street Dubbo or bhp. It's a figure that's used quite widely. And the third one is wealth. Wealth is really what is the net assets in this business and what have 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 we have cash flows. Most farmers from my experience in South Australia might be different. In this neck of the woods, they'll do their monthly cash flow because their bankers ask them 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 going to be repaid. A lot of the farmers I've worked with then grab their cash flow, put it in the drawer, shut it till this time next year when the banker asks them again to pull it out. I think the challenge is 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 and loss. It's 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 want to do a balance sheet. I'm never going to sell the farm, so why do I need to do a balance sheet? Balance sheets 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 challenge them and say, look, we really should be doing a balance sheet. Pick a day of the year that you would do it every year to see where the trends are. Now, 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 and loss in your tax return? Is it to maximise your profit or to minimise your profit? Generally, we're doing it to minimise our profit so we can minimise the amount of tax we have to pay to the ato. So generally the objective in your tax return of doing a profit and loss is for the wrong reasons when it comes to management. And elements in the profit and loss don't measure the proper profit and loss. Things like depreciation are a little bit different than market activities. And if you think about the business entities, there 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 entity's profit and 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 tax returns, profit and 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 as 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 purchase that asset. So if you bought a block of land back in 1968 and it was valued at $40 an acre, it's still in your balance sheet and the tax return at $40 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 that on 30 June, it measures the amount of liability that is owed by that business to banks and to finance companies and things like that. So if you want to go back and look at the last five tax returns, you can see whether this business's liabilities have been going up, staying the same or declining. So, again, I challenge you as a farmer or farmers in business, don't rely on your profit and loss, your tax returns, and don't rely on your balance sheet and 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 they do. And I think we need to do more than that if we're going to control our capital. As Sol 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. Okay, so the idea is that we should be measuring our current performances and that's what Basil 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 modelling. So if we decide to change the farming system around, is that going to improve us? We use that as a modelling 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, prepare, project forward, what our profit and loss is expected to be, what our cash flow is 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 too well, we'll need a bit more cash, be in there three months before your neighbours being proactive. The bank is seeing you 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 and loss. We know what cash we have on hand, we measure our equity from our balance sheet, we look at our gross margins, we look at our 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. 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 it. The other one is what if analysis. In our company we have a software program called Plan to Profit where we can sit back and look at each individual farm business model, where that farm business is today. And one of the strengths is to look at what if analysis. What if I change this? What if I buy the next door neighbour 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 the Northern mallee. This farmer was a mixed farmer. And we could see, we projected in 2015 we'd only have a profitability of about 30,000. We projected a poorer season the year after, just to have a look at the risk variation of this business. And in a good season, we could generate over 150,000 in profitability. Then we went back to averages again. Just look at the variation this particular farmer was looking at. They really loved their livestock and said, look, I've got dorpers, I want to expand that. I want to cut my cropping program back. What is it going to do for my business? And that's where the orange or the pink line shows that. Okay, we started to change the business and we dropped cropping area down. We started to pick our sheep numbers up and it took a while before our productivity of the sheep numbers started to pick up. So we could see we were 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 it would take us about four to five years to implement this plan. So on paper you'd say from a business perspective, okay, 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 modeled 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 70%, which is, we'd like to see them above 70%. And you can see they were just gradually crawling above that towards the end of that four or five year period. If they changed with more livestock in their system, we saw the equity is projected to fall down the order of about 50% and level off there. And from a business perspective, that was too risky. So I think once we have these tools of profit and loss and cash flow projecting forward, we can use these tools to help bounce off our ideas and continue to make better business decisions. Okay, there's some other tools that are available to us and you would have seen Basil talk about them this morning. There are some bank financial performance ratios. The banks will use between 5 to 10 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 better the banker understands that the management of this business is 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 too. 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 budgets 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're 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, help improve our profitability. Cost of production. It's a good idea to know your cost of production. Unfortunately, because of variation of our seasons, it's really hard to do a cost 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 decisions. We know we're selling as a profit. A 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. They're starting to use a tool called At Risk. It's 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 were looking at systems where there was continuous cropping versus mixed farming and finding that yes, continuous cropping 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 advisers than individual farm activities. Okay, so if you wanted to do these things at home, how would we do them? Well, one is that you've got examples in the book and if we're 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 and cash flow and helps project it 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 skill levels are to farm performance. I just want to run through four training programs that my company offers but also I want to touch on some other training programs that G AT EC 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've 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 we've encouraged 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 anyone 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 the participants manage the mixed farm make decisions and the winner at the end of the day has the highest net worth. Great for young farmers if you don't want to give them the checkbook yet to understand what risk is about Plan to Profit is a two day training program we offer farmers for our for farm Business management and using our software tool and we have a four day version of that for advisers where we run advisors through our software so a few other things available. The Australian Rural Leadership foundation that was in pages of previous proceedings I'm not sure it's 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 30. Same with Nuffield. You've got a page in your proceedings of Nuffield that's mainly for farmers very prestigious and highly thought of. It's 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. Agri Profit, if you're interested in doing something beyond your tax return, this is a company based in Victoria Help funded by GRDC where you can submit your tax return to them. They'll add more information to it and provide you with quite a comprehensive list of benchmarks that come out of it. So that's Agri Profit if you're interested. Write 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 a lot focused on grain 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 is about being a better boss. So how 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 3. They've 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 GADC website or the grain and graze3 website, you'll be able to get access to that gross margins guide. Now I'm not sure. Gavin, have we got gross margins guide? Okay. On the back table, GRDC have funded a lot of gross margins guides from around Australia and they're freely available. Again, if you're a farmer, I'd really encourage you to perhaps 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 there also are 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 levers in a farming business 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 our businesses. And finally, if you'd like to get a copy of the book, there's one on each table. So first in Best Dressed, or go to the back page of your proceedings and grab hold of there.