2. Project No: 2017-1-IE01-KA202-025711
This project has been funded with support from the European Commission.
This publication reflects the views only of the author, and the Commission
cannot be held responsible for any use which may be made of the
information contained therein.
2
3. What’s in this Module
• Aim and use of the Balance Sheet
• Aim and use of the Profit & Loss Statement
• The ratios of the financial analysis
• The financial diagnosis
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4. Aim: To acquire the main notions of economic and financial management
of the farm
Objectives: By the end of this session you will be able to:
Aims & Objectives
To evaluate the performance of a farm
Look at the risk assessment of a farm
5. 5
The financial structure and cash-flow : the balance sheet of its farm
Reminder: what is the balance sheet for?
To read and to analyse the balance sheet
The activity and the profitability : the profit and loss account
Reminder : what is the profit and loss account for ?
To read and to analyze the profit and loss account
Training program
6. Training program
To understand the ratios of the financial analysis
Profitability ratios
Financial structure and solvency ratios
Liquidity ratios
To formulate a financial diagnosis
The different steps of the financial diagnosis
Social and environmental, economic use of performance indicators
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7. HOW TO ANALYZE ITS BALANCE SHEET?
7
The two main lines of analysis of the economic health of a farm are
profitability and solvency. We will focus on the balance sheet analysis.
By the balance sheet, one can check to what extent the financial situation is
sound and if the production tool is properly financed. In a nutshell, is the
operation solid, solvent and how does it evolve over time?
8. BALANCE SHEET PHOTOGRAPHY OF YOUR OPERATION
8
Active = where does the money go? Passive = where does the money come from?
ASSETS
(use of resources)
LIABILITIES
(origins of resources)
Land
Installations
Equipment
Animals
Gross
Depreciations
and provisions Net
Social capital or operator
capital
The result of the exercise
Grants or provisions
Long and medium term loans
TOTAL VALUE
IMMOBILIZED
TOTAL PERMANENT
CAPITAL
Animals (in stock)
Supply stock
Operating income in
stock
Short term debts
Payables
Another debts
TOTAL STOCKS TOTAL DEBTS
Receivables
TOTAL RECEIVABLES
Bank
TOTAL AMOUNT TOTAL AMOUNT
Balance sheet fundamentals: what you own is listed on the
asset side, what you owe is on the liabilities side.
The asset values are divided into 2 categories: fixed assets
grouping the production tool and current assets (resources
mobilized by the production cycle).There are stocks,
receivables and money in the bank.
The liability includes the debts (L & M term loan, supplier and
financial debts of - 1 year).
Assets and liabilities being equal, the difference is the equity
shown at the top of the liabilities.This set forms the book
value of your operation. It can be far away
real value (land, buildings and materials among others).
The separation of professional and private assets adds to the
challenge of asset valuation.
But we have valuable elements to analyze.
From the balance sheet, one can calculate many ratios, some
more relevant than others. We will consider two that are the
key indicators of financial strength in the short and medium
term.
9. DEBT RATIO:
DEGREE OF DEPENDENCE ON THIRD PARTIES
9
The debt ratio is one of the main indicators of the financial analysis.
The percentage (debts / total assets) reflects the degree of fragility of the company in the medium term.
In other words, the importance of equity provides some independence from creditors.
It allows you to borrow in better conditions
If we accept that the debt ratio should not exceed 50%, this ratio must be reported on the date
the farmer's installation, the recent development of the farm and the legal form
(There may be off-balance sheet borrowings to finance the share capital).
If the debt ratio is high or very high (> 75%), it is essential that it move downwards and find a rate below 50%.
Agriculture implements large capital in terms of profitability.
An operation must not remain permanently indebted because the financial costs increase the income accordingly.
Let's not forget that it is this same income that contributes to increasing equity.
Finally, in the debt review, we must assess the weight of short-term debt, that is to say less than a year.They generate financial costs
and precariousness.
10. THE WORKING CAPITAL OF YOUR OPERATION
10
Farms must have a cash flow capacity to meet the deadlines as
and as they arrive.This capacity, more or less sufficient according to the farms, is measured
by working capital. It is obtained by the difference between permanent capital and fixed
assets (see balance sheet diagram). It's a revealer of the financial health of your business in
the short term.
Assets Liabilities
Sustainable jobs
- Intangible and financial fixed assets
Permanent capitals
- Equity
- Long term debts
Margin of safety: net working capital NWC
11. THE WORKING FUNDS OF YOUR OPERATION
Working capital must be positive. The means of financing must finance the production tool and the current
assets (stocks, advances in culture, receivables and bank).
The higher the working capital, the less the need for short-term financing (supplier or bank loans, overdraft).
The optimal working capital is variable depending on the production system.
The longer the recipes are spaced out, the more time it takes to have this cash advance to cover expenses.
The farm must advance the money for its purchases and salaries before receiving the receipts.
It is partially covered by the time allowed by the suppliers, but that is not enough.There remains a "NEED" to
finance, expressed in days of turnover and proportional to it.
Short term jobs
- Stocks
- Receivables
Working capital requirementWCR
Short term debts
-Payables
12. THE WORKING FUNDS OF YOUR OPERATION
The need to be financed must be less than the working capital, otherwise the company has cash flow problems.
Example:
In a cereals and field crops system where expenses are incurred before revenue, the working capital must cover 6 months of
expenses, ie 550 to 600 € / ha.The target is 800-1000 € / ha when the farm has a high proportion of industrial crops (25%
beetroot and potatoes).
On the other hand, on dairy farms, monthly milk receipts will more easily cover the coming deadlines. As a result, a working
capital covering 3 months of expenses will be enough, about 400 € / ha.
To monitor your working capital is to improve the profitability of your business thanks to small "plus" additions (avoid agios,
take advantage of discounts and buy in the dead season). Moreover, it is very useful to dialogue with his banker; your
management center advisor will help you analyze your own balance sheet.
Short term
needs
WCR
Short
term
debts
NWC
Uses
Sustainable
capital
Rest in cash
13. THE INCOME STATEMENT
Annual accounting document providing a description of
the 12-month operating expenses and revenues: the
financial year.
It allows to analyze the performances of the company.
The result is calculated by difference between products
and expenses.
3 mains categories of loads and products contribute to the overall performance:
1. Expenses and revenues related to current and usual operations; lead to the operating result
2. Financial expenses and income: interest on debts and investments of the holding; indicate the financial result
3. Exceptional expenses and income: from non-recurring transactions, including the purchase and sale of fixed assets; determine the
exceptional result
EXPENSES PRODUCTS
· Purchasing supplies · Sold production
· Subcontracting and external services
→ Plants, animals, services,
other products
· Rent and tenant fermage · Operating premiums
· Maintenance
· Dues and taxes
· Insurane
· Staff costs (+ social charges)
· Depreciation (expenses not
corresponding to a cash outflow) Operating profit
· Financial expenses (interest only and
no capital repaid)
· Financial products
Bottom line
· Exceptional expenses · Exceptional products
Exceptional result
14. INTERMEDIATE MANAGEMENT REBATE
How to analyze its result?
Exercise Previous Exercise Variation
Total % Total % Total
Sales
+ Change in production stocks
PRODUCTION
- Extraordinary charges
- Variation of supply stocks
OVERALL GROSS MARGIN
- Other supply charges
- External Services
ADDED VALUE
+ Grants, allowances
- Taxes
- Personal costs
EARNINGS BEFORE INTEREST, TAXES AND AMORTIZATION
+ Other products
- Economic depreciation
- Supplies
OPERATING RESULT
+ Financial product
- Financial expenses
CURRENT RESULT
+ Sales value of fixed assets
+ Other exceptional products
- Tax depreciation
- Accounting values of fixed assets sold
- Other exceptional charges
NET PROFIT
The economic result is obtained by difference between products
and expenses.
It is possible to measure masses by taking into account some of the
products and loads.
Intermediate results, called intermediate management balances,
are thus determined.
The most used are:
Added value: VA
Earnings Before Interest, Taxes and Amortization: EBITDA
The interest of these balances makes it possible to:
Improve knowledge and analysis of the economic
performance of the farm
Make comparisons between farms at an operational level.
EBITDA excludes depreciation and financial expenses
Make comparisons with other sectors of economic activity.
15. PROFITABILITY OF A PRODUCTION
CALCULATE GROSS MARGIN
Different activities or workshops make up the
farm.
The difference between variable income and
expenses generated by an activity must be as high
as possible: this is the gross margin.
If the gross margin is low, it is necessary to
question:
Technical issues ?
Unfavorable buying or selling conditions?
Combination of insufficiently effective activities?
Lack of productivity?
Wheat Maize Sunflower Colza TOTAL
Sold production (turnover excluding taxes)
- Initial stock value
+ Value of the final stock
(1) = Total products
Seeds
Fertilizer
Pesticides
Food
(2) Total operating expenses
= Gross Margin (1) - (2)
= (Gross Margin / total products) X 100
Area
Gross Margin / hectare
16. PROFITABILITY OF A PRODUCTION
INTEREST OF THE GROSS MARGIN
There are basically two types of charges that relate to an activity:
Directly and easily assignable to an activity, appear and disappear with them: these are the variable loads;
Related to the production device, requiring certain conventions, some distribution keys to be assigned to an activity or
workshop: these are the fixed loads.
Gross margin: difference between income and variable expenses
The level of gross margins varies according to the size of the variable charges and their combination, one can find there the
technicality of the operator.
The gross margin has two interests:
it indicates the contribution of a workshop to the formation of the result by the cover
fixed charges; in the short term, it is a tool for orienting exploitation by seeking a better combination of activities
it allows comparisons between farms with the same production structures
We then seek improved margins through a better efficiency of variable factors, called inputs.
17. PROFITABILITY OF A PRODUCTION
CALCULATION OF THE GROSS MARGIN
The activity product is obtained as follows:
Yield x price obtained + allowances and premiums
(premiums becoming more and more important).
Variable expenses express the consumption of goods or services directly related to the production cycle.
Consumption is equal to purchases adjusted for inventory change (initial stock - final stock).
These are the variable loads related to the surface (fertilizers, treatments ...) to which may be added the
specific variable loads related to a production workshop, such as animal loads (livestock feed purchased and
collected, veterinary costs ...).
18. CALCULATION OF MECHANIZATION COST
Reported per hectare, it indicates the amount of costs related to the use of equipment on the farm.
Assurances matériel ……………………………..
Entretien …………………………………………
Energie …………………………………………..
Frais de récolte et travaux ……………………….
Amortissements / Equipements …………………
Frais financiers / Equipements …………………..
TOTAL Frais de Mécanisation
Surface …………………………………………..
Coût de mécanisation / ha
This cost will be used in the calculation of the cost of
production and the threshold price.
Material insurance
Maintenance
Energy
Harvesting costs and works
Depreciation / equipment
Depreciation / Financial expenses
TOTAL mechanization costs
Area
Mechanization costs /ha
19. CALCULATION OF PRODUCTION COSTS IN
AGRICULTURE
To calculate the cost price of a production consists of calculating exactly how much the production of a quintal of
wheat, corn or rapeseed ...
The marketing threshold is the threshold selling price above which all costs (including the farmer's remuneration)
are reimbursed.
In all sectors of economic activity, especially in industry, the manufacturers of a product begin by calculating how
much it costs to manufacture, to then determine a selling price.
Ideally, it should be the same in a farm, for its different productions.
20. CALCULATION COST OF RETURN AND
MARKETING THRESHOLD PRICE
To calculate the cost price, it is necessary to make an inventory of the various expenses of the exploitation, to then
impute them with each quintal product.
There are two types of charges:
A. Operating expenses (directly related to the activity)
- Entrants who enter the technical itinerary of a crop: seeds, phytosanitary products, fertilizers, harvesting costs
per company, hail insurance, etc.
(for milk or meat, it would be food ...).
These charges disappear if there is no production.
B. Structural costs (existing outside any production activity)
- operation: maintenance costs for equipment and buildings, fuels and lubricants, insurance, purchase of tools for
the workshop or office expenses
- company commitments: depreciation (plant) of equipment and buildings, salaries paid to staff, seasonal or
permanent, financial expenses
- Operator's commitments: rent, property taxes, social security contributions and labor remuneration provided by
the farmer.
21. EXAMPLE: COST OF A VEGETABLE EXPLOITATION
Cost price of a farm with 100 ha of UAA, including 50 ha of wheat
(yield achieved: 85 qx / ha of wheat on average).
This farmer has 400 € / ha of operational expenses for this crop.
The total of its operating expenses is 13.000 € for the exploitation, that is to say 130 € / ha.
Its expenses related to the commitments of the company represent 25,500 €, or 255 € / ha, those related to the commitments
of the operator represent 68.000 €, or 680 € / ha (including a salary of 20.000 € / year).
He has 8.500 € overhead on his farm, or 85 € / ha.
Its gross cost price or its wheat crop is therefore:
400 € / ha + 130 € / ha + 255 € / ha + 680 € / ha + 85 € / ha) / 85 q x / ha = 18 € / q
Cost: 18 € to produce a quintal of wheat.
The determined net cost, we can calculate the threshold of marketing.
At the net cost price, the premiums collected per hectare (coupled and decoupled premiums) are deducted.
If the farmer receives 340 € of premium per hectare, this represents 340 € / 85 q = 4 € / q
Marketing threshold for this farmer: 18 € / q - 4 € / q = 14 € / q
The interest is to have cost prices and marketing thresholds as low as possible.
We note that it is important to lower the load of structures, especially the loads mechanization (Cooperative use of agricultural
equipment, mutual aid, common rotation, ...).
22. COST OF PRODUCTION AND
COST OF RETURN OF MILK
Loads
suppletive
104
Milk Price
326 €
28 Another loads
12 Financial Charges
20 Workforce
16 Landed
20 Building
64 Mechanization
49 Other operating expenses
81 Food Cost
Structural
loads
160
Loads
Operational
130
Productioncost290€
Pricecost394€
23. INVESTMENT AND
WORKING OF AN OPERATION
Investment is a complex operation that always fits into an overall development strategy of the operation,
because it allows:
growth in operating capital and production
the substitution of capital for work, therefore a better match between the dimension of the tool and the
availability of work
the improvement of the working conditions: execution of the tasks, comfort, safety ...
the reduction of certain hazards limiting production (irrigation, drainage ...)
Investment refers to financial capital, buildings, equipment, but also herd increase, financial participations, market
research costs ...
24. FINANCING INVESTMENTS
The rule: Because of its sustainability, an investment must be financed by permanent capital and not by short-term or
very short-term cash resources to avoid cash flow problems.
It is necessary, for prudential reasons, that the permanent capital be greater than the total amount of investments
made.The gap (permanent capital - fixed assets) is a stable resource reserve called the Working Capital Fund.
The sources of permanent capital are:
- self-financing: internal resource taken from the annual balance of current operations of the farm; it thus depends on
arbitrations of which this balance is the object (private levies, annuities of current loans)
- subsidies: granted for certain operations, aid for modernization, compensation for handicaps, upgrading to European
standards and granted at certain privileged moments in the farm life cycle (installation)
- loans: medium and long term
- the initial investment and the personal contributions of the operator
25. AUTOFINANCING OR BORROWING?
By making too much self-financing, for the sake of safety, the farmer deprives himself of expansion
possibilities by drawing on his working capital.
By using too much borrowing, he runs the risk of having trouble repaying, or even worse, being
unable to do so.
There is therefore a balance to be found between self-financing and borrowing, which ensures both
security, sustainability and development of the farm.
26. FINANCIAL HEALTH OF OPERATIONS AND TREASURY
The income approach is necessary to appreciate wealth creation and profitability. However, this approach is
insufficient, this wealth may be only potential in the case of receivables (what customers still need) or inventory
(unsold, they are not cash generators).
On the other hand, the calculation of income is subject to conventions such as:
depreciation (variable periods, linear or declining mode, resulting in different profitability, without modifying
revenue from the activity)
valuation of stocks
The cash-flow approach is complementary to that of profitability and makes it possible to highlight cash flow
problems with multiple causes.
PROBLEME
DE
TRESORERIE
Aléa
Investissements
mal financés
Capitalisation
trop rapide
Conjoncture
économique
défavorable
Besoin en fonds
de roulement
mal évalué
Investissement
dont le coût réel
dépasse la prévision
Prélèvements privés
trop importants
Insuffisance
de rentabilité
cash flow
problem
Alea
Lack of
profitability
Private levies too
important
Investment whose actual cost
exceeds the provision
need for badly assessed
working capital
Unfavorable economic climate
Poorly funded
investments
Capitalization too
fast
27. SOME DEFINITIONS
Net assets Difference between assets and balance sheet debts. It expresses the heritage value of the company.
Amortization
Sum set aside corresponding to the loss of value (discount) of a good that one possesses (building, car, machine ...), in order
to replace it in the same way.Tax rules determine the amount of annual depreciation called amortization expense.
Supply Raw material or components delivered for resale or incorporation into the manufacture or packaging of a product.
Self-financing Part of the profit of the company not distributed to the shareholders in addition to the depreciation made during the year,
making it possible to finance new investments.
WCR Working capital requirement: difference between, on the one hand, inventories and operating receivables, on the other
hand, operating debts.
Balance sheet Annual and quantified inventory of assets and debts of the company on a specific date, "photography" of the company.
Budget Prediction of objectives and means used as a reference for the company, must be updated according to the events and the
level of activity.
Cash flow Net profit of the company distributed or not + amortization of the year ("what we have earned and we can use + what we
put aside to replace what is used").
Equity
All the financial resources belonging to the company. They mainly include capital, previous profits retained as reserves or
retained earnings, capital gains generated either by inflation (revaluation differences) or by financial transactions (merger,
contribution, etc.). , and regulated provisions.
Turnover Amount of invoices sent to customers. Corresponds to deliveries made over a period, in relation to the normal business
activity. Always expressed without taxes.
Income statement Summary of all expenses and products of the company over a period. It allows to know the result by difference. This is the
"film" of the events of the year.
28. SOME DEFINITIONS
Discovered (or current
bank loan)
Difficulty of temporary cash flow over a relatively short period. The bank helps with a loan (usually quite expensive)
provided that it has been consulted beforehand.
Net debt Financial debts (lines of credit, bank loans, bonds, etc.) less available cash (cash and cash equivalents). See also ratio of net
debt to equity and ratio of net debt to cash flow.
Net working capital
Gap between the situation of sustainable resources and the situation of stable jobs. Defined (curiously) by the financing
table and not directly by the balance sheet. Global net working capital can also be defined as the difference between:
• on the one hand, the sum of equity, provisions, financial debts exceeding one year
• on the other hand, the sum of net fixed assets and receivables more than one year old
Writedown Loss suffered during the resale of an action or property. Difference, net of fees, between the purchase price and the selling
price.
Exceptional operations Part of the income statement corresponding to transactions of an exceptional nature in relation to current operations such
as, for example, a transfer of assets.
Financial operations Part of the income statement corresponding to transactions with banks or financial institutions or third parties involving
financial assets or liabilities.
29. SOME DEFINITIONS
Investment plan and
financing
It is a kind of cash plan spread over 2 to 5 years (10 to 20 years in heavy industries), in order to spread over time the
stable jobs (planned investments) and the sustainable resources (capital and loans) opposite. The differences, by partial
period, and over the entire period, indicate the needs and the surplus of resources.
Capital gain Profit realized by selling something that one possesses (building, machine, car, share ...) to a higher value of its book
value (purchase value - possible depreciation). A negative difference is called "less value".
Provisions for risks and
charges
Registration of a possible future cost and / or probable operating costs and, in return, liabilities, the potential outflow of
money, comparable to a possible debt. In general, provisions for risks and charges are deductible from the tax base; but
the tax administration admits of their deductibility only if they are created by a real and serious fact.
Profitability Relationship between a result and the means implemented to obtain it (eg profitability of a machine, an investment, an
activity ...).
Financing table Table of uses and resources that explains the overall changes in the company's assets during a given period. Table
showing the resources of a period, their source and category, secondly, the jobs of the same period, their use by
category, by heading, by post that the company has made of its resources.
Value added tax (VAT) It is an indirect tax borne solely by the final consumer of the product or service. Companies recover most of the VAT
they pay on purchases and return theVAT they collect on sale to the State.
Editor's Notes
The assessment describes the heritage situation of the holding at the end of the financial year. It presents in front of the asset to on the left and the passive on the right, whose accumulations are definition of equal value. Balance sheet assets reflect the means owned by the operation and implemented to carry out his activity. It includes fixed assets which are the goods necessary for the productive process, such as land, buildings, materials or breeding animals and circulating assets that essentially represent the resulting goods and receivables of the production process, including stocks.
The liability describes the resources mobilized by the holding to finance the means implemented, the indebtedness constituting the contribution of the partners and the equity of the operator.
The structure of the balance sheets is largely conditioned through the production process. It differs significantly from one orientation to another. For example the share of fixed assets in total assets reaches 75% for specialized farms in herbivore breeding. It is lower among vegetable orientations, 64% for field crops and only 41% for the viticulture of appellation. The importance of capital own is also conditioned by the production process. Wine farms, which often carry out the breeding and storage of wine, largely the financing of their activity on equity. In market gardening and horticulture and pigs, poultry, shorter production cycle does not require equity financing in such a large proportion.
The debt ratio (ratio of all debts balance sheet total) measures the contribution of resources external to exploitation in financing its activity. It reflects the degree of dependence of the farm with its creditors.
The rate average debt is 40%.
To produce wealth, a farm, like any business, implements the goods it owns (balance sheet assets) and uses labor (number of annual work units). The contribution of each of these factors in the production of the farm is evaluated by their intensity. Capital Intensity (Balance Sheet Assets Relative to Value added increased operating subsidies) the value of the means to be implemented to create a unity of wealth. Farms specialized in breeding herbivores must, in proportion to the created wealth, bring more capital than the predominantly vegetable farms, in particular those market gardening, horticulture and fruit.
If the balance sheet is a financial state of affairs at a specific moment, the income statement presents the results economic activity during a fiscal year. It relates to the activity of the company, to its function of production (of goods and services), and not to its heritage status. It highlights the performance achieved by the company during the year. It brings together products and expenses consumed during the period and to determine the result (profit or loss).
Operating expenses : fertilizers, amendments seeds Treatment products Livestock feed Fuels, lubricants Workshop supplies Office supplies Animals Water, gas, electricity Supplies, maintenance (bricks, cement etc ...) / Fermages and rentals Maintenance expenses (labor) insurance Documentation Works undertaken (harvesting, plowing ...) Publicity Veterinarian, notary Transport Professional fees / Taxes and assimilated taxes Property tax ✔ Staff costs Salary MSA fees ✔ Current management expenses Accounting fees ✔ Depreciation correspond to depreciation charges
Financial charges Interest on loans contracted
Extraordinary charges They mainly correspond to: - penalties - penal and fiscal fines, - donations, - on the market (eg a farmer will have to pay a deduction if he can not deliver products from his harvest to a trading customer.) - the carrying amounts of the assets sold (ex: disposals of fixed assets)
The products of the exploitation ✔ Sales sale of goods animal sales other production sold, ...
Financial products: Interest paid to the company (shares, discount for quick payment), ...
The exceptional products: proceeds of previous years, entered during the financial year and not provided for in the receivables. Drought allowance Sale of building land Depreciation of equipment subsidies, ... Proceeds from the sale of assets
Periodically, it is necessary to take stock of the resources created or consumed as a result of the activity of the exploitation: it is necessary to determine the result of the period. The comparison between the expenses and the products of a period makes it possible to determine the result of the period.
The result which is the difference between the products and the expenses can be profit or loss. he thus shows the profit or loss of the exercise. Two cases are possible: the result of the exercise can be positive or negative.
It is equal to the difference between the gross product corresponding to the total revenue of exploitation and proportional charges, which are necessary for a specific production and which disappear because of the influence (rent, share of social contributions, fuels, equipment maintenance expenses ....). The gross margin thus calculated is reduced to the hectare. We then obtain a net income that is capitalized over a number of years.
Revenue, expenses and gross margin per culture are enough criteria accessible for farmers. They measure the impact of technical conduct and choices on the result.
Pay attention to conclusions too fast. The gross margin should not be the only decision criterion, it must be associated with other elements of analysis (eg working time).
The distinction between variable loads (operating expenses or operating expenses) and fixed expenses (also called structural or structural expenses) is essential because it makes it possible to determine certain key data related to the profitability of a company.
A variable load, activity charge or operational charge, represents a charge related to the operation of the company. It varies according to the volume of activity: the more the activity progresses, the more the variable expenses are important; and vice versa. The following are examples of variable loads: purchases of goods, purchases of materials, subcontracting, energy consumption (case of production companies), salaries of operational staff (when indexed to the activity), commissions.
A fixed load, structural charge or structural charge, is a charge that is related to the existence of the business. It does not depend on the activity, i.e. it remains independent of the level of sales or production. It will therefore be supported by the company and disbursed, whatever happens and even if no turnover has been generated. Examples of fixed costs are: rents (movable or immovable), insurance, salaries of administrative staff, certain fees (lawyer, accountant), depreciation of fixed assets.
the gross margin is equal to the difference between the gross product which corresponds to the amount of the total revenue entered in the operating account and the proportional charges which are necessary for a given production and which disappear with the abolition of the lands allocated to this production.
It is usually reduced to the hectare.
The elements necessary for the calculation of the gross margin are derived from the standard operating accounts prepared annually by the administration for the basis of flat-rate agricultural profits for the tax regions.
Gross margin is the most used cost accounting tool in the analysis of results by activity of a holding. It makes it possible to highlight the crops that "seem" the most profitable (to be taken with caution) and to measure the various activities between them. Finally, it allows to know if an activity allows to "earn money" or not, by comparing the gross profit margin with the CS / unit (calculation of the net margin)
The product of the activity is the market value of the total production of goods and services generated by the activity during a campaign. Be careful, do not forget the internal disposals, that is to say the goods and services that are reused in the production system instead of being sold outside.
There are two possible approaches to calculating the product of an activity:
an accounting approach: the elements composing the product of an activity can be found in the accounts of the company;
a direct approach: the product is obtained by the following calculation:
Yield x price obtained + allowances and premiums
(premiums becoming more and more important).
The mechanization job remains complex to analyze because it covers a wide range of expenses that can have a great variability from one year to the next.
Among these items of expenditure we find:
The consumption of fuel oil: for this single item of expenditure several factors influence the overconsumption of fuel A parcel or ungrouped, the types or the state of the grounds, the adjustments and the maintenance of the material, the mode of driving, the system Feeding cows for grazing and reducing the hours of distribution of mulching fodder and cleaning. For this last example it is estimated on average a saving of 30 liters of fuel oil per hectare UAA.
Maintenance of the equipment: with regular maintenance of the equipment park of the farm it can be hoped an improvement in the longevity of the machines limiting on the one hand the costs of repairs and on the other hand a reduction of depreciation. Another method to limit the weight of this job is to pool a powerful equipment to optimize, the cost of maintenance and depreciation with the use of a CUMA with driver, or an ETA. But be careful to adapt your own equipment park within the farm, to avoid duplication.
The choice of investments: it is crucial to reason each investment so as to avoid the pitfall of the over-sized equipment park. Because in times of crisis the over-mechanization can very quickly penalize the cost of production. Unsuitable equipment represents a surcharge of € 15 to € 20 / 1,000 liters. The traction station is one of the basic position to be mastered It must ideally be below the 3 HP / ha of UAA, A renewal of head tractors every 8 years allows a recent equipment park and therefore less subject to heavy repairs.
Recall :
Production costs :
There may be variations, but in general, a budget of production costs includes the following topics:
Operating revenue: Gross operating income from the sale of crop or livestock products before removal of any operating expense.
Direct variable costs: Costs directly attributable to a product. The amount of these costs varies according to the volume of production (this is the case for the costs of seeds, fertilizers, pesticides and feed).
Indirect Variable Costs: Costs incurred in the production of all products on the farm (ie, fuel, labor and utilities costs). The amount of these costs also varies according to the volume of production.
Fixed Costs: Costs the amount of which is independent of the volume of production (ie property taxes, fire insurance and depreciation).
Net income (loss): A positive (negative) difference between total revenue and total variable and fixed costs.
Cost of return :
The breakeven or production cost is the price in € / t at which you must sell your grain to pay all fixed and variable costs on your farm. You will sometimes read the breakeven: it is actually the price beyond which you will be able to pay you. However, it is often expressed in terms of the number of days, the number of hectares, the number of tonnes or liters of milk produced. For example, from the moment you sold 200 t of wheat you paid back all of your expenses and you will be able to pay for the extra tonnes.
The cost price or marketing threshold is the price that allows you to repay all of your expenses and integrates your own remuneration for your work. In general, you get from this price the PAC subsidies you receive elsewhere.
Your target price is the one you are aiming for that includes expenses and your salary, but also allows you to earn a margin that will allow you to save money or invest in your farm.
It is important that you know these different prices that will allow you to define your marketing strategy.
Be careful, these prices are specific to each production system and each farm. They are also variable from one year to the next. You will have to update them regularly.
To calculate them, take out your calculators:
What are your fixed costs: depreciation, material, building ...
What are your variable costs (which depend on the number of hectares): seeds, fertilizer, fuel, ...
What salary would you like to receive?
How much do you receive from compensatory aid under the CAP per hectare?
What is your yield per hectare?
Cost of production in € / t = sum of your charges / output
Cost price in € / t = (sum of your expenses + remuneration - help PAC) / output
The profitability / investment pair is inseparable. Difficult to invest without waiting for sufficient profitability to generate income and repay loans.
The investment must therefore be reasoned not to compromise the economic equilibrium and limit the risk taking associated with any project. The current situation is more and more unpredictable hence the interest to make calculations and projections before embarking.
In the same way, it becomes more and more difficult to be financed in case of lack of profitability. It is a vicious circle that can cause serious difficulties whereas the investment would be necessary to improve this profitability (new buildings more efficient ...).
Pork production has been very concerned for a few years with a decline in profitability and investment needs to remain competitive.
The investment / income link is very strong in agriculture. As soon as the income drops, the investment falls (very clear trend in milk production during the crisis of 2009). Everyone is waiting for the recovery, producers and bankers while the investment is a project over a few years.
The profitability / investment pair is therefore not perfect because the two are sometimes too close to each other.
Finally, investment is necessary but not an end. We see it especially in milk when the enlargement has been poorly prepared or anticipated. Profitability is deteriorating and exploitation can be in difficulty.
Managing an important project requires a good pilot and preparation.
To elaborate the financing plan is to put in front of the cost of the installation the necessary financial resources. These resources can be of various kinds: prior savings, contributions in kind, deferred salary, family loan, credit transfer or bank loan (subsidized or not).
This is the moment of truth, the viability of the project is at stake. The finalization of a project often involves the combination of several of these resources.
This step sometimes highlights an imbalance between project needs and resources. It is then necessary to take over the different components of the project to analyze if it is possible to improve the profitability, to reduce the costs or to postpone the installation.
Self-financing:
Self-financing is the ability of the farm to finance its activity as well as its investments using its own financial means. It is a method of financing internal to the company, which essentially consists of accounting depreciation.
Cash flow is the result of the sum of amortization charges (expenses necessary for the renewal of equipment), reserves (provisions and undistributed profits), capital gains, equity, prior years and savings. . It corresponds to the increase in the actual net assets of the enterprise during a given period.
It is important to point out that recourse to self-financing has a cost and still involves certain risks.
Indeed, before being able to afford to be self-financing, the farm must have sufficient means, which allow it to invest in new projects. It is also important to know that these projects can prove to be fruitless, and thus generate big losses for the company and its shareholders. The use of these reserves, mainly intended to remunerate shareholders, must therefore be carried out in a vigilant and organized manner.
Borrowing :
Rather than self-finance an investment by taking cash out of your farm, it may be more appropriate to apply for a loan:
you preserve your cash flow so that you can meet your short-term obligations (current expenses, inventories, suppliers),
you benefit from the tax deductibility of interest on the loan (or rents in leasing) which are considered as a charge for the business,
you keep your cash and you can get it paid on short-term savings investments.
However this is the bank loan is not without risks, and should avoid:
Minimize the amount you need to borrow to keep your business running smoothly.
Creators often tend to underestimate their needs to limit indebtedness. Do not fall into this trap! A good evaluation of your needs will result in:
- secure the start of your business by anticipating the cash gaps you will inevitably encounter,
- give credibility to your file with regard to a financier,
- and thus facilitate the obtaining of financing.
To act with haste. Take the time to prepare your project. Your presentation must be complete, precise, clear and neat ... in a word "salesman"!
Farm management: real-time results
Cereal growers want to anticipate their results in order to be reactive to the price fluctuations of cereals and make the right decisions, including valuation. The objective is not only to determine the results of the last closing but to evaluate those of the next two years.
For this, the managers specializing in the production of cereals have at their disposal a new tool that allows to determine precisely the accounting results of the following year. From the harvest, the customer knows his economic results with several months in advance. No need to wait for the next accounting close. This analysis can also be done upstream using yield and price estimates.
Manage to arbitrate
In the case of tense cash, the calculation of the equilibrium point makes it possible to identify the periods during which the needs are the most important. Depending on the size of the deficit, one or more corrective actions will have to be considered. The reduction of charges and the use of a short-term loan to finance the production cycle are preferred, before a readjustment of private levies.
Secondly, the use of credit opening is a less expensive solution than supplier credit. It can be useful to deal with hazards and allows to join the two or three months before the payment of aid. If necessary, we must think about structural actions. Reducing annuity payments, financing debt with a self-financing asset, or taking long-term bank loans with short-term loans are all solutions to consider.
In most cases, the banker is at the heart of the device. Before asking, it is imperative to have all the elements of control because it will be necessary to convince him. The objective is to demonstrate that the exploitation is structurally viable and that the demand is to cope with a difficult situation.
Medium-term vision
The analysis goes even further because, starting from the future rotation, the results will be estimated over the next two years. In concrete terms, this means that, from now on, we will evaluate the 2018 results, while the 2017 cereal harvest has not yet taken place. Of course, the climatic and cyclical vagaries are numerous but piloting in prospective offers many advantages.
With the forecast equilibrium price, the operator knows in advance his break-even point for each crop. With the real-time production cost, he can tailor his sales strategy to the campaign.
The estimation of its economic results for the next two years makes it possible to adapt its social and fiscal trajectory and make the necessary arbitrations. Investment policy is also greatly facilitated.