Benchmarking Analysis of 2001/02 Figures

Phil Holmes 25.11.02 – Quirindi Tennis Club

Consider the following rules when setting your Business Goals

• Always start with your assets when setting goals.
• A return on assets/capital target should be set.
• The 5 yr pre-tax average ROA should be set at 8%. (Australia’s long term average is less than 2%).
• Percent profit of gross income (pg 1) should be 40% or above.
• This will allow machinery replacement, capital improvements, etc but will not allow you to purchase more land.

Equity Goals:

• 80% to remain viable in the long term;
• 85% is safest in the long term &
• 75% as opportunity debt, to increase wealth.
• Income generated must be able to cover the cost of the machine within it economic life. (i.e. within 5,000 hrs for a tractor)
• Match your horsepower to the task required (i.e. if planting or harvest has to occur within two weeks, you need to provide equipment with the ability to carry this out).
• Off farm assets should be built up to be greater than, or equal to, on farm assets.
• This allows the tractor to be left in the shed if conditions are marginal (as it was this year).
• If something is not earning 5% return on assets, get rid of it. (i.e cropping enterprises, livestock, machinery.)

There are 3 main banks of capital:

• Soil Nutrients;
• Plant & Equipment &
• Cash Supply.

• Return On Equity = Net Profit After Tax / Shareholders Equity
• Return on Assets = (Net Profit x 100) / Total Assets

• Don’t look at your ‘profit’; look at your ‘profitability’. (The two are different, don’t get them confused).
• Always use hectares as the unit of measure.
• Fixed costs should be below $120/ha.
• There is not much you can do to affect fixed costs. Scale is the only way to reduce fixed costs.
• 1 labour unit per 500 ha or greater.
• It pays to lease farms if you can get the lease rate for 5% of the asset value.

If the above business principles are followed, how to allocate capital should be the most difficult decision you have to make each year. Income & productivity drives profitability in agriculture. Excess haggling over input costs is an inefficient use of your time.

Key Performance indicators to target:
 

• o       Cost of production of cereals (should be less than $100/T);
• o       Price received per tonne (or kg);
• o       T/ha produced &
• o       Hectares per labour unit (less than 1 per 500 ha).

Our Performance

The figures provided in the Group Summary provided are both AgVance figures as well as the average for all of Holmes & Sackett comparative analysis clients for the last 5 years. Based on ABARE figures, the average H & S farms, highlighted in this booklet are in the top 20% band for all Australian farms. Therefore, those AgVance members in the top 20% band, based on ABARE figures are, in actual fact, the top 3% of all Australian farmers.  

• Average capital employed on AgVance farms submitted is $2609/ha
• The cost of our assets is $200 above the rest of the mixed cropping enterprises studied by Holmes & Sackett.
• Therefore we need to be producing $16 – $20/ha more, than the rest of H & S clients in a financial year. (Based on an 8% return on asset requirement).
• Our top 20% of farmers performed lower than the H & S top 20% of all mixed farms. (See pg 1 of analysis report).
• In general the farms with higher equity are achieving a lower return on assets.
• We should drop barley & grow triticale (only if storage facilities are available).

Purchase of silos:

• If silo costs $70/T to build.
• We need to make an extra $5.60/T of grain placed into the silo, to cover the cost of the additional capital.
• Based on an 8% return on assets.

Cattle production is returning 1/10th that of cropping. Most profitable cattle production system:

• Buy yearlings 280 – 320 kg in August
• Sell to Coles (lower specification requirements)
• Sell in March at 420 kg.

Breeding cattle is not profitable. In some cases, spending is affecting profitability.  
 

Where Do We Go From Here??

• If AgVance wants financial success as one of its goals, we must continue with this process.
• Ideally the number of members should be 16 – 18 to make this process fully functional.
• Phil Holmes provides 2 hrs of his time for each farm involved in the benchmarking.
• This time can accumulate over 2 – 3 years if that is what suits you.
• Financial planning can go as far as you like.

A full business plan is a good step:

• Written (not in your head);
• Updated every year (a live document);
• Full property risk assessment &
• Assessment of the capability of the property to deal with risk.

- submitted by R Grant 18/2/06