module onebusiness management

MANAGING INDIGENOUS PASTORAL LANDS

McClelland Rural Services Pty Ltd

Pub no. 14/017

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MODULE 1business management

List of TablesTable 1.1 SWOT Analysis for

Indigenous Pastoral Business in Northern Australia 7

Table 1.2 Livestock Return Glossary 19Table 1.3 Bookkeeping and

Accounting Functions 22

List of FiguresFigure 1.1 Example of a

Livestock Return 18Figure 1.2 The Farm Business Model 24

List of PhotosCover Photo – business toolsPhoto 1.1 Engaging Young People 4Photo 1.2 Planning at Ullawarra

Station, WA 11Photo 1.3 Cora Johnson,

Myroodah Bookkeeper, WA 23

Contents

Introduction 3

Business Plan 5What is a Business Plan? 5Business Objectives 5SWOT Analysis 6

Governance 12What is Governance? 12Governance in Practice for Indigenous Corporations 12Governance Models 14Training and Support for Governance 14

Recording and Budgeting Beef Production and Costs 17

Livestock Records 17Costs Records 20Finance Costs 21Capital Costs 21

Bookkeeping and Accounting 22

Beef Business Performance 24Business Model 24Calculating Gross Income 25Calculating Gross Margins 25Calculating EBIT (or Operating Profit) 25Calculating NPAT 25Management Accounting Formula 26Cash Flow Statements 26Cash Flow Budgeting and Analysis 26

Assessing the Performance of the Herd 27Price Received 27Calculating Cost of Production 27Operating Margin 28Herd Modelling 29

Sensitivity and Breakeven Analysis 30

Financing Arrangements 31Workshops to Attend 32

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IntroductionModule 1 covers the key areas of business management appropriate to an Indigenous-owned pastoral enterprise in northern Australia. These areas are business planning and governance, recording and budgeting, and how to measure business performance.

GoalsBusiness management will assist you in attaining your goals of running a sustainable beef cattle business on your land, engaging young people, and offering properly paid jobs.

Business PlanningA business plan is an essential tool to run a successful and profitable business. Planning assists owners and managers to define goals and objectives and decide the type of beef cattle enterprise and herd management activities to undertake. With proper records, budgets and forecasts, you can establish operating and financial measures to evaluate your performance and business success.

The Indigenous Land Corporation (ILC) requires that Indigenous pastoral businesses that are seeking funds to commence or conduct their business have a current business plan. This is important as the ILC is often the main source of finance for Indigenous property acquisitions, infrastructure and socio-economic development.

SWOTA Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis is a key component of the business planning process. A SWOT analysis of northern Indigenous cattle operations is provided in this module. This will assist you to follow a strategic approach to managing your pastoral business. In particular, there is a need to capitalise on the main strengths of land ownership and association with country, and tap the potential of young people in local communities by providing employment.

Governance The Boards of Indigenous pastoral corporations have to consider the wishes of Traditional Owners (TOs), and need to consider both cultural and corporate governance when planning, setting strategic directions and overseeing the management of the business.

Management must satisfy its stakeholders by making a profit for its shareholders, producing beef which meets the specifications of its customers, and providing rewarding employment for its staff.

Management needs to deploy skilled staff to maintain and develop land and cattle resources, and therefore there is a need to educate, train and develop people from Indigenous communities.

Business Records, Accounting and Analysis Many pastoral beef businesses in northern Australia operate in remote and risky environments. Boards and management must make budgeting decisions in many varied situations. Often there may be a shortage of cattle and financial resources, as well as challenging market conditions.

This module provides guidelines on the records necessary for management accounting. Properly kept records help in operations, management and analysing business performance.

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Photo 1.1 Engaging Young People

Courtesy “Beef Central”

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Business PlanWhat is a Business Plan?A business plan is a document that describes your business, its objectives, strategies, target market and financial forecasts. It’s a blueprint to your business’s future.

Business plans can vary enormously in length, style and content, but the key is to ensure the document is realistic, practical and regularly reviewed. It should not only set the direction for your business, but act as a reference point for measuring performance.

Having a business plan will help you:

• apply for finance from a funding organisation such as the ILC

• apply for government support

• secure investors, sponsors, suppliers and staff

• clearly outline your goals and long-term vision

• determine the commercial viability of the pastoral business

• examine your business idea from many different angles

• test your commitment and motivation

• identify your business’s strengths, weaknesses, opportunities and threats

• develop strategies to successfully operate and market your business

• identify the major risks to your business success and develop strategies to reduce risk or respond to risk situations

• develop annual budgets and medium term forecasts of where you want the business to be

• establish operating and financial measures to evaluate your business success, including recording and accounting systems.

Having a detailed business plan is one of the most important tools you can have to ensure that your business has every chance of meeting its goals.

Business Objectives Your business objectives could include:

• achieving annual profits and returning a dividend to the Traditional Owners and/or community

• employment creation and training

• social and economic development for the local community

• preserving the culture of the Traditional Owners

• looking after country.

For most pastoral businesses in northern Australia, the business objectives are likely to be a combination of all of these.

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SWOT AnalysisSWOT stands for Strengths, Weaknesses, Opportunities and Threats. A SWOT analysis is a useful tool to use when developing a business plan. A well completed SWOT analysis forces you to properly consider all the strategies and actions your pastoral business could implement to achieve the business objectives.

Whilst developing this manual, the project team consulted groups of Indigenous pastoralists and their advisers about the main factors that currently affect their businesses. These factors were placed in context using a SWOT analysis to gain a more strategic understanding of Indigenous beef cattle businesses in northern Australia. The industry-wide SWOT analysis that resulted is included in Table 1.1 SWOT Analysis for Indigenous Pastoral Business in Northern Australia. This table could be used as a template to follow when planning your business.

Following the SWOT analysis, your business plan should include strategies or actions which address each of the issues identified in the SWOT.

For example, an opportunity identified in Table 1.1 is ‘Sub-leasing or agistment’. After consideration, the business plan may include a strategy as follows:

Strategy: Sub-lease the portion of the property that is currently underutilised due to lack of cattle or inability to purchase additional cattle to increase the herd.

Presumably, the implementation of this strategy would result in income for the Indigenous pastoral business, at the same time as addressing several weaknesses in the business that were identified in the SWOT analysis; that is small scale, lack of cattle and inability to borrow to purchase additional cattle. The Board may elect to:

• permanently sub-lease the land to earn ‘passive’ rental income or

• sub-lease the land for a shorter period, enabling it to earn income from the land and direct that money towards the eventual investment in more cattle to build its own business.

In following this process, you have demonstrated that you have considered everything you need to, made a decision and then documented the objectives, strategies and actions that need to be put in place. As stated above, having it documented makes it a lot easier to communicate to financiers, government departments, your staff and communities.

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Table 1.1 SWOT Analysis for Indigenous Pastoral Business in Northern Australia

STRENGTHS WEAKNESSES

Land ownershipCultural attachment to landCommunity labour forceHistorical association with pastoral industryAccess to good operational skillsRegional access to live export markets

Small scaleLack of cattleLack of finance including red tapeCaveats over land restricts borrowingHigh transport costs to southern marketsLow cattle prices and high costs of production Inaccessible during wetConflicts of interest amongst Traditional OwnersAging leadersLow literacy and numeracyPoor communication facilities (phone, internet)Limited markets for cattle breeds that are best suited to these regions

OPPORTUNITIES THREATS

Business planning including goal settingNew markets and better informationFind mentorsJobs and fill management rolesEducate youthTraining in husbandry, management, leadership, governance, ITAccess extension servicesAccess funds for infrastructure (e.g. ILC)Sub-leasing/agistmentCombine landholdings to achieve economies TourismCommunity meatworksOff-farm employmentContracting RangersRoyaltiesGoat & camel enterprisesCarbon farming

Market quotas or bansUncertain lease renewalsAnimal activists banning live exportsWelfare is an easier optionDrugs and alcoholClimate change

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It may seem like a lot of work at the outset, but a well prepared business plan can save you time and money in the long run and help you secure major contracts or funding. There are no rules about what your plan should cover, or the level of detail it should contain, but it’s worth considering the ILC guidelines for business plans.

As ILC is an important source of grants and debt finance for many Indigenous pastoral businesses in northern Australia, it is suggested that you follow ILC’s detailed requirements for business plan submissions for land acquisitions, infrastructure development and socioeconomic development. These requirements are listed below with references to the relevant modules in this manual, where more information may be found.

1. Overview

a. Your business proposal.

b. The nature of the venture.

2. The Corporation

The structure of your corporation in legal, financial and operational terms.

a. The current financial position of your corporation, including an up-to-date statement of your assets and liabilities (balance sheet).

b. If your corporation already conducts a business, include the last three years’ cashflow statements, income (profit & loss) statements and balance sheets.

c. The key people in your corporation, including an outline of their roles, responsibilities and their stake in the venture (See Human Resource Management Module 8).

d. Skills, qualifications and experience of office holders of your corporation directly involved in the venture or other relevant project areas/industry.

e. Your knowledge and practice of sound corporate governance principles such as participation in relevant training seminars, previous business management history (See Business Management Module 1).

3. The Business

a. The external influences that affect the venture in terms of the current market environment, labour requirements and availability, method for marketing the products and capital demands (See Markets and Marketing Module 2).

b. Any existing legal and informal business relationships and arrangements.

c. The performance of the industry, business or service regionally, with particular regard to any environmental issues that may affect the venture (See Land Information Module 3 and Grazing Land Management Module 5).

d. Proximity to markets, key services, inputs, labour, expertise and professional assistance (See Markets and Marketing Module 2).

e. Any competitive advantage that your enterprise, region, product or service has.

f. Your business partners; their experience and expertise, and the skills and resources they bring to the business.

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g. Your business structure, including a description of any joint arrangement and proposed equity sharing between stakeholders (See Governance section in Business Management Module 1)

h. The cash flow, income (profit & loss) statements and balance sheets for the last three years if you are acquiring an existing business.

4. The Plan

a. A detailed management plan, calendar of events and production assumptions (See Herd Management and Production Module 6).

b. Identified risks and related management strategies for issues such as disease, production loss, environmental, management, political and legal issues (See Husbandry Health and Welfare Module 7).

c. Description of infrastructure, plant, equipment and other assets. Include the level of development required listing cost, maintenance, replacement cycle and expertise required (See Property Management Module 4).

d. Human resource planning and development involving training, education and any requirement for outside expertise. Include a description of the individuals involved, staffing levels and management of staff, succession plans and the management of risk associated with management and staff (See Human Resource Management Module 8).

e. The mentoring, training and development schedule that will facilitate transfer of knowledge and skills to the applicant group (See Human Resource Management Module 8).

f. Market development strategies are based on the expected enterprise capacity and production. Include any development proposals for alternative market options, key market assumptions for production, price and product specification. Also include any identified risks and management strategies (See Markets and Marketing Module 2).

g. The management, operational and legal structures for the business including monitoring and reporting regimes, key performance indicators and critical success factors for all elements of the enterprise (See Recording and Beef Business Performance sections in Business Management Module 1).

h. For rural businesses, a description of the natural resource base and a plan for management of natural resources, including utilisation and monitoring of water, pasture, stocking rates (if appropriate) and ecological sustainability of the proposed business. (See Property Management Module 4 and Grazing Land Management Module 5).

5. Financial Analysis of the Business Plan

a. Cash flow budgets (forecasts) for a minimum of three years and preferably five years. Cash flow budgets should reflect the specific enterprise or project planning undertaken rather than industry averages or benchmarks and be based on conservative estimates, including Goods and Services Tax (GST). Included should be a verifiable explanation of how the assumptions have been made (See Cash Flow Analysis section in Business Management Module 1).

b. Sensitivity analysis based on key assumptions such as changes in beef prices, expenses, herd productivity, interest rates, etc. (See Sensitivity Analysis section in Business Management Module 1).

c. Break even points for the key products. (See Breakeven analysis section in Business Management Module 1).

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d. Industry benchmarks - comparative analysis of enterprise and business projected performance against local, regional and industry benchmarks.

e. Analysis of liquidity and debt servicing ability.

f. Level of investment of applicant(s) and partners in the business including direct financial investment and investment of plant and equipment.

g. Finance structure and any repayment schedule.

h. Potential risks to financial performance and how such risks will be minimised and managed.

6. Monitoring and Evaluation

a. How progress against the business plan will be monitored.

b. Details of who will have responsibility for implementation and monitoring of the plan.

c. Details of what will be monitored.

d. The key milestones and benchmarks by which the business will be monitored.

Business Plan Checklist

Proposal - business objectives.

Detailed management plan, calendar of events and production assumptions.

Risks and ways to deal with risk.

Type and cost of infrastructure, plant, equipment and other assets such as cattle.

Staff and training required.

Markets, market specifications and prices.

Management structure, management and operation of reporting, recording systems and performance indicators.

Land management including stocking rates and carrying capacity.

Investment required.

Projected business performance.

Cash flow budgets.

Sensitivity analysis and breakeven analysis.

Finance required and repayment schedule.

Monitoring systems.

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Business Plan References

ILC Business Plan

Business Plan Guides and Templates

Photo 1.2 Planning at Ullawarra Station, WA

Courtesy “WA Indigenous Land Services”

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GovernanceWhat is Governance?Governance refers to the processes, roles of key people and structures that are set in place to decide how a business will be governed. Corporate governance is how people lead and run their organisa-tion; and is usually the responsibility of the Board. The Board performs its duties with the support of management and staff; in line with members’ wishes; the constitution of the business (rules) and the law; and ideally in partnership with stakeholders.

For Indigenous pastoralists, the process of governing a corporation or business typically involves the establishment of a group of people who represent the owners of the assets of the business. This group of people are referred to as the Board and normally comprise some Traditional Owners (at a minimum). In the situation of a cattle business on Indigenous land, the primary asset is the land. As the land is of core value to the entire community, it will be this asset that will be central to all consid-erations by the Board.

In Indigenous businesses, corporate governance is often intermeshed with cultural governance. Directing a cattle business requires corporate governance with an emphasis on reporting, legal and technical compliance and financial management. Cultural governance is about how Aboriginal society organises itself to achieve its goals; it is about looking after land and culture, who should be represented and interrelationships. It can be challenging for many Boards (including Indigenous) to simultaneously achieve the goals of good corporate governance and good cultural governance.

Transparency in structure and decision making in Boards should be a key focus. There is a need to respond to disputes and make decisions, such as how to treat any dividends from the business and royalties from the land, so that monies are not transferred out of the pastoral business to its detriment.

Governance in Practice for Indigenous CorporationsThe Office of the Registrar of Indigenous Corporations (ORIC) is an independent statutory body that administers the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). This Act guides how Indigenous corporations are run. ORIC supports and regulates the corpora-tions that are incorporated under the Act by:

• advising them how to incorporate

• training directors, members and key staff in good corporate governance

• making sure they comply with the law

• intervening when needed.

ORIC offers ten important practical tips for good corporate governance as follows.

1. Keep the register of members up-to-date

Make sure the register has the following information for every person who is, or has, been a member:

• person’s name and address

• date that person became a member

• date that person ceased to be a member (if applicable).

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(Note: the register of members is a continuing record and if kept correctly, it will help to resolve any disputes about who is a member.)

2. Know your role and responsibilities

Make sure the directors fully understand their role and responsibilities.

3. Know your rules

Know your rule book (constitution). Encourage your members to learn about it.

4. Know your money position

Make sure you know about the money position, or use your auditor more often (say every three months) to check that your staff are managing the money properly. A good auditor will do this for the directors.

5. Taxes

Make sure that tax matters are handled correctly, in particular the Goods and Services Tax (GST), Pay As You Go (PAYG), Pay As You Earn (PAYE) and Fringe Benefits Tax (FBT). Make sure the Su-perannuation Guarantee contributions are paid for all your staff.

6. Attendance

Make sure a director is at every meeting when the funding agency(s) come to visit.

7. Insurance

Make sure the corporation’s property is insured. Check that insurance policies are renewed on (or before) the due date.

8. Assets

Be careful to only use the corporation’s assets in line with funding conditions. Most funding contracts will say that personal use is not allowed. Better still, make a policy about this for everyone to see and use.

9. Minutes of meetings

Make sure you keep minutes of every meeting of the corporation. Minutes should say what type of meeting you had (annual general meeting, general meeting or directors’ meeting, what day it was held, who came, and what decisions were made).

10. Hold an annual general meeting (AGM)

Make sure you have an AGM every year (usually before 30 November).

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Governance ModelsThere are a number of different governance models to suit diverse Indigenous communities across northern Australia, with vast and divergent networks of leaders, family groups, and land ownership rights and interests.

Some Indigenous corporations that are collectively owned by family, clan or community groups have overcome the dilemma of corporate and cultural governance conflicts by having shares in a separate pastoral company to run the pastoral business. This company also may own the cattle. (See Box on the following page which describes the governance structure of Morr Morr Pastoral Company).

Responsibility for corporate governance rests with the Board of the pastoral company to look after the business and the money (with appropriate reporting and accounting systems), make decisions, run programs, and follow the rules. The pastoral company may pay dividends and lease fees to the land owners, which may be the Indigenous Corporation.

Some successful Indigenous companies have also used governance models that broaden Board membership and services beyond the community groups involved. These models may combine the services of a respected mentor on the Board, and appoint an experienced Company Secretary to ensure reporting obligations are met.

Directors need to focus on overseeing the implementation of strategic goals through management, including having a say in the employment of the Station Manager. The Manager then needs to deal with grazing the land, running cattle, employing people and marketing product to ensure success. The Station Manager reports directly to the Board. The staff report to the Station Manager.

Training and Support for GovernanceIndigenous Landholder Services and Indigenous Pastoral Program services, including Land Councils, can help communities in governance matters as well as arrange training for Boards. Governance training is a key focus of Farm Training WA, which has assisted many communities in the Pilbara and Kimberley. ORIC also provides training in governance and directors’ duties.

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Governance Structure of Morr Morr Pastoral Company (MMPC)

MMPC operates a pastoral business on Delta Downs under a corporate model and in accordance with Australian corporations’ legislation. The Board consists of 10 members, including a Chairman and Vice-Chairman. The Board and Company Secretary meet regularly and give direction to the Station Manager.

The Kurtjar Aboriginal Corporation (KAC) is the major shareholder of MMPC and provides the Board of Management. The KAC is made of 14 moiety groups who are the Traditional Owners of Delta Downs. The Elders of these clans form the Board of the Kurtjar Aboriginal Charitable Land Trust (KACLT). The KAC elects the Board of MMPC. The Board oversees an Executive Committee of MMPC that includes the Chairman, Vice Chairman, Non-Executive Director, Station Manager and the Company Secretary.

The MMPC pays an annual dividend to the KAC of $250,000 which is paid pro rata on a monthly basis. The Board members of MMPC are paid and receive training in corporate governance.

Half the Board is elected at the Annual General Meeting held in December each year. Each member is elected for two years.

KURTJAR ABORIGINAL CORPORATION

MORR MORR PASTORALCOMPANY P/L

Pays Dividend

KURTJAR ABORIGINAL CHARITABLE LAND TRUST

100%Owns

Pays LandRent

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Governance

• Governance for Boards in Indigenous Corporations involves the rules and processes of running the pastoral business.

• Corporate governance involves reporting, technical and legal compliance and financial management.

• Cultural governance is about looking after land and culture, who should be represented and managing internal relationships.

• Ideally, corporate and cultural governance roles should be separated.

• Outside help is possible by enlisting the services of a respected mentor to the Board, and employing an experienced Company Secretary to ensure reporting obligations are met.

• Boards should give strategic direction and leave management alone to concentrate on managing grazing land, cattle, people and marketing to ensure success.

• Indigenous Landholder Services and Indigenous Pastoral Program services including Land Councils can help communities in governance matters and arrange training for Boards. The Office of the Registrar of Indigenous Corporations also provides training in governance and directors’ duties.

Governance References

Corporate governance

Indigenous governance tool kit

Achieving Indigenous governance, Chapter 2 Social Justice Report 2012 AHRC

Indigenous Governance Program (Australian Institute of Company Directors)

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Recording and Budgeting Beef Production and CostsBefore you can begin to plan, you will need records or budget estimates of your beef enterprise, expected incomes from sales and expenses for running the business. This means having good information relating to herd size, herd composition, branding, death and turnoff rates, and cattle sales and purchases. You will also need financial information on all cattle sales and purchases, as well as details on what it will cost to run the business each year.

Livestock Records• Livestock records are a very important part of running a beef cattle business. Basic re-

quirements are an annual herd summary or Livestock Return. This can be prepared on a monthly, quarterly or annual basis. The Livestock Return shows the starting or opening numbers, the physical movement within herd numbers on the property during the period, sales and purchases of cattle, numbers of cattle branded and weaned, mortalities and closing numbers. Therefore, in order to keep up-to-date, managers need to record the following data on a regular basis:

• starting numbers of cattle by sex and class

• any natural increases (brandings in a Branding Book)

• all sales including age, sex and class of animal

• all purchases, including age, sex and class of animal

• estimated deaths in each class of animal, which can be verified later by a bangtail muster.

This information may be recorded in a Livestock Return as shown in Figure 1.1. A glossary of terms used in the Livestock Return is also provided. The Livestock Return should be completed and returned to the business’s accountant on a monthly basis, as part of normal end-of-month management activities.

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Figure 1.1 Example of a Livestock Return

Aboriginal Pastoral Company

Monthly Stock Return Whichone Station Month Ending 31-Jan 2013

Year No.

Class Age Opening Numbers

Purchase Brand-ings

Recoveries/ Losses

Sales Rations Deaths Adjustments Closing-Numbers

Breeders

2 Maiden Heifers 1–2 220 10 2 208

1 Maiden Heifers 2–3 200 20 2 178

0 First Calf 3–4 180 10 2 168

9 Cows Mxd 700 100 12 588

Sub Total 1300 - - - 140 - 18 - 1142

Unjoined Females

3 F. Calves & Weaners 0–1 - 350 10 340

2 Maiden Heifers 1–2 150 150

1 Maiden Heifers 2–3 20 20

Sub Total 170 - 350 - - - 10 - 510

Speyed Females

Heifers - -

Cows 4+ 50 25 2 23

Sub Total 50 - - - 25 2 23

Total Females 1520 - 350 - 165 - 30 - 1675

Year No.

Class Age Opening Numbers

Purchase Brand-ings

Recoveries/ Losses

Sales Rations Deaths Adjustments Closing-Numbers

MALES

Steers

3 S. Calves & Weaners 0–1 - 350 350

2 Steers 1–2 340 280 2 3 55

1 Bullocks 2+ 130 120 2 8

Sub Total 470 - 350 - 400 2 5 - 413

Bulls

3 B. Calves & Weaners 0–1 - -

2 Young Bulls 1–2 - -

1 Joiners 2–3 10 1 9

0 Herd Bulls 3+ 35 2 1 32

Sub Total 45 - - - - 2 2 - 41

Total Males 515 - 350 - 400 4 7 - 454

Herd Total 2035 - 700 - 565 4 37 2129

B/F

Year to Date 2035 - 700 - 565 4 37 2129

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External Purchases External Sales

Waybill No. Number Waybill No. Number Waybill No. Number

Total 0 Total 0 Total 0

Table 1.2 Livestock Return Glossary

Year No. (Number) The year the animal was born.

Age The age of the animal in years.

Opening Numbers The number in that age group at the beginning of the period.

External Purchase Add any cattle purchased into the business (onto the property) in the period.

Natural Increase Add any calves or weaners branded during the period.

Recoveries/Losses Add any extra cattle found or subtract any extra cattle lost during the period (+ or -)

External Sales Subtract any cattle sold during the period.

Deaths Subtract any cattle that would have died during the period. This num-ber is generally an estimate, based upon deaths as a percentage of the herd and may be done monthly, quarterly, half yearly or annually.

Rations Subtract any cattle used for killers during the period.

Adjustments Use this column to move numbers from one class to another for example subtract Unjoined Heifers and add to Joined Females, or to change a number of males to females if necessary. In this column the Total Line should always be Zero (0) as you are only adjusting numbers, not increasing (+) or decreasing (-) numbers.

Closing No. (Number) Is the sum of the (Opening No. + External Purchases + Natural In-crease + or – the Recoveries/Losses – External Sales – Deaths – Ra-tions + or – Adjustments = Closing No.)

Year to Date Opening Number

Is the opening number for the beginning of the recording period (year) and remains the same through each recording period.

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Costs RecordsChart of Accounts and Operating Expenses

Work with your accountant and bookkeeper to develop a suitable Chart of Accounts. This is usually done at the start up of the business. The Chart of Accounts is a series (usually numbers) that allows your accountant to form expenditure and income categories to enable tracking of individual cost and income groups such as:

4117 Repairs and Maintenance Vehicles

4118 Repairs and Maintenance Windmills

Your accountant will be the best guide in this area. All operating expenses should be identified. Operating expenses are all the costs that are necessary for the business to complete its day to day operations. They can be further broken down into two main types of costs - Variable and Overhead costs.

Variable Costs

Variable Costs are also referred to as Direct or Production costs. These costs are directly related to the size and nature of the livestock enterprise. Variable Costs often change from year to year depending on stock numbers and seasons, and are typically broken down into the following headings:

• animal health – vaccines, dips, drenches and veterinary costs such as medical treatments, pregnancy testing, spaying

• contract services such as helicopter and contract mustering

• freight for shifting the herd around during the year; for example trucking weaners to the weaner camp

• any direct insurance costs (valuable bulls)

• materials

• livestock selling costs

• supplementary feed costs including all hay, lick and supplements.

Overhead Costs

Overhead Costs are also referred to as Fixed Costs. These costs remain relatively stable year on year, and do not vary too much whether the property is fully stocked or the season is in a downturn. Overhead Costs are typically broken down into the following headings:

• Administration

• Depreciation

• Electricity and Gas

• Fuel and Lubricants

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• Insurance

• Land Care (weed and pest animal control)

• Materials

• Motor Vehicle Expenses:

» Registrations

» Repairs

• Rates and Rents

• Repairs & Maintenance General:

» Infrastructure

» Plant and machinery

• Wages (Staff Costs):

» Salaries and Wages (excluding contract mustering)

» On costs including board and keep, workers’ compensation, superannuation, payroll tax and long service leave

» Recruitment costs such as advertising of vacancies and employment agency fees

» Staff Training.

Finance CostsFinance Costs include all costs to finance the business such as:

• interest on loans

• bank fees and charges

• leases on land

• hire purchase

• chattel mortgages

• vehicle / equipment leasing.

Capital CostsCapital Costs are often described as CAPEX or capital expenditure. There are two main types of capital cost:

• ‘Stay in Business’ costs: These costs cover replacement of plant, machinery and infrastructure.

• ‘Development’ costs: These costs include any expenditure on plant and infrastructure that will increase the profitability of the business by improvements in technologies or through expansion.

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Bookkeeping and AccountingYour business may have an accountant to manage financial transactions. You may have to carry out some recording and bookkeeping functions on station, so that all transactions are verified there and then forwarded to your accountant. You will also need to verify cattle sales and purchases, and enter the numbers into the Livestock Return described previously. Expenses may need to be authorised with Purchase Orders and then passed for payment on receipt of goods and services.

The accountant will keep a Ledger with a Chart of Accounts for the various cost categories.

You will also need a Staff Time Book or Wages Book to be kept at the station. When work has been done and staff are due to be paid, forward the details to your accountant who will calculate and pay the wages.

A summary of responsibilities for the Manager, Bookkeeper and Accountant is provided in Table 1.3 Bookkeeping and Accounting Functions.

Table 1.3 Bookkeeping and Accounting Functions

Transaction Manager verifying financial transactions and recording livestock movements

Bookkeeper/Accountant recording financial transactions and preparing reports

Cattle Sales Verify trucking numbers and forward Sales Accounts to accountant. Enter numbers into Livestock Return.

Checks deposits into bank account, enters into Journal and Ledger, and creates Livestock Trading Account.

Cattle Purchases

Verify receiving numbers and authorise invoices for payment by the accountant and enter numbers into Livestock Return.

Makes payment and records transaction in ledger. Creates Livestock Trading Account.

Costs

May use purchase order from accountant. Verify goods or services received on invoice, pass for payment and forward to accountant.

May issue purchase order to Manager. Enters transaction into Ledger against Chart of Accounts.

Wages Maintain Wages Book and forward to accountant.

Calculates wages and deposits wages into employees’ bank accounts.

Reports Livestock Return forwarded to accountant. Creates Livestock Trading Account.

Reports Files Business Activity Statement (BAS) quarterly.

Reports Preparation of Income Statement, Cash Flow Statement and Balance Sheet.

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Photo 1.3 Cora Johnson, Myroodah Bookkeeper, WA

Courtesy Myroodah Station Management, WA, ILC

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Beef Business PerformanceBusiness ModelAnalysing a beef business’s production and financial performance is important in understanding how profitable the operation really is, where the financial restrictions are to success, and where the income that sustains the business is coming from. The recording and reporting data described in the previous section can be used with management accounting to calculate Cost of Production, Operating Margins, Price Received, Gross Margins and annual Profit (or Loss) and analyse Cash Flow.

Figure 1.2 The Farm Business Model

Figure 1.1 demonstrates how all of the different farm business economic terms come together and are calculated. The diagram shows the different profitability measures.

Equity Debt

Equity Debt Growth

Enterprise Costs

Owner/Operator Labour Cost

Gross Income

Gross Margin

Net Income

Tax

Overhead Costs

Operating Pro�t

Interest & Lease Costs

Total Capital at 1st July

Total Capital at 30th June

Financial performance for the year

Price Per Unit Quantity (Units)x

+

Business Pro�t (Before Tax)

Business Pro�t (A�er Tax)

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Calculating Gross IncomeGross Income can be calculated from the annual Livestock Return using the following formula:

Gross Income = Cattle sales minus Cattle purchases plus Inventory Change, where:

Cattle sales and purchases reflect the value (as measured by weight and price) of the total numbers of animals sold and purchased. These numbers can be taken from the Sales Advice provided by your livestock agent.

Inventory Change is worked out by subtracting the value of the herd at the end of the year from the value of the herd at the beginning of the year. To do this, you will need to place a value on each class of cattle at the beginning and end of each year. The change in the value of the herd over the year is then calculated and used for assessing the Inventory Change.

The value of each age group and class of animal at the start and end of the year can be estimated by using prices from various sales centres, and making estimates of weight and class. Your local livestock agent can be a useful source of information for this work.

Calculating Gross MarginsThe Gross Margin for a beef enterprise is one measure of efficiency that is a useful tool for cash flow planning and determining the relative profitability of different cattle enterprises. It can also be used to assist in assessing the opportunity to develop new enterprises, or analyse whether certain management strategies are more profitable than others; for example, supplementary feeding strategies. The Gross Margin is the difference between the annual gross income for that enterprise and the Variable Costs directly associated with the enterprise during that period.

In constructing Gross Margin budgets, Overhead (fixed) Costs are ignored, as it is considered that they will be incurred regardless of what enterprise activity is undertaken. The Gross Margin of different enterprises should not be compared if they have different Overhead Costs. No allowance is included in the Gross Margin for machinery ownership costs such as depreciation or opportunity cost of capital.

Calculating EBIT (or Operating Profit) EBIT stands for Earnings Before Interest & Tax and is a widely used term in business circles. EBIT indicates or measures the amount of profit that a business has made. Business people are always interested in the EBIT of a business as it tells them if the business is inherently profitable. Looking at the EBIT over several years tells you whether the business is reliably profitable, highly profitable, un-profitable, or is in real trouble.

Calculating NPATNPAT stands for Net Profit After Tax (and Interest) and is also a widely used term in business circles. A positive NPAT indicates that the business has made a profit after it has paid its finance costs and its company tax. A negative NPAT indicates that the business was unable to pay its finance costs for the year.

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Management Accounting FormulaGross Margin = Gross Income – Variable costs

Operating Profit (EBIT) = Gross Margin minus Overhead Costs

Net Profit After Tax (NPAT) = Operating Profit minus Interest Costs & Tax

Return on Assets = (Operating Profit divided by Total Assets) X 100

Return on Equity = (Net Profit divided by Total Equity) X 100

Cash Flow StatementsCash Flow Statements simply measure the actual money flowing in and out of the business during the year. It is not a reliable measure of financial performance as it does not take into considera-tion any changes in Assets or Liabilities on the Balance Sheet, although the income from sales or purchases will be seen in the cash flow report.

In the short term, we need to pay attention to cash flow because it is the cash flow that the business generates during the year that provides for the ongoing operating expenses of the business, and the servicing of any financing arrangements.

If the business is not generating a positive and reliable cash flow each year, then the business will need to draw on reserves, or may even need to borrow money to pay the costs of running the business. Unless this changes and the business is able to rely on future cash profits, it could be unsustainable and could be spiralling downwards to a loss situation.

Cash Flow Budgeting and AnalysisAn important task for Station Managers or Owners is to prepare Cash Flow Budgets for the coming year. Budgets are typically prepared for each month of the coming year, and the company’s accountant will most likely do this with the assistance of the Station Manager.

To prepare these budgets, cash income into the business can be estimated from herd modelling and estimating the numbers of cattle to be sold, their weights and estimated prices on a ‘per kg’ or ‘per head’ basis. Cash into the business can also be generated through the sale of assets, sub-leasing of land and the proceeds of loans when money is loaned to the business. These also need to be provided for in the budget if applicable.

Cash that flows out of the business will be for all the costs of running the business including Variable, Overhead and Finance costs, as well as expenses for cattle purchases and capital items. The Cash Flow Budget also reflects flows out of the business when dividends are paid or when owners take drawings from the business.

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Assessing the Performance of the HerdAnalysing the herd’s production performance is important in understanding the likelihood of the operation being profitable, where the restrictions are to success, and where the income that sustains the business is coming from.

There are three key measures that relate to the herd:

• Price Received (cents per kilogram (c/kg) of liveweight produced)

• Cost of Production

• Operating Margin.

Price ReceivedPrice Received is a measure of the average price received per kg (liveweight) of beef produced by the business over the year. In some cases, the business has produced a lot of beef over the course of the year but the cattle will not be sold until next financial year. Nevertheless, this beef has been produced and needs to be brought to account to understand the overall average Price Received.

Remember this is a weighted average and takes into account all the beef produced by all cattle that leave the property, including old ‘Culled for Age’ (CFA) cows and bulls.

Price Received = (Gross Income ÷ kg of liveweight beef produced)

To arrive at this figure, you need to calculate the total kilograms of beef produced by the business. Total beef produced is simply the total liveweight of all cattle sold minus total liveweight of all cattle purchased plus the change in the herd (Inventory Change) over the year.

For sales and purchases, you will need to use data on the weights of all animals sold and purchased. Inventory Change is worked out by subtracting the weight of the herd at the start of the year from the weight of the herd at the beginning of the year.

Price is only one measure of performance, and other factors such as age of turnoff and capital invested should also be considered.

Calculating Cost of ProductionThe Cost of Production (CoP) is another measure of business efficiency but again should not be taken as the only indicator of performance. CoP measures how much it costs the business to produce a kilogram of beef. Theoretically, the lower the CoP, the better it is for the business.

The CoP is driven by both the business’s control on costs but also productivity of the herd. CoP is measured in c/kg (or $/kg) liveweight produced.

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There are four components to the CoP calculation:

1. Kilograms of beef produced (liveweight)

See section above.

2. Variable Costs

This figure comes directly from the management accounts prepared by the accountant.

3. Overhead Costs

This figure comes directly from the management accounts prepared by the accountant.

4. Owner/Operator Allowance

Typically labour costs are included in Overhead Costs; but if the Owner/Operator is not drawing a PAYE wage from the business, then an Owner/Operator allowance must be made for the value that this person adds to the business. As a rule of thumb, $55,000 is the value used for a fulltime Owner/Operator in 2013. It is important to place an economic value on the owner, as later you will wish to calculate the profitability and sustainability of the business, and to do so you will need to also place a reasonable cost on the role of the Owner/Operator.

Total costs are divided by the kilograms produced to give the CoP in c/kg (or $/kg) liveweight.

MLA’s Tips and Tools (2006) states that if you have a CoP less than $1.00/kg liveweight, you are performing better that the average beef producer. If it is greater than $1.50, the future of your business may be at risk. Again this measure should not be relied upon in isolation of other measures, because in some cases where the CoP is too low then animal condition may suffer.

Financed Cost of Production is the CoP with financing costs also taken into account. The financed CoP is perhaps a more important measure for businesses that are carrying debt. This indicator tells business management the average liveweight beef price it needs to achieve to break-even, after its loan repayment commitments have been met.

Operating Margin The Operating Margin is the difference between what it costs the business to produce a kg of beef and the price it has received for each kg produced.

An important rule of thumb is that this figure needs to be over 60c/kg if the business is to be profitable and ‘bullet proof ’ over the medium term.

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Herd ModellingYou can model your herd to:

• understand the number of replacement heifers that are required to keep the herd number stable

• gauge how many breeders you can cull without reducing numbers too much

• look at the cost-benefit of different husbandry strategies

• find out the most profitable age of turnoff and what weaning rate is required to sustain that strategy

• carry out herd, profit and cash flow projections over a period, say 10 years.

This can be done by using your existing records and anticipated herd management changes. Alternatively, you can use a software modelling package such as Breedcow Dynama, which can be downloaded from the internet for free. Future Beef Link to Breedcow and Dynama

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Sensitivity and Breakeven AnalysisSensitivity and Breakeven Analysis is used if there is uncertainty in estimating an important component of price or quantity. It determines the amount of component necessary to result in the cattle business breaking even (where gross income and costs are the same). Then you have to decide on whether the breakeven price or quantity is likely to be achieved, in practice. If it is, then there is less risk in running the business at a loss. Again, you can do these analyses using Breedcow Dynama software.

Financial Measures for a Northern Cattle Enterprise

• Gross Income = Annual Cattle Sales minus Annual Cattle Purchases plus Inventory Change in value of herd.

• Change in Inventory Value = Value of the herd at the beginning of the year minus the herd’s value at the end of the year.

• Variable Costs = Direct or production costs including animal health, feeding, transport and selling costs directly associated with the cattle enterprise.

• Fixed or Overhead Costs = Staff, R&M, Energy, Motor Vehicles, Rates & Rent, Insurance, Land Care, General and Depreciation.

• Gross Margin = Gross Income minus Variable Costs.

• Kilograms (kg) of Beef Produced = Total liveweight (kg) of all cattle sold minus total liveweight (kg) of all cattle purchased plus the liveweight change in the herd (Inventory Change) over the year.

• Cost of Production (cents per kg) = Total Variable and Fixed costs divided by kg (liveweight) of Beef Produced.

• Earnings Before Interest and Tax (EBIT) or Operating Profit = Gross Margin minus Overhead Costs.

• Return on Assets = (Operating Profit divided by Total Assets) X 100.

• Net Profit After Tax (NPAT) = Operating Profit minus interest and tax.

• Net Cash Flow Before Financing = The net of all money in and out of the cattle business before interest.

• Net Cash Flow After Financing = the net of all money in and out of the cattle business after interest and loans.

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Financial Tools and Workshops

Future Beef Link to Breedcow and Dynama

Cost of Production Calculator

QDAFF Monthly Cash flow Forecast

Business EDGE is a two-day financial and business management training workshop for northern beef producers

Financing ArrangementsMost businesses will, from time to time, wish to borrow money to fund activities within the business. There are a wide range of reasons, such as cash flow shortfalls, growing the business, property development programs or buying a large piece of equipment.

Generally, Indigenous businesses have a limited ability to borrow money. This means that they have to rely on their cattle sales to generate working capital or cash to run their businesses on a day-to-day basis.

The major external source of finance for Indigenous pastoral properties is the ILC which is supported by the Aboriginal and Torres Strait Islander (ATSI) Land Fund. The ILC funds land acquisition and land management. Funds in the form of grants from the ILC are available for property management planning, infrastructure development and environmental management and training. All applications for funding of property-based projects require a business plan. Examples of types of property-based projects funded by the ILC are as follows:

• construction of fences to improve livestock management or protect areas of cultural or environmental significance

• acquisition of equipment to assist with land management such as tractors, weed eradication or fire management gear

• propagation and planting of native trees and plants

• weed and pest animal eradication

• development of watering points on properties

• construction of infrastructure to assist with land management such as sheds, buildings and renewable energy systems.

Access to finance for Indigenous businesses in the form of loans is often limited because of caveats (cautions or warnings) on the land being available to use as security against the loan.

Section 191S of the Aboriginal & Torres Strait Islander Act 2005 enables the ILC to place a caveat on the title to land, in order to prevent sale or mortgage without the consent of the ILC Board. However the ILC does grant consent in some instances.

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Although finance is theoretically available from various other sources such as Indigenous Business Australia, other government grants and the major commercial banks, these sources generally have not been active in the field of northern Indigenous pastoral development. There are notable exceptions where overdrafts have been granted to successful Indigenous pastoral businesses with sufficient cattle numbers to provide banks with security.

Sources of Finance

Indigenous pastoral businesses can access the following sources of finance:

• Self finance from own cattle sales

• Indigenous Land Corporation (ILC): Land Acquisition and Management (requires a business plan)

• ILC grants: property management planning, infrastructure development and environmental management and training

• Indigenous Business Australia - mainly involved in tourism ventures

• bank overdraft with stock mortgage on large herds.

Further Information on Finance for Indigenous Pastoralists

ILC Land Management Program Handbook 2013

Indigenous Business Australia

Section 191S of the Aboriginal &Torres Strait Islander Act 2005

Workshops to Attend

Business EDGE is a two-day financial and business management training workshop for northern beef producers