21378-mla goats cover - meat & livestock australia · · 2016-07-13west 2000 plus – role of...

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Financial analysis

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What to do?

To ensure the profitability and long-termsurvival of your business, you need to beable to assess the financial position of thebusiness, and analyse the financial impactof any enterprise changes.

The critical aspects of financial analysis are:

• Enterprise gross margins

• Return on investment

• Cashflow budgeting

• Valuing secondary benefits

• Risk management strategies

How to do it?

Financial analysis is a specialised area. Theinformation provided in this module is only abasic introduction to the subject. It isimportant that you seek further advice froma financial adviser (with an understanding ofagricultural industries), an accountant oragricultural adviser (with good skills infinancial analysis).

What sort of information do you need?

Returns = income from the enterprise

= $/unit of product sold x numberof units sold.

For example: cents/kg x kg hot standardcarcase weight (HSCW)

Costs fall into three categories: variablecosts, overhead costs, capital costs.

Variable costs = costs directlyassociated with production from anenterprise, eg animal health costs, fuel,fodder production costs, supplementaryfeeding costs, breeding costs. For moreexamples of variable costs refer toModule 2 - Financial analysis Toolkit 2

page 4. These costs vary according tothe size of the activity.6,7

Overhead costs = Fixed costs of runninga business, eg rates, general insurance,electricity, accountancy. Again, for moreexamples of overhead costs refer to theModule 2 - Financial analysis Toolkit 2page 4. These costs do not varysignificantly even though the level offarming activity on the property maychange.8

Capital costs = The value of theresources on which the business bases itsoperation eg land, equipment, livestock.These tend to be infrequent purchases.

Tools of analysis

Some of the commonly used tools offinancial analysis include:

• Gross margins

• Return on investment

• Budgeting

• Cost of production

• Benchmarking

Which tools you choose to use will bedependent on your business situation andyour level of financial competency. If youhave difficulty working with figures, it wouldbe wise to seek the assistance ofprofessionals in the financial field. Theprofessional will be able to give you ameaningful analysis provided you are ableto present accurate and current physicaland financial data. Module 2 - Financialanalysis Toolkit 2 page 4 provides achecklist of the type of information requiredfor financial analysis.

The following section outlines a range ofbusiness situations and makes somesuggestions about the sorts of analyses thatmay be appropriate.

Module 2 – Financial analysis

6 Simmonds, J., Davies, L. and Glastonbury, D. (2001). Economic Selection of Enterprises. In: “Australian Goat Notes”, K1, pp261-265. Australian Cashmere Growers Association.

7 Makeham, J.P. and Malcolm, L.R. (1993). The Farming Game Now. Cambridge University Press, Melbourne.8 Makeham, J.P. and Malcolm, L.R. (1993). The Farming Game Now. Cambridge University Press, Melbourne.

Module 2 – Financial analysis 1

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2 Module 2 – Financial analysis

It should be noted that calculation methodsmay vary slightly between informationsources. The key is to be consistent withthe type of calculation method that you useand always compare figures that have beencalculated using the same methodology.

Note: when undertaking financial analysis,it is vital that the figures used are realisticestimates of costs and returns. It may bevaluable to run and compare thecalculations for a range of scenarios: bestcase, average, worst case.

A. Buying a goat-farming business

This is a big step. You should definitely seekthe assistance of a financial adviser toassist you in analysing the economicpotential of the proposed business venture.

Prior to meeting with the adviser you needto have collected the following information:

• Projected stock numbers and level ofproduct turn-off per year.

• Projected costs: annual variable andoverhead costs.

• Projected returns: income from sale ofproduct (units sold x $/unit).

• Capital investments: cost ofpurchasing property, plant andlivestock, and the cost of anyinfrastructure changes that may berequired.

Annual figures for costs and returns are agood start. Ideally these should be brokendown into monthly estimates to give you anappreciation of the pattern of cash flow.

Obtaining accurate estimates of costs andreturns will require thorough research.Module 2 - Financial analysis Toolkit 2 page4 can assist you in this process. In otheragricultural businesses you would refer toindustry benchmarking data, which couldprovide you with information about typicalcosts and returns. However, in the goatindustry, such enterprise benchmarkinginformation is not currently available.

Potentially useful sources of informationinclude talking to other farmers with similarproduction systems, documented case-studies of similar enterprises, marketreporting services, such as Meat &Livestock Australia Market ReportingService, The Australian Goat Report andprofessional advisers.

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B. Changing the operation of an existingfarm business to include a goat enterprise.

Enterprise gross margins

Gross margins are used for initialcomparisons between different enterprises.9

The gross margin for a particular enterpriseis the income generated by the enterpriseless variable costs. For livestockenterprises, the gross margin should alsotake into account any changes in livestockinventory.10

Comparing enterprises based on grossmargins does not take into account anydifferences in enterprise establishmentcosts.11

*Value of enterprise output includes:

• Income from sales minus cost of anystock purchases; plus

• Value of changes in livestockinventory

= (closing stock number – openingstock number) x per head marketvalue of stock.12

Gross margins can be expressed in avariety of ways: per hectare, per dry sheepequivalent (dse), per doe or per $100invested in livestock capital. Gross marginsshould always be expressed in terms of themost limiting resource.13

An example of a gross-margin calculation isprovided in Module 2 - Financial analysisToolkit 2 page 7.

Module 2 - Financial analysis Toolkit 2 page13 provides a summary of an enterpriseprofitability study undertaken by a group ofsouthern Queensland goat producers, usinggross-margin analysis.

Return on capital

Most major enterprise changes will incursignificant set up costs, and require aninjection of capital to get the enterpriseestablished. Therefore it is important toconsider the rate of return that the newenterprise will provide for the amount ofcapital invested, and compare that figurewith rates of return offered by alternativeinvestment opportunities.

To calculate operating profit you need tohave the following information:

A. Gross income

B. Variable costs

C. Total gross margin (A – B)

D. Total overhead costs

Operating profit before tax = C – D

Return on capital can be assessed in terms ofthe total capital invested in the business, or, asin the case of looking at new enterprises, theextra capital invested in the new enterprise.


Gross margin = value of enterpriseoutput* – variable costs

9 Hacker, R., Clipperton, S. and Melville, G. (2000). West 2000 Plus – role of goat production as a range restoringalternative enterprise. Final Report. New South Wales Department of Primary Industries.

10 Millear, G., Conway, A. and Mills, T. (2003). Calculating a gross margin for sheep, goat and cattle enterprises. Queensland10 Department of Primary Industries and Fisheries. (www.dpi.qld.gov.au).

11 Simmonds, J., Davies, L. and Glastonbury, D. (2001). Economic Selection of Enterprises. Australian Goat Notes, K1.Australian Cashmere Growers Association.

12 Millear, G., Conway, A. and Mills, T. (2003). Calculating a gross margin for sheep, goat and cattle enterprises. QueenslandDepartment of Primary Industries and Fisheries. (www.dpi.qld.gov.au).

13 Simmonds, J., Davies, L. and Glastonbury, D. (2001). Economic Selection of Enterprises. Australian Goat Notes, K1.Australian Cashmere Growers Association.

Return on capital = (operating profit /capital investment) x 100

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To look at the impact of incorporating a new enterprise into an existing farm business,where the change is relatively straightforward, you can use a partial budget to help you.The calculation methodology is as follows:

Gains and savings as a result ofincorporating the new enterprise

(+)

E. Returns from new enterprise

F. Variable costs from original business thathave been avoided as a result of thechange.

G. Overhead costs from original businessthat have been avoided as a result of thechange.

H. Total gain associated with the newenterprise = E + F + G

I. Overall gain from new enterprise = H – D

K. Gain from new enterprise after tax = I – J

M. Any capital released from originalbusiness as result of the change (eg saleof infrastructure or stock that are nolonger required)

O. % Return on extra capital invested =(K/N) x 100

Costs and losses as a result ofincorporating the new enterprise

(–)

A. Returns from the original business thathave been forgone as a result of thechange.

B. Variable costs of the new enterprise

C. Overhead costs of the new enterprise

D. Total costs and losses associated withthe new enterprise = A + B + C

J. Extra tax incurred with the new enterprise= marginal tax rate x extra taxableincome (may be different from E)

L. Capital required for set up of newenterprise (eg purchase of stock,infrastructure, extra land)

N. Net capital investment in new enterprise= L – M

Partial budget:14

An example of a partial budget calculationis provided in Module 2 - Financial analysisToolkit 2 page 9.

Return on extra capital invested should becompared with the rates of return offered byother potential investments (these could beon-farm or off-farm investments). If thereturn on capital is favourable, the next stepwould be to complete a cashflow budget,showing monthly costs and income.

When assessing the rate of return from anew enterprise always allow a margin forrisk management.

If the enterprise change is more complexand dramatically changes the farmbusiness, then it would be advisable toundertake a complete budget for both theexisting business operation and the newoperation, and compare the two.

14 Information used to compile this table was sourced from: Makeham, J.P. and Malcolm, L.R. (1993). The Farming GameNow. Cambridge University Press, Melbourne.

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C. Existing goat producer, seeking toimprove performance of his/her farmbusiness.

To analyse the performance of an existingbusiness, the basic tools described abovecan also be used.

If you have multiple enterprises, you coulduse gross margins to compare theperformance of the different activities.

You may also want to calculate the return oncapital that the business is generating.

Cost of production

Cost of production is another tool that youmay find useful. Cost of production is thesum of all costs associated with producingand selling your product.15

Module 2 - Financial analysis Toolkit 2 page 4provides a comprehensive list of the itemsthat fall into each of the cost categories.

If you have a mixed enterprise business youwill need to apportion a percentage of theoverhead costs to each enterprise. This canbe done based on the number of dry sheepequivalents (dse) represented by eachenterprise. For example, if 30% of the totaldse of the property is made up by goats, then30% of the overhead costs should beattributed to the goat enterprise.

For a goatmeat enterprise, cost of productionis usually expressed in terms of dollars perkilogram of meat produced ie divide the totalcost of production by the number ofkilograms of goatmeat produced.

You can take this one step further by addingfinance and tax costs to the cost-of-production figure to determine a break-evenprice16 for your product.

Benchmarking

Benchmarking your business performance isalso something that may be of benefit.Benchmarking is about making comparisonsbetween performance figures, these can bephysical, financial or both.

Benchmarking can be undertaken internallyor externally. Internal benchmarking is aboutannual monitoring and comparison acrossyears. This will help you to see how thebusiness is progressing over time. Are yourfigures improving? Is the business achievingits targets? The important things are tounderstand the trends and identify theimpacts of management changes.

External benchmarking involves comparingyour business performance figures with thoseof similar businesses.

To set up an external benchmarking activityyou need to do the following:

1. Assemble a group of like-mindedfarmers.

2. Decide on the sorts of informationthat the group is going to collect andanalyse.

3. Each member of the group collectsthe necessary information for theirproperty.

4. Information is pooled and analysed.

5. As a group, review the data andcompare figures.

The real value of such exercises comes fromthe discussion between producers about howdifferent performance levels are achieved. Thefocus should be on learning from each other’sexperiences.

Unlike many of the other major agriculturalindustries, there are few formal opportunitiesfor goat producers to participate in industry-specific benchmarking programs.


Cost of production = variable costs +overhead costs

15 Rural Industries Skill Training (2003). Taking Control of Beef Prices. Course notes.16 Rural Industries Skill Training (2003). Taking Control of Beef Prices. Course notes.

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However, there is a range of financial analysissoftware packages on the market that canhelp you to analyse your business. Talk toyour accountant or financial adviser aboutwhich packages would be most appropriatefor your business.

There are lots of figures that you can collectand monitor. With pages of facts and figuresthe exercise can quickly result in confusion.The key to successful benchmarking is toidentify and concentrate on those factorswhich have the most impact on your businessoutcomes.

Module 2 - Financial analysis Toolkit 2 page12 provides an example of some of thebenchmarking data that has come out of theBizCheck™ program. The figures in this toolrelate to intensive red-meat enterprises.

Valuing secondary benefits

If you are considering incorporating a goatenterprise into your farm business theemphasis will no doubt be on the primarybenefits that the enterprise offers, ie thequantity and value of the product produced.However, there are often secondary benefitsthat also warrant consideration. In the case ofa goat enterprise, such benefits might includeweed control (including woody weeds) andchanges to botanical composition of thefodder base.

With their broad eating habits, goats canoften be used as an efficient means ofcontrolling weeds. A reduced weed burdenon your property is a definite benefit. The useof goats for weed control may reduce theneed to use alternative control methods, suchas chemicals or machinery, thus presenting asignificant cost saving.

One cautionary note: be realistic in yourexpectations of the goats’ role in suchactivities. Consider the feed value of theweeds and the goats’ feed requirements.

To maximise production, goats need goodnutrition. Ensure that their use in weed-control strategies is well managed, and thatproduction does not suffer as a result ofinadequate nutrition. Module 2 - Financialanalysis Toolkit 2 page 10 provides a simpleexample of how to undertake a partialbudget to assess the value of using goatsto control weeds.

Bathurst Burr on a contour bank heavily grazed by goats.

In a mixed livestock enterprise, goats maycomplement the grazing habits of otherstock. For example, sheep show a muchgreater preference for clover than goats. As aresult, heavily grazed sheep pasture may lackclover. Replacing some of the sheep withgoats will reduce the grazing pressure on theclover, which can enhance the overall clovercontent of the pasture. With improved clovercontent, the feed value of the pastureimproves, providing the sheep with a higher-quality diet.

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Risk management

There are many factors that can threaten theperformance of your business. It is importantthat you identify these threats and have riskmanagement strategies in place to minimisetheir negative impacts.

Module 1 – Property planning talks aboutundertaking an analysis of your business’sstrengths, weakness, opportunities andthreats – a SWOT analysis. This process canhelp you to identify potential threats to yourbusiness and develop strategies to deal withthese threats.

Some examples of potential threats mayinclude poor seasonal conditions, drought,fire, downturn in market prices, illness orinjury to management or staff, stock diseases,parasites and predators.

It is critical that such scenarios are taken intoconsideration when managing your finances.There will be costs involved and these shouldbe factored into the budgeting process.

Be realistic in the figures that you use forbudgeting and financial analysis. Run a rangeof scenarios: best case, average year, worstcase; so that you are fully aware of the business implications of various situationsand cater for this in your planning.

In the paragraphs that follow we will brieflylook at some of the potential threats that youmay face and suggest some appropriate risk-management strategies.

• Diseases:

o Refer to the ‘Biological threats toyour farm’ section in Module 6 –Husbandry.

• Down turn in prices:

o In predicting the impact of, andaddressing a downturn in prices, itis important to know your cost ofproduction. Refer to the sectionon cost of production earlier inthis module for an explanation ofhow to calculate this figure.

o Diversification of income sourcescan help to reduce the impact of afall in price in a particular market.This can be a range of differententerprises and/or marketopportunities.

o Make use of forward contractswhich negotiate a price well inadvance of supply, thus ensuringthat you are working toward anagreed price, rather than subjectto weekly price fluctuations. Note:this may be a disadvantage ifprices rise.

• Poor seasonal conditions:

o Develop a drought plan for yourproperty – forward planning iscritical. It is often more costly ifyou wait until a crisis hits beforetaking action. Have a strategy inplace that you can activate ifweather conditions move towarda drought. Your plan shouldinclude strategies for managingstocking rate, purchasing andfeeding supplements, accessingstock water, fodder conservation,protecting soils, preserving plantspecies, managing finances andminimising stress. Whendeveloping your plan, you mayfind it beneficial to talk to otherproducers who have experienceddroughts or advisers with relevantexperience. Useful references ondrought management can befound in Module 2 - Financialanalysis Toolkit 2 page 2.

o Fall-back opportunities –understand the range ofmarketing opportunities availableto you, and have a back-up planshould stock growth rates fallbelow the targets required to meeta specific market specification. Insuch cases, the first thing to do isto look at strategies to lift current


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growth rates, eg use techniquesthat will boost pasture production(fertiliser, grazing management),reduce stock numbers and/orsupplementary feed. Carefullyconsider the cost and practicalityof each option. Compare this tothe costs and returns associatedwith carrying the stock over tosupply a different market. A rangeof fall-back marketing options areoutlined in Module 2 - Financialanalysis Toolkit 2 page 11. Youneed to be aware that prices tendto decline in accordance withincreasing age and weight.

• Injury or illness:

o Document your plans and farmmanagement strategies. If somethinghappens to you, say unexpectedillness or accident, will others be ableto step in and take over themanagement? If there isdocumentation to guide them thiscan help to ensure that the businesscontinues to function effectively.

o Occupational Health and Safety.Analyse the day-to-day operations ofyour property and identify potentialthreats to health and safety. Havingassessed the level of risk, developcontrol strategies. Ideally eliminatethe risk. If this is not possible, aim toreduce the risk:

• Substitute with less hazardousplant or processes

• Use engineering controls

• Isolate the hazard

• Use administrative controls

• Use protective clothing andequipment

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TO

OLK

IT 2

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Tool 2.1 Finding further information (page 2)

Tool 2.2 Check list of financial data and physical figures required for a business analysis(page 4)

Tool 2.3 Example of a gross-margin calculation (page 7)

Tool 2.4 Example of a partial budget (page 9)

Tool 2.5 A partial budget investigating the use of goats for weed control (page 10)

Tool 2.6 Fall-back marketing options (page 11)

Tool 2.7 BizCheck®‚ benchmarks for meat enterprises – intensive enterprises (page 12)

Tool 2.8 Profitability of an extensive goatmeat enterprise (page 13)

Toolkit 2 – Financial analysis

Module 2 – Financial analysis Toolkit 2 1

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2 Module 2 – Financial analysis Toolkit 2

Tool 2.1

Finding further information

Useful contacts

Banking sector – agribusiness managers.Rural advisers and consultants.Accounting firms experienced in dealing withrural businesses.Livestock firms’ financial planners.

References

Are goats worthwhile? How to decide, usinga partial budget. Davies, L. 1991. Agfact A7.1.7.

Integrating goats for a sustainable systems.May, T. 1995. NSW Agriculture, Orange.

Budget templates (Farm Forms). Scott, F.2000. NSW Department of Primary Industry.Agnote DPI-227. Second edition.

Financial Analysis of New and EmergingRural Enterprises. Evaluating enterprisechange and capital investments: partial andbreak-even budget. Patton, D.A. 2001. NewSouth Wales Agriculture, Trangie. AgfactM1.2. Second edition.

Investigating Emerging Industries for theCentral West of NSW. Henry, E. 2001. TheUniversity of Sydney, Orange.

Drought management references:

Managing Drought. Mackay, B. 2002. NewSouth Wales Agriculture. Third edition.

New South Wales Department of PrimaryIndustries, Agriculture has a series of usefulpublications on the topic of droughtmanagement. Many of these can beaccessed via their websitewww.agric.nsw.gov.au or the NSWDepartment of Primary Industries bookshopphone 1800 023 374 (toll free call).

Nutrition of goats during drought. McGregor,B. 2003. Rural Industries Research andDevelopment Corporation.

Nutrition and management of goats indrought: a report for the Rural IndustriesResearch and Development Corporation.McGregor, B. 2005. Rural Industries Researchand Development Corporation.

Courses and workshops

GrazingforProfit™ Training School –business school for grazing industry.Resource Consulting Services (RCS),Sandgate Queensland. www.rcs.au.com

BizCheck® for Meat – EDGEnetwork™financial benchmarking training course. Tofind your state contacts for EDGEnetwork™contact Meat & Livestock Australia.

Websites

Refer to Module 1 – Property planningToolkit 1 page 5 for instructions on how toconduct an effective web search.

Department of Primary Industries, Victoria:www.dpi.vic.gov.au Search for South WestMonitor Farm Project. This web pageprovides detailed financial figures relevant tosheep and beef enterprises in south westernVictoria.

NSW Department of Primary Industrywww.dpi.nsw.gov.au/agriculture

Primary Industries and Resources SouthAustralia www.pir.sa.gov.au

Department of Agriculture Western Australiawww.agric.wa.gov.au

Queensland Department of Primary Industryand Fisheries www.dpi.qld.gov.au

Meat & Livestock Australiawww.mla.com.au

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Tools in development – things to look out for

Hassall & Associates. Dairy goat analysis –Excel spread sheet.

Rural Industries Research DevelopmentCorporation (RIRDC). RIRDC Project OSE-1A.Assessing Management Strategies andFinancial Performance of Angora Goats andthe Production of Mohair and Meat. Acomputer program that assists in enterpriseproduction and financial modeling. For moreinformation contact RIRDC atwww.rirdc.gov.au or phone 02 6272 4819.

Meat & Livestock Australia PIRD reportG2001/Q14. South Queensland GoatmeatProducers Group – a gross-margin analysistool, developed with the cooperation of theSouth Queensland Goatmeat ProducersGroup. This report is available from Meat &Livestock Australia. A summary of this reportis provided in Module 2 - Financial analysisToolkit 2 page 13.

New tools

Enterprise Comparison Calculator – aspreadsheet for comparing the economic andfinancial returns of goat, Damara, merino andcattle enterprises on pastoral stations inWestern Australia. This program has beendesigned to assist producers who areconsidering changing enterprises on theirproperties. To access this spreadsheet,contact the Department of AgricultureWestern Australia, Rangelands Program.


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Tool 2.2

Checklist of financial data andphysical figures that you need tocollect to assist in discussionswith your adviser, accountant orbank manager.

Please note the items in the lists that followare in no particular order.

In some circumstances, entries may appear intwo sections. For example in a fibreenterprise, part of the electricity bill may beconsidered a variable cost when associatedwith shearing, and part an overhead costwhen supplying the office. Your adviser willbe able to assist in the decisions about whatto include where.

Variable costs

� Animal health and husbandry –drench, vaccination, veterinarycosts, identification tags, contractedhusbandry activities (eg marking).

� Bought in supplementary feed –hay, grain, pellets, silage.

� Fodder conservation – silage wrap,baling twine, contract labour andequipment.

� Fertiliser.

� Pasture seed.

� Herbicides.

� Pesticides.

� Transport.

� Commissions, levies, agents’ fees.

� Machinery running costs – repairs,fuel, oil, servicing.

� Shearing costs – electricity, shearingcontractors, servicing plant, repairsto plant.

� Dairy costs – electricity, detergents,rubberware, servicing plant, repairsto plant.

� Livestock and crop insurance.

� Irrigation running costs.

� Casual/contract labour.

� Irrigation sales/tradeable water.

� Livestock trading – replacementstock.

� Agistment.

� Vermin control.

� Sundries.

If you do not know the actual figures for anenterprise, you can make an estimate byworking out the quantity (number of units)required multiplied by the unit cost of theproduct or service.

For example, drench cost: $/dose x numberof doses. Your agricultural produce supplierwill be able to provide a cost per dose. Youwill be able to determine the number of dosesrequired by calculating the number of stockto be drenched, multiplied by the number ofdrenches required per year. If you are unsureabout drench requirements refer to Module 6– Husbandry for more information.

Often the local department of agriculture orprimary industries will be able to providesome general figures on enterprise costs.

Overhead costs

� Repairs and maintenance to watersupply, tracks, buildings, fences,yards.

� General insurance – WorkCover,insurance of plant and fixedstructures.

� Electricity.

� Administration costs – accountant,bookkeeper, office costs, stationery,bank fees.

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� Shire rates.

� Permanent workers’ wages andassociated costs.

� Depreciation of plant andimprovements.

� Consultants’ fees.

� Manager’s/operator’s allowance.

� Running costs of general farmvehicles, eg farm ute, motorbike.

� Water – in irrigation areas waterright/permanent water allocationwould be classed as a capital cost.

� Interest.

� Lease payments.

� Rent.

Overhead costs are often similar across ruralenterprises, so you could make estimatesbased on figures from similarly sized orlocated enterprises, not necessarily goat-specific. An accountant or financial adviserwould certainly be able to help out with someof these figures, based on the averages thatthey see across a range of clients. For itemslike rates, contact the local Shire for anestimate. For insurance costs, contact aninsurance agent or broker for a quote.

Capital invested

� Value of land.

� Value of livestock.

� Value of plant and machinery.

� Off-farm investment.

Income

� Number of goats sold and pricereceived per head, or quantity ofproduct sold and price receivedper unit.

� Do not forget to include cull sales:number of culls sold and pricereceived per head.

� Off-farm income eg contractingwork or partner’s income.

Price estimates can be obtained from localprocessors and buyers (a list of usefulcontacts is provided in Module 8 –Marketing), the livestock report on the Meat &Livestock Australia website and publicationssuch as the Australian Goat Report whichhas fortnightly price updates.

Other items to consider

� Finance costs – principalrepayments and other debtservicing commitments (eg creditcards).

� Taxation.

� Property development.

� Surplus funds (eg funds available foroff-farm investment, holidays, etc).

� Lease commitments – eg car lease.

Production figures

� Livestock inventory – number ofgoats in each livestock class at thestart of the financial year, versusnumber of goats in each class at theend of the year.

� Fodder inventory – quantity ofstored fodder (hay, silage, grain) atthe start of the financial year, versusthe quantity at the end of the year.

� Number of goats turned off eachyear and/or quantity of product soldeach year.

� Quality of product sold each year –product specifications (conditionscore targets, liveweight targets,fibre micron, milk solids).


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� Stocking rate.

� Timing of product sales.

The figures that you collect can be used toanalyse the financial merit of your businessproposals. These figures will enable thecalculation of cost of production, partialbudgets and gross margins.

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Herd dataDoes in herd 1,000Bucks% 2%Joining age 1Sale age (years) 1Kidding rate 150%Death rate – adults 5%Death rate – kids 10%Does cast for age (cfa) (years) 6Bucks cfa (years) 3

Tool 2.3

Example of a gross margincalculation

*Value of enterprise output includes:

• Income from sales minus cost of anystock purchases;

• Plus value of changes in livestockinventory

= (closing stock number – openingstock number) x per head marketvalue of stock.

Scenario: Self replacing herd in south-westQueensland


Gross margin = value of enterpriseoutput* – variable costs

Value of enterprise outputSales Number $/hd Total $Cast for age does 150 $35 $5,250Yearling females 441 $35 $15,435Yearling males 614 $40 $24,560Cast for age bucks 7 $40 $280Totals sales income $45,525Stock purchases Number $/hd TotalDoes 0 $0Bucks 7 $300 $2,100Total stock purchases $2,100Livestock inventory Opening no. Closing no. $/hdDoes 1000 1050 $35 $1,750Kids 1287 1300 $15 $195Replacement maiden does 200 205 $35 $175Bucks 20 20 $250 0Total value of livestock changes $2,120

Value of enterprise output = $45,525 – $2,100 + $2,120

= $45,545

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Variable costs#

Number units $/unit TotalDrenching 1237 0Vaccination 1500 0Tags, rings, etc 1300 tags $0.30/tag $390.00Supplements 1000 head $2.00/hd $2,000.00Vermin control $600.00Casual labour $1,500.00Selling charges 3% $1,366.00Cartage 500km $2.50/km $1,250.00Total variable costs $7,106.00

# The variable costs listed in this table are specific to the example enterprise. For a full list of potential variable costs that mayapply to a goat enterprise see Module 2 - Financial analysis Toolkit 2 page 4.

Gross margin = $45,545 – $7,106

Gross margin per DSE* = ($45,454 – $7,106) / 1748 dse= $38,439 / 1,748= $21.99 / dse

* For further information on dse ratings, see table on the following page.

Gross margin per doe = ($45,454 – $7,106) / 1050 doe= $38,439 / 1050= $36.60 / doe

Dry sheep equivalents for range of goatclasses:17

Class of goat Dry sheep equivalent (dse) Weight range1 dry doe 0.75 30-40kg1 breeding doe 1.5 (doe in a herd producing 150% kids) 40-60kg1 weaner 0.7 (weaning to one year old) 20-40kg1 buck 1.5 60-80kg

17 Blood, D. and Williams R. (2005). The Grazing of Goats in the Pastoral Areas of Western Australian. Best ManagementPractice – July 2005. Department of Planning and Infrastructure Western Australian Government; Pastoral Lands Board.

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Tool 2.4

Example of a partial budget

This is an example of a partial budgetlooking at changing from running 600 ewesand 12 rams to an enterprise of 1000 doesand 20 bucks. In this example the sheep

costs have been estimated and the goatinformation is the same scenario as inModule 2 - Financial analysis Toolkit 2 page7.


Costs and losses as a Example Gains and savings as a Example\result of incorporating result of incorporatingthe new enterprise the new enterprise(–) (+)

A. Returns from the $27,000 E. Returns from new $45,525original business that Wool & cfa enterprise. Sale of Kids, have been forgone as a stock cull does andresult of the change. cull bucks

B. Variable costs of the $7,106 F. Variable costs from original $10,500new enterprise business that have been Shearing costs

avoided as a result of the and sheepchange. health

C. Overhead costs of $5,000 G. Overhead costs from No changethe new enterprise. original business that

have been avoided as a result of the change.

D. Total costs and losses $39,106 H. Total gain associated $56,025associated with the new with the new enterpriseenterprise = A + B + C = E + F + G

I. Overall gain from new $16,919enterprise = H – D

J. Extra tax incurred with Assume nothe new enterprise = change.marginal tax rate xextra taxable income (may bedifferent from E).

K. Gain from new enterprise $16,919after tax = I – J

L. Capital required for set Purchase 1000 M. Any capital released from Sale of 600up of new enterprise does and original business as result ewes and 12(eg purchase of stock, 20 bucks of the change (eg sale of ramsinfrastructure, extra land). $40,000 infrastructure or stock $18,240

that are no longer required). $18,240N. Net capital investment $21,760in new enterprise = L – M

O. % Return on extra 77.75%capital invested = (K/N) x 100

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Tool 2.5

A partial budget investigating theuse of goats for weed control

This example shows the calculations forbuying 400 does and 12 bucks to assist inweed control. Income will be derived from

the goat breeding enterprise and theherbicide costs will be saved as a result ofthe goats reducing the weed burden.

Costs and losses as a Example Gains and savings as a Exampleresult of incorporating result of incorporatingthe new enterprise the new enterprise(-) (+)

A. Returns from the original No change E. Returns from new Sale of kids, cfabusiness that have been enterprise. does and bucksforgone as a result of $14,797the change.

B. Variable costs of the $6,558 F. Variable costs from No Changenew enterprise. original business that have

been avoided as a result of the change.

C. Overhead costs of the $1,000 G. Overhead costs from $2,000new enterprise original business that have Weed chemical

been avoided as a result and sprayof the change. application

D. Total costs and losses $7,558 H. Total gain associated $16,797associated with the new with the new enterpriseenterprise = A + B + C = E + F + G $16,797

I. Overall gain from new $9,239enterprise = H – D

J. Extra tax incurred with Assume nothe new enterprise = changemarginal tax rate x extra taxable income (may be different from E).

K. Gain from new enterprise $9,239after tax = I – J

L. Capital required for set 400 does & M. Any capital released from No changeup of new enterprise 8 bucks original business as result(eg purchase of stock, $14,400 of the change (eg sale of infrastructure, extra land). infrastructure or stock that

are no longer required).N. Net capital investment $14,400

in new enterprise = L – MO. % Return on extra 64%

capital invested = (K/N) x 100

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Tool 2.6

Fall-back marketing options

Target market Fall-back optionsBreeding stock Those not suitable for sale as breeders can be sold to the

live-export trade or carcase trade.Live export Goats that are not suitable for the live trade may be

consigned to the carcase trade, generally as commoditygoatmeat.

Carcase trade – capretto Kids that do not make the target weights or have beenweaned can be carried on to the chevon trade, or sold asunfinished animals to finishers or feedlots.

Carcase trade – chevon Goats that do not meet the required weight specifications by18 months of age, or whilst still classed as two-tooth, can besold for commodity goatmeat in either the carcase or live-export trades.

Carcase trade – Older, heavy goats that are not sold in the carcase trade forcommodity goatmeat commodity goat, may be eligible for sale in some of the live-

export commodity goatmeat markets.

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Tool 2.7

BizCheck®‚ benchmarks for meatenterprises – intensiveenterprises18

BizCheck® for Meat is a workshop for red-meat producers which includes the use of acomputer software program to analyse farmbusiness data. The summary of collected

data has been used to develop benchmarksfor the important business indicators.”19 Asummary of the benchmarks for some of themore relevant indicators is provided below.You can use these figures to compare theperformance of your own enterprise andidentify your business’ strengths andweaknesses.

Indicator BenchmarksWeak Medium Strong

Operating costs Above 60–50% BelowFarm operating costsas a percentage of income.Debt Above 15–7% BelowFinancing cost as a percentage of income.Machinery and livestock investmentValue of livestock as a Above 200–150% Belowpercentage of livestock income.Machinery clearing sale Above Ratio of 0.6–0.4 Belowvalue as a ratio of farmincome.Farm profit per Below $30,000 – $60,000 Abovehousehold per household

For more information on these figures or to get involved in a BizCheck® workshop contact your state EDGEnetwork® coordinator.To find your state contacts for EDGEnetwork® contact Meat & Livestock Australia.

18 Meat & Livestock Australia (2000). BizCheck® for Meat – workshop notes. EDGEnetwork® workshop. Meat & LivestockAustralia.

19 Meat & Livestock Australia (2000). BizCheck® for Meat – workshop notes. EDGEnetwork® workshop. Meat & LivestockAustralia.

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Tool 2.8

Profitability of an extensivegoatmeat enterprise

Summary of Producer Initiated Researchand Development (PIRD) Project –G2001/Q14, Sustainable Meat GoatManagement.

Final Report, August 2004, Meat & LivestockAustralia

A group of five goatmeat producers fromsouthern Queensland undertook an analysisof enterprise profitability as part of a ProducerInitiated Research and Development (PIRD)Project. The producers were typically cattleand/or sheep producers who had added agoatmeat enterprise to their business andwere keen to analyse and compare theperformance of the enterprise.

Although this summary focuses on theprofitability component, the PIRD Project alsoinvolved developing a measure of feedavailable and determining sustainablestocking rates for different types of country.

The group used production and financialfigures from the financial years ending 2001and 2004. Gross margin was the chosenmethod of analysis.

The analysis revealed that the average grossmargin for 2004 was $11.24/dse, which wasup 17% on 2001. The data showed that theincome levels for 2001 and 2004 were verysimilar, with the biggest impact being areduction in costs. On average, the variableexpenses for the group had halved between2001 and 2004. The cost reduction wasexplained as follows:

• With increasing experience,producers had found that “goats donot need much attention or treatmentif given enough room and areasonable spread of vegetation.”

• Two years of drought had causedproducers to cut back onexpenditure.

In terms of variation within the group, the keyprofit driver was identified as percentage ofoffspring sold per doe, high figures beingachieved through a combination of highkidding percentage and high sale percentage.The producer with the highest gross margin inthe group had a sale goat-to-doe sale ratio of135%, compared with the rest of the groupwhich averaged less than 50%. Thoseproducers with low figures identified thesignificant impact of drought, resulting instock losses, low kidding percentages andless saleable goats.

The group found that gross-margin analysiswas a useful tool for comparison, butprovided a few cautionary notes:

• The gross margin is a snapshot ofone point in time.

• It does not take account of some ofthe secondary benefits of runninggoats such as regrowth control andthe positive impacts ofcomplementary grazing, especiallywhere cattle are involved.

• The gross margin for a particular yearcan be greatly distorted if there is anycarry-over sales from a previous year,a major drought or sudden change inmarket prices.

• Gross margin is only part of the storywhen looking at whole farmprofitability.

As a result of the analysis, the group’s keyrecommendation for management was carefulmanagement of stocking rate, to ensure thatstock requirements and the availability ofvegetation are in balance. The impact onprofitability is that adequate nutrition,especially for does, increases kiddingpercentage, survival rates and growth ofoffspring.


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