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Having carried out the initial analysis of business performance a careful review is needed of what opportunities there are to improve performance
OPPOSITE LEFT Whatever the business, be prepared for much tighter turnover, relevant to the management of stock and products.
LEFT The Anderson Centre’s George Cook says clear management objectives, ac- counting procedures and proper research and planning are vital when looking to diversify a farm business.
investment that such a venture can provide. The potential of such an enterprise to distract management from the core business is high and hence caution is required at the outset. Before getting excited about the potential to diversify there is a need to review and identify the following. • How well is the core business performing as a means of generating a profit? What are the strengths, weaknesses, opportunities and threats associated with the core business and what is the scope to improve? • If the core business is profitable and has the potential to expand what are the current and future requirements for profit from the business? More importantly, what are the demands on the available working capital for the core enterprise if viability is to be maintained or improved? In such circumstances the allocation of new resources, particularly capital, may be better devoted to upgrading and improving the dairy activity rather than diversifying. • What will be the future demand on any profit generated to service and repay loans, to pay tax and to fund drawings or director remuneration? • If there is a need to consider land and business ownership and land tenure related matters? The latter is particularly relevant where succession tenancies are involved particular care needs to be taken when structuring a new venture. Looking at the core business it will
require careful assessment. Examine how good it is and how well run it is. The starting point for this is to carry out some accounts analysis and budgeting to identify historic, current and likely future performance.
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How do production costs per litre for your business compare with others? Are there other opportunities to improve or expand that will leave a better return on capital than any form of diversification. The table below uses DairyCo data to set out performance data for the top 25%, and bottom 25% of typical dairy businesses. It provides a useful starting point for any analysis of any business. It is often thought that many businesses can be effective producers of milk to the point of margin over forage and purchased feed costs, but after that, cost structures as represented by total fixed costs, can become unwieldy and cumbersome and it is this area where the focus of initial business review often needs to be targeted. Looking at the table below it is clear that the top group are already
Top 25%
Financial comparison (ppl) Milk price
Revenue
Herd replacement cost Feed and forage cost Livestock costs
Total variable costs
Labour cost (paid and unpaid) Power and machinery cost Total depreciation
Property costs and finance Overheads
Total fixed costs
Total cost of production Net margin
Net margin (pounds per hectare) THE JOURNAL OCTOBER 2014 31
30.5 32.5 2.9 8.6 2.7
11.3 4.2 3.2 2.1 2.9 0.9
13.3 27.2 5.3
729 Bottom 25%
28.5 30.5 3.9
11.8 3.6
15.4 7.7 4.1 3.1 3.4 1.5
19.8 39.2 -8.7
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