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Do you understand your Lifestyle Farming Balance Sheet?

A lot of farmers just shut down when I ask them if they understand balance sheets. So I'm going to make this as easy as I can.

First there's your income – (money banked within the financial year)

Gross farm income from sales $200,000
Plus your off-farm income $100,000
Total $300,000

Less farm running costs which include animal health, fertiliser, repairs & maintenance, administration expenses, stock purchases etc. They can be at least 50% of your gross farm income, say $150,000. Add to this your interest payments of say 9% on a $700,000 mortgage, which is $63,000.

Your total deductible expenses are then $213,000

Giving you a net profit of $87,000

Now net profit is the gross income less all tax deductible expenses. It is from the net profit that your accountant calculates taxation. There are of course a large number of variations, options and adjustments that can be made such as depreciation which, to keep things simple, I have chosen to ignore.

Taxation will vary depending on provisional and terminal tax from previous years etc. but let's allow it at the maximum rate of 38%.

Tax on net profit of $87,000 is $33,000 giving a true net profit after tax for drawings etc $54,000

So, now you think you're rich. Well you're not. This profit can likely be allocated something like this:

Drawings, i.e. food, clothing & non-deductible costs, say $40,000
Principal repaid on the farm mortgage, say $10,000
Principal repaid on the loan for the new boat, say $3,000
Money given to the kids, say $3,000
Trip to Aussie, say $3,000
Total $59,000

This equates to a total for non-deductible expenditure of $59,000 leaving a true balance in the bank account of -$5,000 .

Now, are you starting to get the drift? You are actually spending more than you are earning on a cash basis.

If your net profit is less than I've calculated then of course you will pay less tax. However, funds available to go to Australia, buy bread and give to the kids, are considerably reduced. In fact, you're likely to find yourself knocking on the bank's door always asking for an increase in overdraft to fund your drawings. This can make the bank grumpy.

Some accountants make it hard to understand when they could actually make it a lot easier. If you don't understand then get someone who is to sit down and explain things to you slowly; i.e. no dumb questions and no dumb answers!

In summary this model has been done to try and make it as simple as possible to follow. Understanding your balance sheet is crucial to your business. It will definitely affect your ability to borrow money and service debt. Make the effort to understand your finances or choose to ignore them at your peril.

We at FRA$ER FARM FINANCE can explain your balance sheet in simple terms that you will understand. We can also discuss with you what it may mean in relation to your business and ongoing viability.


 

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