 Our first speaker today is Chris Shide. Chris is the director and sharehold of ProAdvice based in Victor Harbour. Chris works with farming families, family corporates and small and medium-sized enterprises in a range of roles from management consulting, client manager and as a trainer in the farm management courses. He assists farming businesses throughout southern Australia to discover and meet their business goals, adapt to industry change, understand the financial performance of their business and manage intergenerational succession. Chris's talk today is about the importance of business performance and the role of AgTech. Thanks, Chris. Thanks very much to Perza for putting on the AgTech forums and the program that we've got today. We've got an exciting program. I think when we think about the last few years and where we are on the commodity cycle, I think we're in a very fortunate position with where we are at the moment. A couple of good seasons, good red meat prices, wool prices not too bad, they're picked up, they're still future demand, plenty of future demand I reckon for red meat. So we're in a really fortunate position with where we are at the moment. But I still get a feel working with clients and working in the livestock enterprise planning project that we're fortunate to be involved with Perza. I still get the feeling that we're accidentally designing profit into our business. So the profits that we've got now largely are as a result of good seasons and prices, but today I want to talk to you about how we might be able to deliberately design profits into our business because my fear is with inflation about to rise and what's happening with all prices, my fear is that perhaps commodity prices might come off a little bit, perhaps input prices, well certainly input prices are rising and what happens if yields drop 10% prices drop 10% and costs increase 10%, what will happen to profit then? So I think now's a good time to be thinking about designing a deliberate profit in your business rather than accidental profit and that's what I want to discuss with you today. Here's my seven little topics today. So I want to talk about first and foremost two different business models of running your farm business, a profit optimization model versus a taxation minimization model. So neither is good or bad, there's pros and cons for each and I'll present them. I want to talk about, we know about land values increasing, so is it possible in future for our return on assets, our profitability to continue to rise with rising land values? I want to discuss as well if we do need to improve profitability in our business, if we do need to design profit in the business, what are the three key drivers, what are the three levers that we need to know about to pull to improve profitability? I want to discuss in terms of improving profitability, do I get better and improve profit or do I get bigger? And I've got a little model there to help you ascertain whether getting better or getting bigger may be a future course of direction. And then of course when we've got profits and we've got a farm there's an innumerable, is that a word, there's an infinite number of things we can do to invest in our business. So how do we make some decisions about where we invest in our business? And then I'll finish with some top 10 principles from clients that we're working with that are doing well in terms of profitability. That's my journey today with you. First and foremost, I think we need to define what profit is and what profit isn't. So first and foremost, profit isn't more cash at the end of the financial year than the start of the financial year. So you think about how could we have got more cash? Well, very simply we may have just sold down more grain than what we had at the start of the year, for example, 600 tonne of grain and we ended the inventory at the year with 100 tonne of grain. So was increased cash as a result of selling down our inventory or was it due to our energy and activities? So profit is not more cash at the end of the financial year than the start of the financial year. But what profit is, is it's our income from our activity on farm, it's plus the changes in our inventory, started with 600 tonne of grain, finished with 100 tonne of grain. So we've used up inventory, decreased in inventory. All 3,000 years and we finished with 3,500 years, increased in inventory. So that adds to our gross profit. So gross profit is income plus the changes in our inventory. We then take away direct costs. So direct costs are our commission, freight, input costs, et cetera. Our gross profit from our direct cost gives us our gross margin and we take away our overheads. So overheads are our cash overheads such as accountancy, such as professional fees, rates, occupancy costs. And we take away non-cash overheads. So this is the difference between cash accounting and real management accounting. In cash accounting we wouldn't include these things but in management accounting we're including non-cash overheads such as depreciation. So the value of the wear and tear on machinery. And we're also including owners' labor or imputed labor. Talk about that next slide. So our income plus our trading inventory changes throughout the year minus our direct cost minus our overheads. Cash and non-cash equals earnings before interest and tax, EBIT. That's our profit. And if we know the value of all our assets, the real value of all our assets, our real value of land, our real value of livestock and real value of machinery, our EBIT divided by the total assets gives us our return on assets. And interestingly that EBIT is directly comparable with the dividend from BHP shares or Telstra shares. So now if we're measuring profit in a business like that we can look at the opportunity costs of investing in our business as well as outside of the business. And then after profit we've got to pay the bank back some interest and we might have to pay back some tax if we've made a good profit to get a net farm profit. So that's our definition of profit. It's the cash changes, income minus expenditure minus the inventory changes including the non-cash overheads. Now that's a very theoretical way of looking at profit. How do we practically do it? How do we do it at private vice? Well as I mentioned we've just finished the 24th Livestock Enterprise Planning Workshop for 300 businesses across South Australia, from Woodner to Mount Gambia. And each of those businesses we looked at their profitability from their taxation financials. So that's the answer about how you can do it at home. You can do it from your taxation financials. And the things in red that I've highlighted there are the only things you need to change in your taxation financials to turn a good set of numbers, an audited set of numbers, because I know you'd never tell porcupines to the tax office so they've got to be right. So if we change those three things there in red from your taxation finance, we can turn them from tax financials to management financials and we can actually work out, you can actually work out what your profit is. So just quickly, what are they? We take taxable income, we take taxable income from your taxation financials and trading account. Have you ever seen your trading account in your taxation financials? Your trading account is your births, your deaths, your rations, opening and closing inventory value. So sales are real, purchases are real, the dollars, the opening inventory numbers of livestock is real, but the value is not. The closing inventory numbers is correct because I know you count all the legs divided by four and you give that to your accountant and that to your closing numbers. The value is not real because the tax office allows you to use market values or average costs or different values for your livestock. So in your trading account in your taxation financials, if I change the value of my sheep and my cattle to something like a real value, then my trading account gross profit is a reflection of what's really happening. And then some of the taxable income change the value of livestock gives me my gross profit. Your direct costs are your direct costs listed in your profit loss in your taxation financials, peel them off, direct costs, things that increase as the number of units increase, commission, freight, etc. Grows profit minus cross there as your gross margin minus overheads. Now the conversation on overheads, cash overheads are listed in your in your profit loss occupancy, professional fees, etc. Non-cash overheads. So instead of tax depreciation, instead of tax depreciation, we look at management depreciation. And in the livestock enterprise planning workshops, we ask participants, what's the value of your machinery at the start of the year? A million dollars and we depreciate it at 12 and a half percent, which means about every eight years it's been turned over. So therefore the depreciation of a million dollars is about $125,000. So that's the depreciation to get to put in rather than taxation depreciation. Now imputed labor. What's imputed labor? Imputed or implied labor. I was thinking about this this morning and I think it's the ancient Phoenicians. I think the ancient Phoenicians were before the Egyptians, I think, why ancient history isn't that good. But the ancient Phoenicians had 10 principles of profitability. And I remember one of them was save 10 percent of everything you produce. So they didn't have banks in the days, but what they did do was they had grain inventories. So 10 percent of the grain they stored, 10 percent of the grain they produced actually stored. But the second principle to bring into here is to pay yourself first. So the ancient Phoenicians even back pre-Egyptian times were talking about paying ourselves first. Do you pay yourself first in your business? Or do you take out what's left, partnership drawings at the end of the year or take a mega draw? So the ancient Phoenicians back pre-Egyptian times were talking about paying themselves first. What about you? So all we're doing in this is we're recognizing what your value is really worth to your business. And imputed or owner's labor, we talk about that. So we talk about that in terms of the first person being the manager and the doer at about $115,000 per full-time equivalent. Right? And the second person, not a manager, but more doing about, doer about $70,000. So a two full-time equivalent farm, right? A mum and a dad operation, so to speak, is $115,000 for mum, the manager, and $70,000 for dad, the doer. Because we know that mums do all the managing, don't we? So quick summary. Tonight I can look, tonight I know you'll be really keen to do this. You can look at your taxation financials. You can look at your trading account, put a real value for sheep and cattle in there, project your trading account, and there's your trading account gross profit. You can change the value. Think about the value of the machinery times about 12.5%. There's real depreciation. And then think about how many full-time equivalents work in my business. Owners work in my business and $115,000 the first and $70,000 for the second. Now just before I move off that, what's a full-time equivalent? So the definition of full-time equivalent is working at 40 hours a week, 48 weeks of the year. So how many people here work 40 hours a week, 48 weeks of the year? No one. So invariably, and this is the conversation we had in livestock enterprise planning workshops, invariably, mum, the farm manager is probably one and a half full-time equivalent, 60 hours, and dad is probably another full-time equivalent. So we're probably looking at one and a half full-time equivalents, $115,000 plus a half plus $70,000, and that's our owner's labour. That's what we take off. Now coming back a step, why are we doing this? Why are we working this out? Well, we're working this out because your taxation financials don't tell you the truth about your business. If you're running your business on the profit and loss that's printed in your taxation financials, you might as well toss a coin to decide to invest or not invest in your business because you've got about a 50% chance that it's right or wrong. So all we're doing with this is we're turning your tax financials into management accounts, real figures, and we're removing the subsidies. We're removing the subsidies of accelerated depreciation and removing the subsidies of not paying yourself what you're worth so that the profit that you project from your management financials is a real profit due to your management skills and abilities. That's why we do it. Right, so that's definition of profit, what we're trying to do. Profit optimisation versus taxation minimisation. Let's discuss that quickly. It's not a trick question here but what are the outcomes if taxation minimisation is the focus of your business? What are the outcomes? What do you get? Would anyone be courageous enough to speak? What do you get if you aim to minimise tax? What do you get? I reckon you minimise tax, correct? You get that but if all your problems look like nails then the only tool you've got is a hammer, isn't it? That's the only tool you use. So when you aim to minimise tax what does your accountant do? So your accountants are very good, not dispersing accounts at all. There's an excellent role and I'll tell you I'll talk to you about the role for accountants but in a minute. But how do accountants minimise tax? Well they use taxation rules such as instant asset write-off or accelerated depreciation, farm management deposits etc and use pre-provisioning for interest etc bring forward provisions so they do tricky things or different things that they're allowed to do in the tax act to help minimise tax and the outcome of that is that you minimise tax. The outcome of minimising tax to me is I reckon that there is less or no profit and I question whether there is choice in your business if there's not profit. You're not paying tax but if you've got no profit where do you invest on farm? It's only through borrowings. Where do you invest off-farm? Perhaps you can't. How do I live better and go on a holiday or send the kids to school? Good school? You can't. And how do I repay debt? You can only repay debt when you're paying tax. So while one is taxation minimisation and profit optimisation one of the impacts to me of taxation minimisation as a focus of your business is that invariably there's less or no profit and in my career started around 1990 and we saw a hell lot of that for that 10 years. We'd come out of the war crisis and there was a hell of a lot of taxation minimisation. I think another thing is borrowing ability is limited. Where your taxation minimisation? I see there's a couple of bankers here today and my understanding of the banking rule commission from about three years ago now is that in many cases where the bank manager sees a loss in your profit and loss in your taxation financials they have to tick the box of loss. Where they see a profit they tick the box of profit. So if they're ticking the box of loss that's going against you and perhaps borrowing threatened to some degree. And I think as well IAWO Instant Asset Right Off I suspect there's a day of reckoning coming for us this year or certainly next year with Instant Asset Right Off. So Instant Asset Right Off is where the taxation department, the federal treasury said at the start of the global pandemic that we need to stimulate expenditure and investment in the business. So we'll give you an accelerated 100% Right Off on machinery that you purchase. Now if you're on that scheme then to stay on that scheme and continue to write off 100% of depreciation every year you've got to keep investing in machinery. Now many depreciation pools that I see are at zero and so while there's no tax they're paying this year because depreciation is so high taxable profit to zero what happens the next year when they can't continue to replace machinery and there is no depreciation on the profit and loss taxable incomes will increase profits will be there tax will be there that will need to be addressed. Now the federal treasury they are a smart group of people and do you think they knew that? Absolutely they knew that. They knew that they would stimulate investment in the economy headers and tractors etc it's what a year and a half to get ahead of now they knew that that that that would stimulate the economy. They knew that they would take this tax and take a hit but they knew that there was a windfall coming after investment Instant Asset Right Offs were written off. So if one thing you need to do today one thing you need to do today is to speak to your accountant about what depreciation pool and scheme you're in because if you're in the Instant Asset Right Off there's a day of reckoning coming so start planning for that and I was thinking this morning too that if you haven't put in your 21 taxation financials which are due middle of middle of May there's an opportunity there may be an opportunity to speak to your accountant about can I change the pool that I'm in for example and if I can change the pool I mean perhaps it's a little bit better for me to pay a little bit of tax this year this financial year rather than paying a whole lot of tax in future financial years so that's taxation minimization what about profit optimization if what are the outcomes if profit optimization is your destination well starting on the negative you're going to pay a bit of tax you will pay a bit of tax and in tax planning with clients we talk about an optimal rate of tax to pay at 15 to 25 cents in the dollar now the outcomes to me or the outcomes that I've seen with paying with that sort of level of tax rate is that there is surplus cash left over so I was only looking at our clients figures yesterday they've got a two million dollar turnover we just just finished their tax I've got an annual general meeting with them in two weeks time and they're paying 26 half cent 26 and a half cents in the dollar tax that's a lot but the previous in the last financial year that we purchased four million dollars worth of land we made four contributions of 25 000 dollars into superannuation to help minimize tax for the family so we did a whole lot of different things and there's still cash for that business left over at the end of the financial year for them to do things a holiday pay off debt etc and they are paying off debt so while focusing on profit while focusing on profit means you'll be paying tax invariably there's cash left over at the end of the year and I think with cash you've now got choices and the choices you've got are that you can invest on farm you can invest off farm you can repay debt or you can live a bit better you can do the kitchen for mum you can have a beach house you can send the kids to have the school that you wish and that's what I'm about when I'm working with clients how to optimize profit in their business and then I bring the accountant in and I deliver the result the expected result to the account and I say now minimize tax and I'll talk to you about machinery investing in a in a slide or two time so when I'm working with clients we optimize profit first then we minimize tax second so that we may get optimal tax rates about that 15 to 25 cents in the dollar okay quick summary profit optimization model versus taxation minimization model well yes in profit optimization I'll have to pay some more tax there will be more cash left over I'll have a profit at the end of the financial year but it's perhaps it's easier to pay back interest I've got choices and lots of them and perhaps the bank can see me servicing debt and says would you like some more money for future investment versus taxation minimization maybe there's no less tax to pay maybe there's less or no cash available into the financial year no profit perhaps it's a bit harder to repay interest there are less or no choices for the business owner and perhaps the bank is asking can you repay the loan and just a personal opinion to me cutting my teeth in the advisory space in the 90s there was a there was a whole dearth of this and I just wonder whether our kids perhaps not returning to succession not returning to to the farm at such a hour as a result of you know five or ten years of us not paying tax not having choices and our kids not seeing that let's not let that happen again let's let our profit improve and let's let our profits let our kids see our profit see enjoying our business so that they want to come back to the to the farm with us okay land value is increasing is it still is it still possible to improve profitability with land land prices increasing just to go backwards to answer this question so down the bottom here 1990 to 1991 1999 there's 10 years there in that block there's 10 years in this block and there's 10 years in this block there's 30 years of return on assets for different industries in South Australia we're looking at the return on capital excluding land values appreciating in price so it's return on assets the green are wheat producers for the 10 years 90 to 91 the red are mixed livestock producers the yellow are sheep producers beef producers and finally sheep beef producers so that number there is 3.7 clearly that zero so in that 1990 to 99 period wheat producers were doing well 1990 I know the reserve price was pulled out 1989 we had 160 million bales of wool and 160 million sheep and in 1991 we were shooting sheep for a dollar the wool crisis continued through to the next decade and we probably cleared we probably cleared 160 million bales of wool sort of 12 years later what's the point I'm trying to make just have a look at the trends so probably here probably here in this band land values maybe 250 300 bucks a dc and a grazing in this block here 2000 to 2009 I know I was assisting clients by land at 350 bucks a dc and 2010 to 2019 so at the tail end of that we were looking at 800 to a thousand dollars a dc to buy grazing land cropping land of course similar so while land prices have been increasing over that time and while we're only looking at average returns for different industries in South Australia on general you could say that average return on assets have increased while land values have increased now they're not at 5% but but there's a general trend of increasing there so I'm confident I'm confident with businesses that are designed well for profitability there's businesses that are designed to look at profit optimization businesses that harvest good prices good seasons keep costs low right that there will be that there will be good profits into the future right if we are to design profit deliberately into our business rather than accidentally let's look at some key principles about how we do that so let's have a bit of a deep dive into profitability principles now I know many have seen this so I'll quickly go through this slide but to me it's a seminal piece of teaching in terms of where profit the functions of profitability come from so this is your bachelor of agriculture or this is your bachelor of economics degree in in 10 minutes so if we design a business if we design a business we track the dollars along this axis and we track the number of units be it number of sheep or cows or area we crop along the bottom if we design our business from the start we need people we need machinery right we've got a whole lot of overheads just to run our business we rent sheep we sell a crop we sell cattle we've got direct costs and our overhead costs plus our direct costs gives us our total costs we sell some sheep we sell some cattle we sell some crop and we've got income and at that point there call break even everything above that line is profit so our income is greater than our costs so we're in profit and at this point here our costs are greater than our income so we're at loss okay so so far you've you've completed the first semester of your agriculture degree so let's let's get to your bachelor's degree now in in in economics so if you if we're here at break even if we're here at break even what can we do to improve profitability okay we could can we do something with can we can we do something with costs with direct costs could we increase direct costs and increase production or price could we put fertilizer on more fertilizer and get a response could we do something like grain marketing a client i'll work with we spend a dollar a ton a year on grain marketing and last year we made three dollars a ton three dollars per ton from grain marketing minus one dollar of cost is a two dollar margin divided by three dollars of the income is a 60 to 66% gross margin ratio spend a dollar of direct cost to make three dollars of income there's your gross margin ratio so we could increase direct costs increase production or get a better price right and we'd increase profit would you agree with me there so that's yes that's yes and that's no so let's try it everyone would you agree with me yes right thanks thank you okay so that's one thing we could do we could increase direct cost that would change our income where we'd increase our gross margin could we reduce direct costs and improve our margins yes we could we could as long as we didn't affect production or price okay so the first one we're talking about is improving gross margins the second cost there is overheads right can we reduce overheads right what are overheads overheads typically are people and machinery right they're hard it's hard to manage and deal with people it's hard to run a business with less with less machinery hard to manage a business with less people right but it can be done often when i come to businesses and look at succession planning and i've got three generations around the table i'm thinking overhead ratio here so succession planning can be assistance in terms of in terms of reducing overheads overheads can be reduced but they're very difficult to do so so first thing we can do is we can improve our gross margin we could lower our overhead costs and the third thing we could do is we could increase our turnover so if this was 3000 years if this was 3000 lambs produced if we could produce more lambs better lamb survival better lambic percentage well then our turnover would be here and we would be in profit now there are only three things you can do to improve profitability in business reducing overheads improving gross margins or increasing turnover and that's the same for your business for my business for a bank's business for the football club here so the question is which is it for you do you need to increase turnover do you need to address overheads or do you need to look at the margins of your enterprises and in the livestock enterprise planning workshops my assessment would be of those 300 businesses would be about seven and a half out of 10 need to address for those that are lacking profitability some are very profitable but for those lacking profitability about seven and a half out of 10 need to address turnover about two out of 10 need to look at their overheads and one out of half I think it is half out of 10 need to look at gross margins so by far and away turnover improving turnover is the predominant vehicle for improving profitability okay only three secrets of improving profitability there's the there's the key ratios so turnover ratio is our gross profit as a proportion of a total assets we want 15 dollars of gross profit for our for every hundred dollars of assets of our gross profit we want to retain 35 percent or we want we want to spend 35 percent retain 65 percent of our gross margin and we want to spend no more than 35 percent of our gross profit in overheads if we have those ratios then we have an operating profit of 30 percent there's our return on assets even over total assets there's our return on equity lease businesses if our return on assets manages greater than their return on assets if our profit on our own business plus our lease business is greater than just the profit on our own business then we're using lease funds well to grow a business and for debt funded businesses if our return on equity if our return on equity is greater than our return on assets if the return on our equity what we own is greater than the return on the whole business then we're using debt funded debt funding to grow our business okay how do we fix overheads we need to look at people and machinery invariably people talk to me about succession planning i was on the west coast a couple weeks ago with a final off to kind of prize planning workshop and there was a business there that had three million dollars worth of machinery one million dollars worth of income a three to one machinery to income when one to one is is is pretty good so there's there's some things to think about there for that producer in terms of perhaps contracting using existing labor to expand their business and utilize machinery a bit so other things we can think about are substituting machinery ownership for contracting succession planning as i've said for turnover turnover is about production and price so anything that increases production or increases price improves your turnover so at the moment at the moment wheat prices are pretty good for this harvest coming up in december 22 they've taken a little bit of a kick so it may be their opportunities to look at securing wheat prices for next year securing price and for our gross margins for gross margins we're looking at anything we do to increase turnover or reducing direct costs or the combination of both will assist with the gross margin ratio and often often if i see businesses have lots of enterprises and looking at diversifying they can be businesses that have gross margin issues okay a quick dive one slide into banking ratios and then bring it all together so banks banks are looking at banks are asking three questions first question can you service the debt if you can't what sort of security and thirdly if you can service the debt and if you've got security covered then do you want some more money so a couple of key debt servicing ratios finance costs so interest and lease is a percentage of your gross profit benchmark interest coverage how much ebit or sometimes the banks you've ebit dar depreciation amortization as a percentage of interest and borrowing costs so more than two times as a benchmark trend is the friend there or a three to one or less than three to one debt to income ratio so those three types of ratios talk to the bank about the ability of your business to service debt and of course if you can't service debt then banks need to ensure that they have security to get their money back so some banks look at 50% loan to value ratio and other banks 70% and the final thing if if banks have got if you've got debt service ability covered and if you've got security covered well well then often the banks their visit to you is would you like some more money because you must have a debt service ability business you must have a profitable business tie it together let's bring profitability and finance ability together and when we get it right this is what we get if our turnover ratio is at 15% is at benchmark levels represented by a hundred dollar bill and if our direct costs are less than 35% of gross profit then our gross margins are at 65% 65 dollars divided by 100 and if our overheads are at less than 35% of our of our gross profit then our ebit 65 minus 35 is 30 dollars and then servicing debt if they are at sort of benchmark levels of 15 dollars per hundred well then our net operating profit is 15 dollars so that's a business design well overheads to another gross margin finance that's a business down there that's got 15 dollars and 100 dollars that it earns to pay tax first to invest off-farm to invest on-farm to pay yourselves better or to repay debt what happens when things aren't designed well so let's represent the same hundred dollars of saying turnovers there but if direct costs are 10% more than where they should be our gross margins are 10% less where they should be if our overheads are 15% more than where they should be so they're 50 percent of income rather than 35 percent of income then we've only got five dollars of ebit per hundred dollars of cash coming in we've still got the same finance costs finance or lease costs and we've got a net operating profit that's negative of minus 10 so what looks like a lack of profit and perhaps unfortunately sometimes the banks get blamed in terms of we've we've got too much borrowings and our interest rates too high is actually not the problem the problem is in red there it's the design your business the design of the business there has caused a lack of profitability so this is where we need to look at our responsibility righty oh so we've had an introduction to whether I should minimise tax and whether I should optimise profit and just on that yes look at optimising profit and then yes use your account to minimise your tax I'm not saying to pay lots of tax I'm saying to use your account in the right order optimise your profit first minimise your tax second we've looked at land values and is there a potential for land values and profits to improve with land values increasing the three secrets of design for our business their overheads turn over gross margin and you need to know which one which of those levers to pull do I get better or do I get bigger so if I'm looking to improve profitability do I get better with my own management or do I get bigger and go and lease and buy land here's a little little framework matrix that might help you with that thinking now this comes from Dennis Wigner who helped me put together a whole lot of a bears figures and Dennis is an excellent analyst and he's pulled together for me here mixed cropping and livestock farms what's that for for 30 years 1991 to 2020 so 30 years of mixed cropping and livestock farms and what we're looking at here is we're looking at across the top here we're looking at quartiles of management so the top 25 percent the top quarter of management in terms of return on assets is in that column the next 25 percent in that column and the bottom 25 percent in that column and across this side here I've got scale of business so down the bottom I've got small businesses less than 200 000 dollars turnover 200 to half a million dollars of turnover half a million to a million and a million dollars of turnover and in the body of this is return on assets excluding land values appreciating so it's return on assets profit and what I can see here with quartile one businesses quartile one businesses that have more than a million dollars of turnover are averaging for the 30 years about 10.9 percent return on assets and I can see quartile two businesses that are half a million to a million dollars in turnover are averaging about three and a half percent return on assets right the bottom 50 percent at 200 to 500 are doing minus 0.3 percent so they're not even breaking eating and and and the bottom 25 percent small businesses are doing minus 8 percent I can also see just to scale you in that regardless of management regardless of management businesses that turn over more than a million dollars are averaging 4.2 percent regardless of management regardless of management businesses half a million to a million at 2.4 regardless of scale the top 25 percent producers are averaging 5.1 percent and the next 25 percent 2.4 and the whole the whole shooting match for 30 years regardless of management and regardless of scale are averaging 1.3 percent and probably inflation was more than that for that 30 year time period so that's just to settle you in on that so we're looking at management ability here and scale of business so the first thing to note is that when I improve my management when I go from quartile four to quartile three to two to one down the bottom here minus 2 to 0.7 to 2.4 to 5.1 I'm jumping up in return on assets by about two to two and a half percent so when my management gets better and I move to a different quartile my profit's increasing that makes sense second point when I increase my scale and I go from from here to here to here to here when I jump my scale that it's also increasing profit by two to two and a half percent which one's easier to do get better or get bigger so that's not a good question to ask which one's less risky to do getting better improving yourself timing and management etc or is it less risky to get bigger by leasing and buying right it's probably easier to get better isn't it so point number one point number two is that there's a minimum scale there's a minimum scale of business to be profitable it's two it's two less than 200,000 there at minus point eight minus four point four minus two might none of them are profitable at any level so small businesses it's it's very hard to be profitable and even at 200 to 500,000 a turn over you've got to be in the top 25 percent to have some sort of charts have been profitable so so what do we do with those businesses what can we talk about with those businesses that that perhaps don't have scale on this side well to make a business that's you know 200 to 250 or even 300,000 a turn over is is a half a business in my experience I reckon Dennis has got 500,000 of turnovers a break even to be to look at profitability look at your 500 ones right you can be average at 50 percent and there's a three and a half percent return there that's possible just because you've got scale but if you're smaller then you've got to be top 25 percent so to me with smaller businesses it's about what they do so so rather than it being a six day a week business maybe it's a Monday Tuesday Wednesday business for their 300,000 a turn over which is equivalent to a six day a week full-time full-time business so Monday Tuesday Wednesday for three how 300,000 a turn over and let's do something else or think about doing something else on Thursday Friday and Saturday maybe it's off-farm work there's plenty of off-farm work there that's available so that's the conversation with smaller businesses well they can still be profitable they've just got to scale back their time and design appropriately next point produces after above the 500,000 of turn over can be can aspire to be profitable can aspire to be at the four percent return on assets and the question is should you get better or should you get bigger well if you know if you know what the scale of your business is and if you know your return on assets then you can work out whether you're a quarter one two three or four manager so you can work out where you are so if you're over here at three and a half percent perhaps you could improve yourself and get get better and aspire to be six percent if you're over here then perhaps I've got to get better but if I'm over here then perhaps getting bigger is a direction of travel for me so I just include that so that if you know the scale of your business and you know your profitability it gives you an idea about whether getting better or getting bigger could be a direction of travel but as you've picked up that the less risky thing to do is to get better and to continually get better okay now now we've made some we've designed our business to be profitable we've got some profits we're minimizing tax with our account let's have a quick conversation here about investment decision making so where do we spend scarce capital I don't have enough time to talk about where you spend scarce capital on a farm there's lots of places but to me again where there's profit you've got choice where there's not profit it's probably coming out of borrowings so the investment decisions there are even more important so I think there's four choices around tax planning time and setting your budget to look at in terms of investing so I think you can invest off-farm number one for succession for the for the generation one for the non-farming children and maybe there's beach house maybe there's diversification of assets so my example is the client I was looking at yesterday so uh two million dollars turnover 26 half cents in the dollar we made four contributions of superannuation $25,000 each sum 27 and sum 23 have already got a superannuation balance of $200,000 because of profitable businesses right so that's helping them that's helping them with their future living and mum and dad of course as well they've made contributions over decades so that's helping them with their succession and retirement the super annuation fund itself is a pot of wealth for non-farming children and there's been still surplus cash after they've contributed to superannuation after they've paid tax to contribute to a to a house in town to continue to diversify their asset base so that's what's happened as a result of profit and that's what's happened as a deliberate result of designing profit in their business minimizing tax second I think this there's the first choice I think the second choice the second choice we have is to invest on farm discern it down to three areas that we can invest on farm the first one is investing in areas and increase production and productivity so there's shearing sheds that we hear about from Emily today there's ag tech and data that we're going to hear about from Nathan right and there's equipment and and self and sheep handlers that we're going to hear from Ben today they're all decisions that we can do that we can do to improve labor efficiency and productivity so very often there's one client that I'll visit in a couple weeks time and they're very disciplined they have an A and a B list of capital right and they look at their A list and we sit down with their A list and we look at return on capital so the thirty thousand dollars that we're going to put towards something we look at the return on capital for a sheep handler versus this versus that versus that so they make decisions based on where they going to get their best return for their investment that's so that's one way another way perhaps I worked with a corporate client whereby retaining staff was really important so facilities so they invested in facilities to maintain and retain staff and the other area that we can look at investing is improving labor efficiency so if we're not quiet at our six hundred thousand of turnover per full-time equivalent and our labor units say 500 or 550,000 per full-time equipment and labor efficiency devices might help us get to that 600,000 per full-time equivalent turnover. Thirdly I think we can invest we can we can choose to invest in ourselves children's education beach house farmhouse or the kitchen for example so that's a third choice and a fourth choice is that we can repay debt you can't repay debt unless you're paying tax and to me repaying debt is about the future farm asset purchase if I can leverage my borrowings at 70% with my bank the hundred thousand I repay in debt is effectively a seventy thousand dollar purchase of land in the future to come so I can draw that back and to me talking about inflation and perhaps cost rising and perhaps incomes dropping off with prices perhaps perhaps there's an argument for a little bit of debt repayments and business resilience because it's what you do in the good years that determines how you survive the bad years. Last couple of slides just some top 10% principles so here's some examples of clients that are in our top 10% and what they're doing so first and foremost they haven't just got there by magic they haven't working up the next day and all of a sudden become a top 10% top 10% client they've worked hard at over the time but they've looked at structure of their business they've also had assistance so they've had assistance to get their business structure right they've got their overheads designed so they're fully utilized six hundred thousand dollars of turnover per full-time equivalent if you're a two full-time equivalent business right it's 1.2 million dollars of turnover that's where you are you've got labor utilized at their right ratios if you're at a million dollars and you need to get to 1.2 million dollars for two FTEs then that's where leasing comes into the conversation or other opportunities there and where we add that extra two hundred thousand dollars from leasing for example and we're not adding overheads such as machinery we're just utilizing existing machinery utilizing existing labor now we're fully utilizing our labor. To me specialization focuses energy and reduces overheads and keeps it simple my very quick and dirty business success the three key principles are do what you like doing do what's suited to your country so breeding sheep breeding country cattle on cattle country cropping on cropping country don't try to do something different do what you like doing do what's suited to your country and do lots of it specialize in it specialization means you've got to be profitable because if you're not if you're not you're out of business you need to have a base scale of turnover to be in the top 10 percent so 600k per full-time equivalent right if you're under half a million dollars turnover in your business it's pretty hard to be profitable so think about Monday Tuesday Wednesday business and what you can do Thursday Friday Saturday improving gross margin ratio through a efficient conversion of direct costs so think about look at your look at your rotations that you just set up look at of course you've got fertilizer and you got chemical costs you got round up at 16 bucks a liter so look look at your direct costs and are you spending a dollar of direct costs for three dollars of income right and to me this is where agronomists can come in so agronomists are agronomists about improving about making the most for you but sometimes like you could be spending two dollars to make three dollars and that's inefficient so I asked the agronomist that are you spending a dollar of direct cost to make three dollars of income because if your agronomist is that level there you've got your gross margins right leasing only works if it improves utilization of overhead so that million dollar business to get to 1.2 that we're not adding machinery we're not adding labor level of borrowings is important not too much not too little the top 10 percent have good systems and management so they've already identified risks and they've got policies in place to mitigate or to stop risk or to manage risk when it occurs so therefore they're responsive with their management I mentioned matching enterprise to environment and once you're in the top 10 percent getting bigger and replicating so my 1.2 million dollar business design well here if your business model is to grow again well then let's go and look at another 1.2 million dollar land business and grow again let's replicate and duplicate so therefore once you're in the top 10 percent turnover drives profitability I've mentioned that one last couple of takeaways a unit of efficiency of labor is 600,000 full-time equivalent I've mentioned the machinery value ratio the last thing I'll finish on is while I focus a lot on tax and a lot on business design and a lot on the money side in my experience as well where families are functioning well business profitability follows and where people are functioning well then profit also follows and the cororally the opposite is also true thanks very much Jody