Transcript

3 Baron-Hay Court, South Perth Western Australia 6151Telephone: +61 (0)8 9368 3333 Fax: +61 (0)8 9474 2405Email: enquiries@dpird.wa.gov.au

Financial intelligence webinar 1: Financial basicsIn the audio is:

Doug Watson, Consultant, Australian Facilitation Company

Transcript

Doug Watson:

Good morning, everyone. Welcome to the first in the financial intelligence webinar series hosted by DPIRD. And my name is Doug Watson and Ill have the pleasure of taking you through the next five webinars as we work through this topic of financial intelligence.

So first off, a little bit about myself. Im a consultant with the Australian Facilitation Company and were working with the webinar host, the DPIRD, in terms of presenting this series of financial intelligence webinars. My background is in banking finance and insurance, not in farming unfortunately. Albeit, when I left school the first I did a degree and I did that degree at Queensland Agricultural College. Unfortunately it was in hospitality, not farming.

So over the years though as a bank manager, Ive been exposed to farming businesses and indeed was an agri-manager for Westpac for a period of time based in Northam. That was many years ago but Im not here as an expert in farming. Im here as someone who can help you understand the numbers and figures and thats my background in terms of banking finance, those sorts of things.

So Im not an accountant but Ive spent a lifetime trying to understand what accountants do. What I do do is use numbers and figures to help me make better decisions and help people make better decisions in their business. And if I was to summarize the financial intelligence webinar and the five webinars well be going through, thats what its aimed at doing, helping you make better practical decisions on your farm by using some of the numbers and figures that are available to you and even creating some numbers and figures from the information you have available.

So its designed to be a practical series of webinars to help you improve decision making on the farm by taking into account the agronomy issues, by taking into account people issues, by taking into account stakeholder issues but also taking into account financial issues and on that basis, getting a more balanced sort of outcome and decision. Any sort of adult learning sort of happens in a bit of a ratio and I believe that ratio is about 10% theory, about 20% discussion and about 70% actually doing it. And if you think about anything youre good at now if youve had to learn some computer programming or how to work Excel and Word and those sorts of things, you can read as much theory as you want but until you maybe talked to others and start doing it yourself, the learning doesnt really happen.

So weve designed these webinars around a bit of theory. The webinar 10 minutes sorry, 10% of your learning probably between sort of 60 to 90 minutes most of the webinars. So there will be this practice activity between webinars and therell be a step by step guide to completing that and this will be about your farm and creating financial information and help you make financial decisions about your farm. Its not about the theoretical model or an example thats taken from the book. Its about your farm and your finances. There will be in several webinars some notes to actually help you understand some of the key concepts as well as references at the end of the webinar. One of the last slides gives you a number of references.

So you have been sent a copy of the PowerPoints already and a copy of the notes and a copy of the practice activity and you will have the opportunity with this sort of follow up call.

Having said all of that, I still think that the learning is going to be [indiscernible] [0:03:51] of times. Its going to be difficult. Its going to be hard. Its not concepts you may be fully used to. I guess you need to take the time, read some of those references, have a chat in the phone call, do some of the practice activities and thats where the sort of 70% of learning by doing starts to happen.

And this will be a gradual process, not everyone will get it all at once, but as long as were moving forward and getting better and using financial information more in our decision making then thats a key outcome. There are other learning programs that well feed into and Department of Primary Industries and Regional Development run a Planning for Profit one-day workshop that you can see details on their website and they also run a five-day sort of workshop Plan, Prepare, Prosper, a broader overlook of farming and the need to plan to be able to the outcomes youre looking for.

So were really aimed at a more of an introductory level into some of those other programs and trying to keep it convenient and easy through a series of webinars where youre only committing that sort of one hour once a week. But then in your own time maybe doing those practice activities reading the notes and maybe making that phone call.

There is a strong focus on sheep within the webinar series as theres been a bit of a gap in the sort of support available out there but we do look at mixed farms but when we look at examples often well look at the sheep example and thats quite deliberately to have that focus and bridge some of that gap.

So thats a bit about me and a bit about the series and how its all going to come together. Im just reading some of the people in the chat and most people have the audio and Im saying a lot so its Im not talking to a blank wall.

Lets get on with the first webinar. A little bit of housekeeping first in terms of making sure youre comfortable for the next 45 minutes. Be prepared to ask those questions. Be prepared to be a bit challenged and be a bit uncomfortable but do know that youll have some notes to actually follow up with. Youll have some references that you can read if you wish to get further information. Youll have a practice activity to apply some of the concepts to your farm and indeed youll have the opportunity if you wish to have a one-on-one sort of 30-minute or so phone call with myself.

What I think works really well in terms of webinars and in terms of learning in general is a degree of fun and a positive outlook that helps a learning process. I think respect for others in terms of their opinions and ideas and questions that they ask and it is a safe learning environment, and so any question is probably a good question and theres probably two or three other people on the webinar that might be thinking the same thing but maybe they havent asked that question. So I really ask encourage you to where possible ask those questions.

And lastly webinars require you to be present so if you can avoid distractions, if you can focus on what were actually talking about even though maybe Ive heard this before, maybe start thinking about, Well, how could I apply this differently? Focus and zeroing in on the content and what is being said will help you get the best possible outcomes.

So lets start with some very broad questions around financial acumen, financial decision making if you like. And it was interesting to see your registration questionnaires and we had 12 people complete those questionnaires. We have 26 or so questions on there of a financial nature and you may recall some of those. What I did is I sort of counted the number of times people said, Yes versus Dont know, Not sure, No. And we got about 48% of people answered those 26 questions, Yes. So, its about 52% that are No, Not sure, et cetera. And like all of the webinar series is really to try and get more people answering positively to those questions and lets try and get the percentage up to 80% or more rather than the 48% at the moment.

If we look at some of these broad issues that were trying to deal with, the next one sort of says, What are the financial objectives for your farm? This might be an interesting one for you to think about and if youre happy to type something into the chat because for me, a financial objective is about, well, where do you want to be in five to 10 years in a financial sense with your farm? So, Im not talking about this year, Im not talking about the next season or two. Im talking about over the longer term. Lets say about five to 10 years sort of period. And what I found in terms of working with farmers and business people in general, is that theres a strong tendency to focus on the here and now. So, what were trying to do is get people thinking about the longer term and using that to help make decisions in the shorter term and then the medium term.

So, its a really good question to think about if you have a clear answer or not in terms of where do you want to be in that five to ten years and that might be not have any financial pressures, maybe from the bank, maybe you have enough cash reserves to help invest in the farm to grow it, maybe to be in the position to hand the farm over to the next generation and be able to retire in comfort or a degree of comfort.

A lot of these financial objectives in the long-term are really about the owners wealth and sustainably growing the wealth of the owners. And if you stop and think about your financial objectives, then it probably falls into that category. It might be about subsets, it might be about retirement, it might be about investing, it might be about being able to sleep better at night, all of them come back to a sustainable growth in the owners wealth and it will be hard to argue with that as not a very good long-term objective.

I guess the third question here it sort of says, Can you sustainably grow your wealth in the long-term if you just focus on short-term decisions? And I guess, I stop and I think here about Alice in Wonderland comes to a fork in the road and shes confused which fork which road to take and I think she asked the Mad Hatter, you know, Which road do I take? And the Hatter says, Well, where are you going?, and she says, I dont know., and he says, Well, it doesnt matter. So, I guess if you dont have a long-term goal and direction, then the short-term decisions you make, it doesnt matter. And we may jump from one to another to another and sometimes, they might work for us and sometimes, they dont, but they may not take us to that end goal of where we want to get to.

I guess in a farming sense, it might be about your commitment to sheep, you know, wool prices are down, lambs are down, Ill get out of sheep. And then a year later, 2 years later, Oh, things are looking a lot better. Well, I better get back into them. And chopping and changing them, going backwards and forwards, and trying to get back into them realizing that, Well, its fairly expensive. And maybe I shouldve stayed in them if I hadve stopped and thought about the long-term goals of what Im trying to achieve.

So, the key focus of our webinar series is about the short, medium, and long-term goals, and making sure that the decisions we make fit together. And the short-term decisions lead into medium-term goals, and the medium-term decisions lead into the longer-term goals. And were working in a coordinated way towards the end goal that we want in that five to ten years. And to do that, youre going to come across different risks and thats going to be our last webinar, is talking about financial risks in the business.

We go through the five webinars. Its basically based on a concept of planning that is really around where are we now, where would we like to be, how are we going to get from where we are now to where wed like to be, and then are we on track? So, any plan we have probably has those four steps.

Lets define where we are now and thats what were going to do in webinar one. Were going to be looking at financial information that starts to [audio gap] financial position. Very hard to build a plan if you dont know where youre starting from. So, where are we now? And were going to look at some financial basics to transition at this point in time. Then were going to look at where would we like to be, what are our longer-term goals that were trying to get to in webinar two. We then start to say, Well, what are the decisions we need to make in the short and medium term to achieve those longer-term goals? and they are webinars three and four. And then lastly, we have some checks and balances in place to make sure were on track and that were doing it in a sustainable way and not in a very risky sort of way.

So, were going to be looking at these five webinars and to take us from where we are now to where wed like to be, to how do we bridge the gap between the two and the decisions were making, and the plans we make. And lastly, are we doing it in a sustainable way? Are we on track? Are we delivering what we actually sought to do? Were putting some checks and balances in place. So, thats the broad outline of the five different webinars and were using the sort of concept here of taking the long-term before we look at the medium and the short-term.

As I gave that example of Alice in Wonderland, unless you know where youre going in the long-term, had to know the short-term decisions that you should be making. We need to make sure all of those sort of decisions link together and we need to have those different time horizons to make decisions because some decisions are going to impact us over the next season, some will impact us over two, three, four seasons, and some will all feed into the longer-term, all of them will feed into the longer-term objectives of what were trying to achieve.

So, lets get our mind decision-making from that perspective of those different time horizons. So, as we go through webinar one, what were going to see is three broad learning outcomes that were trying to achieve in this first webinar around financial basics, around determining your position before you put some plans in place. So those three key learning outcomes are really around understanding the key financial reports around your business, the balance sheet, the profit and loss, and the cash flow. Many of you might be very familiar with the cash flow and not so familiar with the others. But well explain why its a good reason to actually have those three key financial statements.

Secondly, were going to give you some skills to actually build some management accounts. So these are not accounts that will go to the tax office, these are accounts that you will use on the farm, and reports you use on the farm about your financial position to help you make better decisions. So were going to build your own balance sheet, profit and loss, and cash flow. Well, hopefully you have a cash flow, were going to build a profit and loss and balance sheet from that. If you dont have a cash flow, maybe you have bank statement, its very similar sort of concept and thing.

And lastly, the last learning outcome is basically around making sure that the information we have and that were making decision on into a degree of consistency to it, a degree of robustness to it, such that we can make good decisions. If the information were using and the numbers that were using are not consistent, if they are not robust, if they are not strong, if theyre not reflective of whats actually happening, then its not going to help us make that good decision in the longer term.

So thats a bit of an overview of the webinar series, and indeed the first webinar, and how they are structured. Once again Im going to stop there and see if there are any questions people have. I see Daniels sort of asked in the chat room a copy of the PowerPoint and havent received it as yet. Ill take that up with Kylie, the administrator. She may have sent it to a different email address, because everyone should have a copy of the practice activity, the notes, and indeed the PowerPoints I believe. So, lets just check and see if there are any questions. Theres a good one Ill just get the questions if I can in the question tab as opposed to the chat tab, otherwise I might actually miss them.

The questions are, what frame is short, medium, or long term? Look, for our purposes, maybe well say the short term is really around the current season if you like. So decisions youre making that impact upon the current yield and outcomes for the current season. The medium term to me is probably over several seasons, so lets take the concept of an operating cycle. And an operating cycle is about the time it takes to convert inputs into outputs. So that youre going to make decisions within the current season that are going to result in an outcome at the end of the season.

Sometimes youre going to make decisions whether to sell lambs or keep them and use them for wool and mutton down the track, that might actually go across several seasons. So for me, that is the medium term, when we have this, sort of two- to five-year time horizon, whereas the short term is more about the here and now in the current season. And then the long-term is five years and beyond, and that might be vary depending upon what your longer-term goals are.

So think about it in terms of inputs versus outputs, and how long it takes to convert those things, and then the farm youve got some short term things this season. Youve also got some medium term, maybe two to five seasons. If you want to build up your flock numbers, it could take several seasons, obviously for that to happen, to get to the level you want. So theyre more medium term type decisions. Or investing in plant and equipment might be medium to long term depending on the nature of that plant and equipment.

So weve got a few people that dont have all the information that Ive suggested that you should have in terms of notes and that sort of thing. Question around the timeframes. So I just typed in for into the chat box Christine, yeah, okay, fantastic. So weve got a few issues in terms of the materials so lets just put those aside and Ill double check with the administrator, Kylie, in terms of what might registered accounts and emails. I know Kylie has had trouble by trying to contact one and not getting responses, so maybe there is a check the different emails you have, but we might get those resent so that everyone actually has them.

So, weve done a bit of an introduction and set up the first webinar, and Im just checking most of the questions seem to have been dealt with at this point in time. So lets just go back to our PowerPoints, and I want you start thinking about and lets use the chat box here to get some feedback in terms of your own personal finances.

So lets not think about the farm, so lets keep it simple to start with, and lets think about if you went to a bank to apply for a credit card, or yeah, so, not lending to do with the farm, a personal sort of loan, credit card, whatever. What sort of questions to determine your financial position?

So I want to stop and sort of think about whether how a bank determines your financial position is the same as how we determine the financial position of your farm. So I want to start simple and lets keep it sort of at a personal level to start with before we add more complexity and discuss more complex issues. So what are the questions with the dollars and cents answer that a bank may ask you to determine your financial position if you applied for some sort of personal loan. So what are the sort of questions they ask just looking for people to type into the chat box, what they might ask you.

So Christine is saying sort of how much security you have? Your ability to repay is probably a good one, and I guess in terms of working out your ability to repay, theres a comment from Sarah, theyre going to ask what your income is, how much do you earn, how long have you had that job, that sort of thing. Financial history, probably not a dollars and cents sort of answer but definitely something theyd look at and maybe do a credit check. So lets look at Sarahs income. For your efforts, how much money are you earning as a result of the work you do, and that would be income. I guess in a financial sense, we might call it revenue.

Maryanne has come back and said, Well, what about assets? Definitely, theyre going to ask you about assets. So lets define assets and in your notes youll find a glossary of terms with some of these definitions in there, but lets just focus in on what people are saying here. An asset is something you own that has value into the future. So thats the definition of an asset. Hence, you might own a motor vehicle. You might have some super in your own name. You might have some money in a bank account. You might have some clothes and contents of your house. All of those things would be assets because you own them and they have value into the future. It may not be what you paid for them but its worth something for you in something you owned that has value into the future.

Do you have other loans to pay, Sarahs come back with? And thats another one in terms of a bank would refer to that as your liabilities. So the money you owe that youve got a future obligation to repay is called [audio gap] you own that has value into the future. Weve got liabilities, money that you owe that youve got a future obligation to repay, income stability, liabilities, so were getting lots of good answers here.

Often in addition to income, theyll ask your expenses. How much does it cost you to live? Because if were to work your ability to repay as Christine says in her comment there, what people do is they take away how much [audio gap] and hopefully theres money left over to be able to repay the loan. So in a financial sense, we would call that expenses so you have revenue and expenses. In personal sense, its income and the cost of living if you like.

Expenses are the costs incurred in generating that revenue. So an expense, a living expense, for people when they apply for loan might be food in the fridge. The fridge itself is an asset because its something I own that has value into the future. The food in the fridge gets consumed in the generation of revenue and at the end of the week, I have to go shop again or if you got four kids, looking ahead, at the end of the day, you have to go shop again and fill the fridge up again.

So expenses get consumed in the generation of revenue. Revenue is what we earn through our efforts and our labour. Assets are things that we own that have value into the future. Liabilities are moneys that you have to repay in the future. Yeah, just looking there, income stability, security, lots of good things that a bank askes. Some dont have that dollars and cents [audio gap] figures and some are more dollars and cents in nature.

Theres probably a third thing that they sort of ask for, a third group of things and thats probably how much money do you have? If you want to buy a car for $20,000 and you want to borrow a $10,000 and youre putting $10,000 towards it yourself, wheres the $10,000? So often a bank will ask for a copy of your bank statement to show how much cash you actually have.

So lets stop there because thats probably the very broad areas that a bank asks for information about in terms of stuff with the dollars and cents answer. We had the last slots of other questions. Sometimes they ask the name of nearest relative not living with you just in case you do a bit of a runner that can try and track someone else down.

Interestingly, often a bank wont believe you when you say how much it costs to live because a lot of people havent sort of budgeted to that extent and they dont really know. So what that ends up is all that different financial information can be put into three separate financial reports that give a whole picture of your financial well-being and financial position. And those three financial reports are exactly the same financial reports as any business. Whether youre BHP Billiton [phonetic] [0:26:33] or actually theyre BHP now or whether its your farm, you have three broad ways of looking at business and you need to look at all three to get a full picture. If youre just looking at the cash flow, youre only looking at one piece of the pie. Youre not looking at the whole pie because cash flow will give you some information but it wont give you all the information.

So lets just go through this slide and look at these three different financial reports and they are built upon the questions that a bank ask you about your financial position. So the first one talks about a balance sheet, sometimes also called a statement of financial position. So your accountant may use different terms but what a balance sheet says is if you take away what you owe, your liabilities from what you own, your assets, whats left over is called your equity. Now, an equity is a measure of your wealth, the owners wealth, and if you think back to that long term sort of goal that we were talking about for most farms to sustainably grow the owners wealth, thats where youll see it in the equity of the farm, thats where owners wealth has ended up in these financial reports.

So if you take away what you owe from what you own, whats left over is yours, your equity. It focuses on the future because remember our definition of an asset and liability said both of them said something you own that has value into the future is an asset, a liability said its money you owe that youve got a future obligation to repay. So theres a future focus. The balance sheet tells you how well youre set up to deal with the future, maybe a poor season or maybe youre looking to expand or maybe in the longer term youve got other decisions youre making, an indication of how well youre set up. And banks are very interested in terms of your balance sheet. It will help you make those longer term decisions that weve talked about, a good understanding of your balance sheet.

So many of you might have only seen a balance sheet prepared by your accountant from time to time for your tax return. Were going to try and build one today that is something you can use more for making decisions on the farm.

Secondly the second financial statement we look at, theres a cash flow and many farmers Ive worked with over the years are familiar with cash flows. Banks are very interested in cash flows. It tells you whether you can pay your bills when they sold you. Do you have enough money in the bank? This is more going to help us with decisions within the season, the short term decisions, we talked about.

Now a cash flow is based on having your opening balance, plus any cash coming in or deposits, less any cash going out or withdrawals, to give a closing balance. Thats the basic formula for a cash flow and its like a bank statement but we group all the different transactions on the bank statement into likeminded transactions. We put all the wages into one category. We put all those sales into one area or the different types of sales for each enterprise into a different area. So we group likeminded transactions together and we come up with totals, but were going to have a starting position for our cash, were going to have some deposits over the year, some withdrawals over the year, and a closing balance at the end. It shows where our money has come from and where it went from where we started. And at the start of the season, we had $20,000 in the bank and at the end of the season, we had $10,000 in the bank. What money came in? What money went out? Where did the money go?

So, it focuses on the present and short-term. It includes all transactions over the season, over the 12 months that you prepare a cash flow for. Anything that you spend money on and comes out of your bank account or goes into your bank account, will show up in your cash flow. If we just jump at it is not inclusive of everything that happens over the 12 months. It is as a point in time. So, youll often see youll always see a cash flow this is at a certain date. Its not for the 12 months ended at a certain date. Whereas a cash flow will say for the 12 months ended.

So, generally, we have an opening balance sheet and a closing balance sheet, and then if we want to see what happened in between, we look at our cash flow and we look at our profit and loss because our profit and loss will include all of the transactions that have happened over the last 12 months that are revenue and expenses. So, heres a key point. Your profit and loss is not the same as your cash flow because cash flow is about money coming into your bank account and coming out of your bank account. Whereas the profit and loss is about revenue and expenses. And if we stop and think about it, some of the money coming into our bank account may not be revenue.

I might have borrowed some money from the bank and they put it into my account to spend it. I might have bought an asset and spent money on a new vehicle, that is buying an asset, that is not an expense. So, we need to distinguish between the different items that go in and out of the cash flow and as Christine we include drawings to live off during the year, but your profit and loss depending upon the structure, you know, proprietary limited company, trust, partnership, may not include drawings.

So, theres differences between a profit and loss, and the cash flow. And they give us different information and Im going to suggest to you that profit and loss is very good for making those medium-term decisions. A cash flow is very good for making the short-term decisions and a balance sheet is very good for making long-term decisions. But its only by looking at all three that we get a full financial picture. The overall health of a business, your farm included.

So, let me just touch on a few dot points here to make sure were across those three key financial statements, the three pieces of the pie, if you like, that determine the overall financial position of a business. Any transaction that happens must be either revenue, expense, asset, liability or equity. Those five things that we identified when we say what does a bank ask you for to determine your financial position.

Let me just get back to the screen so you can see me talking and maybe not have to look at the PowerPoint as much. So, any financial transaction must be one of those five. Asset, liability, equity, revenue or expense. Theyre the only five transactions theyre the only five financial transactions that exist. Theres lots of subsets within those five transactions. So, theres lots of different types of revenue, and expenditure, and assets, and liabilities, and equity, but if at the broadest level, theres only five types of transactions.

The other thing Ill suggest is that your balance sheet because it summarizes where youre at the point in time includes your cash position and the profit you made for the last 12 months. Cash is just the type of asset. So it will show up in your balance sheet underneath Assets. The amount of profit you made has improved the wealth of the owners of the business. The profit belongs to the owners. It doesnt belong to the bank. It doesnt belong to your suppliers. It belongs to you, the owners.

So, the amount of profit or the amount of loss you make for the year will show up in your balance sheet underneath that heading of Equity because we said equity is a measure of your wealth. So, the cash position that comes from your cash flow statement will show up in your balance sheet underneath Assets or if youre overdrawn, it will show underneath Liabilities as an overdraft. And the amount of profit you made will show up in your balance sheet.

If you want to see the detail of how much how you made that profit, look at your profit and loss. If you want to see the total, youll see it in your balance sheet. If you want to see where your cash came from and where it went, look at the cash flows here on your balance sheet. So, we need to read them in conjunction. We cant just read them on their own. Otherwise, they dont make as much sense. So, theyre linked. And the main financial statement is actually your balance sheet because it includes your profit and loss, and your cash flow, but not the details of those two. If you want the detail to make better decisions, look at your profit and loss statement, look at your cash flow.

And the last thing that we want to take out of this slide is basic. Any financial transaction must have at least two sides to it. If we look at the balance sheet, it says assets minus liabilities equals equity. Its not possible to just change one thing and that statement still be true. If I buy a motor vehicle and I got a loan to buy that motor vehicle, and lets say the motor vehicle was $40,000, then one asset Motor Vehicles goes up $40,000 and at the same time, liabilities go up $40,000 because I got a loan. Now, my balance sheet balances. If I only put one side of the transaction in, my balance sheet will not balance, thats why its called a Balance Sheet, it needs to balance. Assets minus liabilities needs to equal equity.

So, for each financial transaction that happens in your business, there are two sides to it. Otherwise, your balance sheet wont balance. So, we need to and that will help us build our financial statements. If we recognize that theres two sides to each financial transaction, and many of us dont sort of understand that. It is the basis of something called double-entry bookkeeping, which you may have heard of. But because of modern software packages, we tend to enter one side of the transaction and the computer doubles that up and automatically creates the other side of the transaction.

But in the good old days before computers, people used to handwrite out both sides of the transaction. There must be two sides to any financial transaction. And if we understand that and if we understand theres only five broad financial transactions that exist and we understand the linkages between the three financial statements, we can actually build some financial statements, and thats what were going to do in a minute.

Before we do that, I want you to think about any questions you have over some of these accounting basics weve been talking about once I show you the sort of last slide on this financial accounting type basics, and well talk about this last slide, and maybe it will embed some of the knowledge and some of the concepts Ive spoken about. Just get that slide up.

So think about any questions you have, and then were going to have a bit of break, and get people to stretch their legs and grab a cup of whatever. Just trying to get the slide up. The technology yeah, thats working a bit better now. So I just want to reinforce the need to have those three financial statements, otherwise you dont have the full picture in terms of making financial decisions. If you are just making it on short term cash flows, then youre not looking at the whole pie, youre looking at one piece of it, and you might make some mistakes. Its the quality of the information that will help the quality of the decisions. And if we dont have good information, then we cant make good decisions. So we need to understand fully where our financial position is now, and to do that we need to look at our profit and loss, cash flow, and our balance sheet.

So weve got three scenarios here. Some of you might have been reading those three scenarios as I was talking but it [audio gap] the need to have those three financial statements, because if you look at the first one, if you invested $50,000 during the year to build up the size of your flock, then thats going to be a cash withdrawal. Thats going to be money youve spent and coming out to your bank account. But if we think about it, building up the size of your flock is not an expense, its not something thats being consumed in the generation of revenue. It is actually something you own that has value into the future. It is an asset, because now you have a bigger flock, and in the future, you might sell them, you might shear them for wool, its going to help you generate revenue in the future. It has value into the future. So that cash out flow is not an expense, it is actually an asset. And if you didnt realize that, and you were making decisions just based on your cash flow statement, then you would be using the wrong information. You could make the wrong decisions. It would look a lot worse than what it actually is.

Conversely, you might end up with a situation where things look better than what they actually are. Lets imagine instead of buying feed, you use $25,000 of grain from last years harvest season. Your cash flow would not show this, so it would overstate your position because you havent spent anything on that grain. You havent bought it, its not a withdrawal from your bank account. They are called profit and loss properly, we would reflect that as a cost, because that grain for this season is a cost incurred [audio gap] this season. So by including it in our profit and loss, weve got a more accurate figure, and weve included the cost of grain even though we havent had to write a cheque out for it. What we need to do is match the revenue with the costs incurred in generating that revenue, and thats what were doing in that second scenario to get a more accurate picture of what our true profit and loss is, rather than just looking at our cash flow.

And the last scenario, might seem a bit unlikely but lets imagine, youve had a few losses, and your equity is going down because the owners own the losses as well as owning the profit. So it feels like your wealth is shrinking, but if your property values are actually going up for some reason, then technically, maybe you are actually wealthier even though youve made some losses in recent seasons. So we need to look at the balance sheet and have some proper values in there of the true value of all the things that you own to get a true sense of your financial position and your financial wealth. If we just went from an accountants perspective, and recorded those losses, and didnt adjust it for an improvement in the value of our land, then once again we might be making different decisions than if we had the whole picture.

So just try to come up with three scenarios here that highlight the need of looking beyond your cash flow, to the profit and loss, and the balance sheet to get a full picture so that you make better decisions.

So Im just looking at the time there, weve been going sort of 50, 55 minutes, and some people joined at the 15 minute mark, but it might be a good time for a bit of a break, and also for anyone that has any questions about what weve been talking about to type them into the question box. I do understand its a lot of information, but you do have the notes, you will have a replay of the webinar. I will check on some of the material that people have not received as yet, and try and check where thats at, and give you some feedback after the webinar about that.

So lets just stop there and try to digest what weve actually spoken about, and see if theres any questions people have at this point in time. So, lets take five minutes to stretch your legs, grab a cuppa, whatever, think about any questions, type them in, and well get back underway in five minutes or so.

Okay, so hopefully people have taken advantage of bit of a stretch and a break. Just checking to see if theres any questions people have come up with. Christine has asked, Will we be going to ratios and benchmarking? Yes, very definitely. So the next webinar, well be looking at ratios for longer term issues around the financial health of the farm, things like liquidity, gearing, and a few basic operating sort of ratios. And then as we get into the medium and shorter term decisions, we start to look at maybe some KPIs and different financial benchmarks that you can actually use.

I guess one of the key concepts were going to be working with is the importance of understanding the pros and cons of benchmarking, and a key thing will be trying to benchmark against yourself rather than or at least in balance against others. And the concept there being no one has your farm, your farm is your farm, and it might have different soil conditions, it might have different objectives to other farms, there might be a lot of different issues that make your farm a bit different. So that will be one of the key concepts when we look at benchmarking, but in future webinars, definitely well be looking at that. Thanks for that question, Christine. Any other questions people have so far? As Ive said, I do appreciate, it is a lot to take in, but were going to try and embed some of knowledge weve spoken about with a practical example now. And the practice activity that you do will be based roughly around what well be going through over the next 20 or 30 minutes. It has step by step instructions in terms of how you might complete the activity to get a set of your own financial statements for the farm, not just a cash flow but a profit and loss and a balance sheet as well. So lets check and see if theres any other questions. None at this point. Any feedback on the webinar so far, am I going too am I not clear? Am I anything that anyone can give me? Otherwise, its a bit like a news reader in terms of Im talking and hoping something is happening out there.

So some positive feedback in terms of going well so far. If you do come across an issue that youre struggling with, just remember you can replay the webinar. There are references, there are some notes and there is that follow up phone call as well and maybe put it aside and focus on the next issue and see if you can take that on board. If there is a specific question you have, dont forget to use that question tab and highlight that for me and well try and deal with it as we go.

So in the absence of any severe this is not working. Lets work through a bit of an example and lets see how we for this hypothetical farm we might be able to generate some financial statements to help them make better decisions. So what we got on the screen at the moment and this is an animated slide. And Im just trying to show this concept of double entry bookkeeping because for many farms, they have a cash flow. The bank needs it. You use it. Maybe your accountant will need it as well at some point in time. So you keep a record of the deposits into your account and in this hypothetical example, we got some cash inflows. Some money from grain, 168,900, livestock, 158,800, and a bank loan. We must have got a bank loan for something and they put the money in our account so that we could spend it on something.

And all of those are cash inflows and they total up to 387,700. Now, the figures arent that critical at this point in time. So you might go, oh, that seemed high or low or whatever. Lets talk about the principle of what were talking about here and understand a cash flow. Lets drop in the cash outflows into this slide and at the high level, summary level, so its not the detail and weve got some crop costs, 128, we got some costs associated with the livestock, 46, and you can see some of those other cost there. Overheads tend to be things that I cant directly allocate to either crop or livestock. So it might be interest on the loan. It might the rates on your property. It might be wages that you pay.

So overheads are more general in nature rather than specific for either crops or livestock. Well define this a little bit more when we get into the profit or loss down the track. At this point in time, Im just trying to show the concept of double entry bookkeeping and this is going to be the key of you building your own set of financial statements. So in this case, the business has repaid a loan of $50,000 so maybe there was a longer term loan that they had for plant and equipment in the past and they made their scheduled repayment of that in addition to the 60,000 they actually borrowed to buy maybe something new and maybe they borrowed the 60,000 actually to buy the motor vehicle because you can see it there at 57. I wonder if the bank will ring up and want 3 grand back, but lets not worry about that at this point in time.

So we repaid some principal off a loan and reduced the balance of loan by 50,000 and we also paid some interest on some loans, 40,500. Theyre two separate things and whilst in your bank statement they might show up as the same, principal and interest. From a financial perspective, we want to separate them out and well see that when we look at the double entry bookkeeping implications of what were doing. We summarize the cash flow and in this case if we take that we had 401 in cash going out and we only had 387,700 in cash coming in, weve got a negative movement. Weve gone backwards in our cash by 13,300, the difference between 401 and 387,700.

If our opening cash was over drawn 10,300 then we add on the backward movement and that gives us our closing cash position at the end of the season of 23,600. So obviously it doesnt look too good. Weve gone backwards in our cash and were more overdrawn at the end of the season than were when we were at the start of the season because we had more money going out cash going out, sorry, than cash coming in. So thats a high level cash flow. What I want to use this to do is illustrate the concept of double entry bookkeeping and then use this concept of double entry bookkeeping to help build some financial statements for your farm and this is what the practice activity will take you through.

So lets look at each one of these transactions and say, well, what is the other half of that transaction? Remember I said that theres two sides to any financial transaction so there must be another half, something else in our financial statements must be changing. And the only things that that can be is asset, liability, revenue and expense because the only five things that can happen in your financial statements, the other five broad headings. So we have the cash movement down here. So weve recorded one side of the transaction, cash, cash coming in, cash inflows or cash going out, cash outflows. But we havent recorded the other side of that. So if I stopped and ask you, if I received 168,900 for the sale of my grain, then what is that? Is that revenue, expense, asset, liability, or equity? So if I received $168,900 into my bank account for the sale of grain, most people would see that as revenue, its money Ive earned as a result of all the hard work Ive done. Thats revenue. Thats the definition we spoke about.

And on a similar day, $58,800 for livestock and whats the other half of that? Is it asset, liability, equity, revenue, or expense? And most people would suggest that that also is revenue, its the money Ive received here. So, theyre both revenues. But when we get to the next one when we got money from a bank, and if we stop and think about the definition of asset, liability, equity, revenue, and expense, I dont think that this money coming in is revenue because the other side of it if we define revenue as the money weve earned through the hard work weve done, we didnt do any hard work. We went to the bank and got some money from them. So, its a different relationship.

So, what we have here is either an asset, something I own that has value into the future, a liability, money I owe that Ive got to repay, equity. We said its not revenue, or it could be an expense. And if we think about the definition, then it becomes hopefully, recently obvious, that if you borrow money from the bank, that is money you owe that you got a future obligation to repay, it makes it a liability.

If we move down to our cash outflows, probably clicked on that one a little bit early, but if you think about costs, by definition, theyre the costs incurred in generating revenue and that makes them an expense. The other half of livestock costs once again is going to be an expense. The other half of overheads is going to be an expense. They are costs incurred in generating the revenue. I have to pay the rates and the insurance. Otherwise, I cant generate the revenue.

But when we get to something like repaying a loan, is this a cost incurred in generating revenue? Or is it something else? Is it asset, liability, or equity rather than revenue? And what youll find is if you think about the repayment of a loan, what youre actually doing is reducing the amount of money you owe. And our definition of the amount of money you owe was liability. So, the other half of repaying your principal is liability. Its a reduction in how much we owe.

If we pay interest on our loan and this is why we split the interest out from the principal. By paying the interest on a loan, were not reducing how much we owe. This is a cost incurred in having a loan and we needed the loan to help generate a revenue. We got a loan to buy some plant and equipment, or buy a chunk of land, or to fund an increase in our flock size. So, we got a loan, the interest we pay on it is the cost of having that loan. We needed that loan to help generate revenue. So, actually, interest is an expense, whereas principal is a reduction in your liability.

And the last cash outflow we see there is we purchased a motor vehicle. So, stop and think whats the other half when you buy a motor vehicle. Is it an expense? Is it a cost incurred in generating revenue for that year? Or is it something I own that has value into the future, an asset? Is it something I owe that Im going to repay in the future? And for many of us, when we stop and think about it, we go, Well, hang on. If I own the motor vehicle, and Im still going to own it next year and Ill own it the year after, thats something I own that has value into the future. That is an asset.

So, very quickly, what weve done is look at the other half of each one of those cash flow transactions. Some are revenues, some are expenses, some are assets, some are liabilities. And this is one of the reasons why your cash flow wont equal your profit and loss because some of the money coming in and out of your cash flow is not revenue or expense. Your profit and loss is all about revenue and expense.

So, Daniels answered the revenue, so I didnt actually see that when [audio gap] you were talking about the these months back up here, so thats good.

So, lets move across and see and I appreciate theres a lot of numbers on this, but Im going to take you through one by one. But what were doing here on the left-hand side and Ive just put it into a table, and then those other half of the transactions for this side here, what Im doing is Im putting them into a profit and loss [audio gap] balance sheet.

So, for example, the grain, the cash flow of $168,900, we said that that was revenue, so were going to put that into profit and loss as revenue. We said the livestock of $158,800 is revenue. We said that getting a bank loan was actually a liability. Now, the $60,000 doesnt match up with the $10,000 and the reason for that is because, remember, we repaid $50,000 of an existing loan. So, rather than I didnt have enough room on the sort of spreadsheet to have all sorts of different loans. Ill just put a total in there. So, the $60,000 we borrowed less the $50,000 we repaid gives us the $10,000. The $40,500 in interest is there as an expense. So, the $40,500 plus the $50,000 equals the $90,500. The $60,000 we got for the loan less the $50,000 we repaid. Weve recorded each of the other halves of those transactions. So, youre going to have to understand what was happening behind that to make that happen. We said that crop costs 128 were an expense, livestock costs were an expense, overheads were an expense. Out of the was actually an asset, plant and equipment. So you can see the 57,000 from the plant and equipment, the motor vehicle actually shows up in your balance sheet as plant and equipment. Weve said that this is movement in the balance sheet because remember, the cash whereas your balance sheet is at the end of 12 months. So were saying as a result of this cash flow, theres been an increase in assets of 57,000, and theres been an increase in your bank loan of 10,000, okay. Thats what were saying there.

So, lets look at a couple of other things here. Firstly, we can see that the profit is now 33,700. If we look at our cash flow, we saw that we went backwards 13,300 in our cash flow. By simply putting revenue and expenses into our profit and loss, and taking other cash flows and putting it into the balance sheet, weve ended up by turning a negative cash flow into a small 33,700, and we should be making decisions based on that profitability, as well as the cash flow, as well as the balance sheet. Its giving us separate information.

Lets look at something else here. If we click on the slide, youll see that the overdraft has now dropped in 13,300. So what Ive done is Ive taken the negative movement in the cash flow and put it in to my balance sheet, because remember I said that cash is just a type of asset, or if you are overdrawn, its a type of liability. The end figure will eventually end up in our balance sheet. So weve moved backwards 13,300. The other thing I need to calculate is the fact that we now owe some tax. Given weve made a profit, and remember Im keeping this simple, I havent put drawings in there, I havent put a range of other things. Im just trying to highlight some principles here. So if we assume tax thats sort of $0.25 in the dollar, then weve got some tax that we owe, 8,425, hence that weve got to pay that in the future, so that makes it a liability.

So our profit after tax is 25,275. And remember we said that that is a measure of the owners wealth, so that gets reflected in the balance sheet. So that 25,275 there actually shows up as retained profit in your balance sheet. So if I want to see did I get richer or poorer over the 12 months as a result of operating the farm, I look there and I say, Well, Im $25,000 better off. If I want to see the detail of how I got $25,000 better off, I look at the revenue and the expenditure. Similarly, have I got more cash or less cash, Ive got less cash, 13,300, I can see that in the balance sheet. If I want to see why Ive got less cash, I go across to the cash flow, and it gives me all the details of why Ive got less cash. So this is a summary measure, the balance sheet, and at the moment weve just got movements in there, we dont have the total. And the profit and loss is telling me all the things revenue and expenditure that have happened during the year.

So what Ive done is Ive just taken the other half of each one of those transactions and turned what looked like a loss or a negative position of 13,300 in the cash flow into a profit of just over 25,000, by putting revenue and expenditure into the profit and loss, and any asset and liability and equity items into the balance sheet.

So, any questions at this point on double-entry bookkeeping, and how we can use a cash flow to help us generate a profit and loss, and a balance sheet for our business? Give people a minute to think about that, and Ill flick across to the questions tab.

I can't see any questions going through. Good point, Christine. So at the moment were just showing movement. Christines asked what about the opening cash in the balance sheet. Were going to create the balance sheet in a minute by looking at the opening position, adding or subtracting the movement to get the end position. But Im just trying to keep it simple at the moment by identifying the movement. And you can see that the movement all adds up, that is, assets 57,000 minus my liabilities of 31,725 equals my equity of 25,275. So the balance sheet does balance. We will create that a bit more in a minute. Were going to focus on the profit and loss for a little while, but I just wanted to show how those entries that we identified in the previous slide actually show up in this slide. Good question, Christine, thank you for that. Just double check, no other questions, very good.

So lets move on to adding a bit of complexity to get more accurate figures. Because at the moment, weve prepared our profit and loss, and the balance sheet movements just from the money coming in and out of the bank account. We want to get a bit more accurate than that, because that may not be the best way to actually do it, because there might be timing differences between when the money comes in and when we actually make a sale.

And were going to look at two different types of timing differences to improve the accuracy of our profit and loss. Some of the scenarios we looked at before were to do with timing issues. You know, we sold some things but we hadnt received the cash for it yet. What we want to do in building a stronger profit and loss is take into account things that have happened in the business but maybe havent shown up in our cash flow yet.

So we want to match revenue with the expenses incurred in generating it and some of the examples like I gave you before that wasnt actually happening. And Ive got a couple more different generic sort of examples just here.

If we look at the first one, movement in the tradable assets, the assets we sell. This could be things like the assets we buy and sell on a regular basis, sorry. This could be things like stock, fodder, supplies, inventories, a whole range of different things. The balance of these items is going up and down. In our profit and loss, we only want to record the amount weve actually used, not the total amount weve spent from our bank account on something. We might get a good deal on fertilizer so we go and we buy a whole heap of it. We dont want to record all of those purchases as an expense because we might have a heap leftover at the end of the season for next season. So we only want to record the stuff weve actually used.

The stuff thats left over, were going to record that as an asset because thats something I own that has value in the future. So as our levels go up in everything from maybe even our flock size to the grain we have on hand, to our supplies, as these levels go up and down, we need to find a way to just record expenditure and match that to the revenue it helped us generate. We dont want to record the cost of all the fertilizer when weve got some of it left over at the end of the season.

And the way we do is through that little formula there that says opening inventory, plus any purchases, less what weve got in the end, equals how much we must have used. The closing inventory at the end will be an asset, something we own that has value into the future. The inventory cost will be in expense. It is the cost of helping us generate that revenue. So we need to consider that and maybe make some adjustments to our [audio gap] sort of movements.

And the next one is businesses often operate of promises rather than actual cash. So sometimes people promise to pay you money and hopefully they do rather than dont. Or sometimes you promise to pay money to someone else and you pay them 30 days later, 60 days later, 45 days later, whatever, whenever the account comes in or whenever you get around to paying it. This is called debtors and creditors, accounts receivable and accounts payable. If people owe you money, they are debtors and thats account receivable. If you owe money to people, then thats accounts payable or creditors.

You owe this money to someone, still means its an expense. So weve got to record this as an expense but its not a cash flow because we havent paid for it yet. So were going to create an entry to reflect that. And conversely, if someone else owes us money, weve got to create an entry to reflect the fact that weve made a sale but we havent collected the cash. So we need to make some adjustments to our cash base reporting to actually allow for these important transactions that are happening so that we get more accurate profit and loss by matching revenue with expenditure.

So thats the principle were talking about here. And it is explained a bit more in the notes that some of you have and Im going to follow up and make sure all of you have following this webinar if you require a bit more information on that.

It might make more sense if we look at some examples. So lets look at if you are still owed $42,000 for this years grain which is sold, what you would do to improve your profit and loss and make it more accurate is record that as a sale this year because its a result of this years effort that you made that $42,000. And the balancing entry would you would be that you would create an asset called accounts receivable and increase that by $42,000.

The second example, livestock sold included reduction in the book value of your flock. So you did the opening inventory plus purchases, less closing inventory. What we need to do is increase our livestock cost by recording that reduction in our flock size of $17,000 and also record that weve got less sheep on hand and reduce that by $17,000. So we need to create those entries to reflect the fact that weve used up some of our flock to generate the revenue this year and its not a cash flow, but it is a cost so we need to create that.

We still owe some contract workers $6,000 so we increase our overheads by $6,000 and we increase accounts payable by $6,000.

And the last one there says your cropping costs included an $18,000 worth of grain retained for next year. We want to increase an asset grain on hand or whatever were going to call it by adding $18,000 and maybe reduce that cropping costs because the costs of that $18,000 that our cost to produce that is not related to this years revenue. Its going to be related to next years revenue when we use that grain next year.

So just trying to give some examples of these adjusting kind of entries to end up with a better a better a more accurate set of financial information. Ill just show you how this works in the profit and loss in the balance sheet. Christine, come back and see whether that answers your question.

So the $17,000 of livestock that you sold is already included in your sales. What were saying is that the way you generated that was part of reducing your flock size. So we need to record that as a cost of generating that extra revenue. Okay? So it might be making more sense when I show you the next slide which is basically the slide you saw before.

Lets just focus on the profit and loss at this point in time. What weve done is weve taken the 189,000 or $168,900 and weve added - sorry, Ill get back up. Weve added the $42,000 onto the 168,900. And in doing that, we came up with a figure of 210,900. So weve created that entry to reflect that people owe us money for the grain.

What else have we done? Weve actually taken our livestock costs and we said that we need to increase them by $17,000 to reflect the use of our flock and the reduction in the flock size. So we took the $46,000 livestock costs there and weve added the $17,000 to come up with $63,000 as our livestock costs. Now overheads with our $79,500 previously and we still owe $6,000 to contractors, so we added the $6,000 onto our overhead expense.

So in doing those entries that weve just identified previously, and recording the impact its had on our profit and loss, what weve ended up with is a profit of $70,700 rather than the $33,000 we had before. Weve got a more accurate figure because weve matched revenue with expenditure.

So in terms of Christines question, the $17,000 was already in our livestock sales. What we havent done [audio gap] the fact that weve reduced our flock size to make those sales. So we had understated our costs and we needed to reflect the reduction in our flock size in this cost here.

So in doing that, weve had some pluses and minuses, but weve ended up at a healthier profit figure and it was by creating some entries to match revenue with expenditure that we actually got there. So I just want to stop there because theres been a bit of information to digest before we move on to the balance sheet.

And weve got about 15, 20 minutes to go and that will take us through to about an hour and a half when we formally started at 9:15, just to give you a bit of heads up of where were heading timing wise. So any other questions around that? I know its a bit to look at but I guess in the slides and indeed into the notes, if you stop and look at the numbers and figures, you can start to see where they come from and Ive tried to colour code them so that you can see where the numbers and figures are actually showing up.

Now, Christine asked some good question before about what about the opening position of cash? This is the $10,300 so lets move on to the balance sheet. Ill just stop and check and see if theres any questions.

Ill move on to the balance sheet. And what we see here is Ive now created because I had a running total, I had last years balance sheet so I've put that in there as the opening position for this year. And this is the $10,300 we saw in our cash flow was the opening cash position. We went backwards $38,300 that means were overdrawn to $23,600. So this is from last years tax return, last years balance sheet that youve prepared. So you need the previous years balance sheet as the starting point to either add or subtract the movement. We've got $80,000 worth of grain because weve held that over for this season. Weve reduced our flock size from $46,000 by $17,000 to help us generate those sales, so now the value of our flock is $29,000. Weve got $42,000 owed to us for that grain that we sold that we havent received the money for yet, and we owe $6,000 to some contractors.

So weve recorded the other half of these adjustments entries. And the adjustment entries [indiscernible] [1:15:59] match revenue with expenditure so we have more accurate figures for making better decisions. And Ive tried to colour code those so we can now see our closing balance sheet. Our opening is moved from there to there. The movement has been caused by our profit and loss and our cash flow.

If we zero in a bit further on the balance sheet, if were going to use this information to help us make decisions, then the values that are recorded in our balance sheet, especially for our assets, may not be as accurate as we would like. We tend to record things on what it cost us rather than what its worth. So accountants are great ones for historical costs rather than market values. If youre going to make decisions about your farm, I think you need to use more market values than historical costs, especially for the assets, because we want to know realistically what is that worth.

A really good example would be land, for example. If the last time you had your land valued and put into your balance sheet with your accountant, the figure might be 5, 10, 15, 20 years old, and its never been adjusted for market value. You dont have to adjust it for market value for accounting purposes, but if we want to make decisions about now and the future, its more important if we understand what is a realistic value rather than what is a historical value from 5, 10, 15, years in the past. We want to know the market value of our flock, not what it cost us to produce that flock. So we want to stop and rethink about the value of our assets in our balance sheet.

So what Ive done here is take that balance sheet that we just created and said, Hang on, are these accurate figures? Are these good figures? I know they are book values, but are they market values? The key [inaudible] [1:17:56] some rationale or logic as to how you created them. Otherwise, there might be a temptation for you to make them overly optimistic.

So we want them to be almost worst case scenario rather than best case scenario and then best case doesnt happen and we based all our decisions on everything working out really well and it didnt. Were better off maybe making decisions understanding that the figures and numbers are most likely worst case, towards the bottom end of expectations rather than the top end. So we need to be conservative and have some logic and rationale.

And this mainly applies to assets, so lets look at something like grain. If you had this much grain on hand, 34,000, and it cost you 34,000 to produce, maybe if I look at the market value of how many tons and the type of grain that is, and maybe if Im a bit conservative and say, Okay, lets take 80% of the current market value, I might end up with a figure of 107,000 as 80% of the current market value of the amount of grain I have on hand. So were looking at market values here because were talking about management figures rather than compliance figures for the tax office. So the book value is more your compliance type figures whereas the market value is more your management decision making figures.

Similarly, if I take the last three [inaudible] [1:19:27] livestock and I look at all the different livestock I have and I multiply all that out, I might find the market value is actually 67,000 rather than the book value of 29,000. If people owe me $42,000, then Im not going to put in $50,000 there. Unless I have reason to believe that theyre not going to pay me, Im going to put it in at $42,000 because that is the market value.

Now, my plants and equipment is actually in the books at 583,000, but if I look at what Ive got it insured for, or if I look at the salvage value, if I went to auction and had to sell it quickly, maybe its only worth 462,000. Maybe thats a better indicator of the true value of the assets that I own. So you could use something like salvage value or insurance value.

And heres one way [inaudible] [1:20:26] valued quite some time back, and weve got a valuer out [phonetic] [1:20:30]. Some people use your rates assessment, but that tends to be very old and maybe outdated and not really market value. Maybe you use your own sort of knowledge or a farm consultant to give you an indication. Maybe you price leasing some land off someone or buying land and you know current sales. Theres a number of ways that you might work out a conservative value of the land that you own. And in this case, weve come up with 3.5 million, which is obviously a fair bit more than 1.78 million.

Okay, so were now moving on to the liabilities, which tend to be as per your book value or as per your bank statements. So we dont tend to understate how much we owe, that wouldnt be conservative. We owe that much at least, so we need to put those figures in there.

What we need to do then is just use our capital, our equity, as a balancing item between assets and liabilities. If I take my liabilities at 458,000 away from my assets of 4.178 million, then what I get is 3.719 million. I know Ive got this much profit in the business, so the difference must be this figure here. So in effect, my equity in the farm is not the book value of 1.9 million, its actually closer to 3.6 million or a bit more.

The key thing is to have conservative, consistent, logical, rational approaches for putting a market value on your assets in particular. Now, weve got a set of figures which are more accurate for us making decisions, for us benchmarking against others rather than something that might help the tax office work out how much tax we need to pay and be historical in nature rather than future-orientated for decision making.

Okay. So thats probably is much as Im going to do on the numbers and figures. And the homework activity is actually taking you through all the steps from creating a cash flow through to what are the other sides to those entries, heres a basic profit and loss and balance sheet, lets [inaudible] ]1:22:38] to the profit and loss to make it match revenue with expenditure. Lets think [inaudible] [1:22:44] of our assets so weve got a better picture of what we own and what we owe and how much is ours, and do that for your farm. So thats basically the homework activity and the notes, and indeed the PowerPoint might help you actually go through that.

What does this mean? I guess it means in terms of your financial information is prepare a cash flow budget at the start of the year, at the start of the season, maybe even for your profit and loss. As you go through the year, compare whats happening especially around your cash flow, because thats about here and now. Maybe quarterly you want to compare it to a profit and loss and budget, but at the end of the year, you definitely want to compare the totals of what you projected at the start of the year to what actually happened at the end of the year for your cash flow and for your profit and loss. And then build a balance sheet at the end of your [inaudible] [1:23:39], say the end of February. So starting March, go through to the end of February, end up with three key financial statements to give you a full picture of your financial position, not just one picture of your financial position.

This is a bit different to what your accountant may be doing because timing-wise its different, based out of the 1st of July theyve got quarterly BAS statements. Theyre working with historical rather than market values. And theyre using this to work out how much tax you owe rather than to help you make better decisions on the farm. So theres a big difference between the compliance type figures that your accountant works with compared to the management figures weve just spoken about.

What we now have is a statement of position thats going to help us with some of our long-term decisions or balance sheet, whatever you want to call it. Weve got some profit and loss figures thats going to help us with the medium sort of term decisions. And weve got a cash flow thats going to help us make short-term decisions.

The key thing is we want our short-term decisions to fit with the medium-term decisions to fit with the long-term decisions, so were heading in the same direction rather than just focusing on the here and now and thinking about, Where do I go from here? by just looking at our cash flow.

So that sort of is the main content. Were just going to do a bit of a summary sort of here.

These were the three things that we wanted people to take out of this webinar. Understand that theres a difference between a balance sheet, which is assets, liabilities and equity, a profit and loss, which is revenue and expenditure, and a cash flow, which is cash in, cash out three different things. Together, they give you the full picture. On their own, they only give you a slice of the picture.

Weve then gone through a mechanism in a way that you might be able to build some of these financial statements if you dont have them already, or improve the ones you currently have, such that you can make better decisions. And lastly, hopefully, weve helped you improve the quality of financial information or given you some tools to help improve the quality of the financial information so you can make better decisions.

So we do have some references, and all of them are on the web so its just a matter of clicking the link and it will take you through to those. And theres a bit of a description of each one of those references there for your benefit.

And just lastly, to ask if theres any final questions that people have over what weve talked about, Ill go through the homework step by step because Im getting some feedback that not everyone has a homework there. But essentially, it is going through those steps weve been through on the webinar but applying it to your own farm such that you end up with a balance sheet based on market values, profit and loss based on matching revenue and expenditures to get and supplementing and complementing the cash flow statement or the bank statements that you currently have. So thats going to be the homework activity.

Ive really enjoyed I want to say talking with you but maybe talking at you and reading what you have to say. And I really look forward to catching up with you if you want to next Monday or Tuesday. And I think its next Wednesday is our webinar at 9 oclock in the morning, and were going to be moving on to the balance sheet and some longer-term financial ratios and maybe helping you set some of those longer-term objectives which your short and medium-term decisions need to feed into.

So Im going to wrap things up here, and youll see the webinar so its now the recording will be available soon. And in due course you will also get a link to be able to replay the webinar. So thanks very much, guys. I look forward to talking to you next week if not before. See you later.

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