At a recent FCG training event we looked at a case study on a dairy farm, discussing the implications of the loss of the BPS alongside succession planning and whether the business could remain viable in the future.
As part of the discussion, we used a tool called backwards budgeting. This enables you to work back from the profit the business needs, through your fixed costs to what the farming enterprises need to generate to meet the required profit.
Profit requirement is made up of private drawings, loan repayments, tax, HP payments and capital re-investment. Once you know this figure you can then add in your fixed costs for running the business and finish up with a target farm gross margin that the business enterprises need to generate. In this particular situation, we could then look at the farm gross margin with and without subsidy to see what, if any the short fall would be. Once this is known discussions can be had as to how additional income can be generated or costs reduced to make up the shortfall in profit that occurs when the BPS is removed.
This was a fairly simple exercise and did not take more than a couple of hours to work through but has given the business an indication of future viability four years before the BPS could end.
Do you know your profit requirement? How would your business cope without a BPS payment? If you wish to discuss these areas, please contact Phil on 07798 673665 or e-mail firstname.lastname@example.org
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