It was time to discuss finances at the April meeting of the Tallangatta Focus Farm Support Group at Mark and Narelle McDonald's, in particular the financial details of Dujoc Pty Ltd, Mark and Narelle's trading company.
The McDonald's operate a company rather than a partnership. This means they can be employees of the company, drawing salaries, paying tax, and most importantly be covered by Workcover. Ray Carty, the McDonald's accountant, has been encouraging them to pay themselves as employees rather than simply taking drawings, even if these payments are conservative.
At the time of the meeting Ray had also done an interim position of taxable profit for 2011-2012. He regards this as good business as it allows time to develop legal appropriate strategies to minimise tax payable before June 30. His estimate for Dujoc Pty Ltd is a taxable profit of about $160,000 from the 390 cow dairy business.
Importantly, if the McDonald's can increase expenditure on justifiable inputs by $30,000 then the tax payable will reduce by $6,500. Farm Management Deposits and superannuation were not deemed appropriate in this situation, because this would permanently drain an already tight cash flow. Mark and Narelle will pre-pay a range of inputs such as grain and fertiliser, which will be used between July and September. This will tighten cash flow in June but it will be back to normal by September.
In addition to profit and tax planning, the group also discussed the debt level and debt servicing on the farm. The details remain confidential, but the McDonald's business has about 80 per cent equity, which is great, but it must be remembered they lease the land they farm including the out paddocks, so at this stage no land is owned. The cash flow is tight because the business is still growing.
Some outcomes and comments from the group included:
- Based on 390 cows, the total debt servicing on plant and equipment, cows, and leasing of land equates to $630 per cow per year, or $1.20 per kg milk solids, which is quite high (20 per cent of income). As the herd grows to 450-500 in the next two years this will dilute the lease and finance costs (as long as the extra cows are profitable).
- The debt servicing is partly interest only, the remainder on equipment with both principal and interest repayments. The group reviewed the debt structure and interest rates and suggested, as some of the debt rolls over in spring, this will be an ideal time to review the debt structure and perhaps consolidate more into principal and interest.
- A detailed and confidential GST-inclusive cash flow budget will be done for 2012-2013, not just a production, lumped finance costs and income budget. This will monitor cash flow more closely next year.
This was an excellent meeting that highlighted the differences between the tax and cash worlds, and the thought processes involved to achieve good outcomes for both. At the end of the financial year the true dairy business profit will be assessed.
Note: The next Focus Farm Field Day will be held on the farm on Thursday, July 5. The main topic will be 'What's Happened to Fertility in Dairy Herds and Why?' This will include a review of the Focus Farm's herd fertility performance.