Business management terminology can often be confusing and difficult to wrap your head around. One of the most common resources that we have been asked for during Young Farmer Business Bootcamps is a glossary of terms.
We have listed some of the most common terms used in farm business management and planning here for you to help improve your understanding.
Asset – Assets are resources owned by the farm business.
Capital – Items that have not been used up. Some examples include tractors, land, buildings, equipment and money.
Capital Investment – Funds used to acquire assets such as equipment, land or stock, or used on improvements that have a life of more than one year and add to the productive capacity of the farm.
Depreciation – The loss in value of a capital item as it gets used or becomes older.
Earnings before interest & tax (EBIT)/ Operating profit – Gross income less variable and overhead costs.
Employed labour cost – The cost of any paid employee in the business, including on-costs such as superannuation and workcover.
Equity – This is the value of assets minus liabilities. It is equal to the total value of capital invested in the farm business by the owner/operator(s), and is often expressed as a percentage of total assets.
Gross income – This is the total cash and non-cash farm income earned by the business. It might include milk, wool, livestock and/or grain sales, the value change in livestock inventory, and other income; such as interest earned or farm rental income.
Gross margin – Gross income minus variable costs. This can be calculated on the whole farm, or as an activity gross margin.
Imputed labour – This is the value put on any work carried out in the business that is not directly paid for by wages or salary, such as from farm owners and family members. It is usually assigned an industry agreed cost based on an hourly rate for time worked and is valued as an opportunity cost.
Liability – Liabilities are the debts owed by the business. Liabilities are usually separated into current (short-term) and non-current (long-term) liabilities.
Livestock trading schedule – A budget used to estimate the annual contribution to gross farm income of animals by accounting for the changes in the number and value of livestock during the year (births, sales and deaths). It is calculated as the trading income from sales minus purchases, plus changes in the value and number of livestock on hand at the start and end of the year.
Net cash flow – The difference between the money received and the money spent in any period.
Net farm income – This is the profit remaining after the cost of interest on borrowed funds and lease costs have been deducted from the operating profit.
Non-cash costs – Costs that are not usually dealt with by the accountant but impact business performance. Examples include imputed labour and livestock inventory changes.
Non-cash income – Income that occurs through asset appreciation. Examples include capital gains and livestock inventory changes.
Other income – Income to the farm business from other farm owned assets and external sources. This could include dividends on shares owned by the farm, interest payments received, and rents from farm investment properties.
Opportunity cost – The amount of net benefit that is given up by choosing one alternative action over another.
Overhead costs / fixed costs – Overhead costs are the costs that are incurred when operating a farm business, but are not directly related to the size or production on the farm. Some examples of common overhead costs include labour costs, insurances and registrations, repairs and maintenance, accounting costs, superannuation, and bank charges.
Principal – This is the amount of capital borrowed when a loan is taken out. Principal repayments are the amounts of capital repaid to settle a debt.
Return on assets (RoA) – The annual operating profit expressed as a percentage of total assets. It measures how efficiently resources are being used.
Return on equity (RoE) – Net farm income expressed as a percentage of equity. Measures how efficiently owned capital is being used.
Variable costs – All costs that vary inline with the size of production in the enterprise. Some examples of common variable costs include herd, shed, feed costs (including feed inventory change), freight costs, animal health, seed, fertiliser and chemicals, and contractors.
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If you have others please add them to the list in the comments or if you have terms you still need help understanding why not ask one of our experts?
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