Phoenix - User Help

Gross income is calculated as sales, plus change in livestock or commodity inventory, plus produce used on farm, less purchases of livestock or commodities.

Inventory change is the closing valuation minus opening valuation of stock and commodities of the enterprise in question. Since a gross margin reflects the profitability of the enterprise and not its cash flow, unsold commodities used and stored on the farm are valued at the market price.

Enterprise variable costs are those costs directly attributable to an enterprise, and vary in direct proportion to the size of that enterprise. For example seed, irrigation water, fuel, herbicides, pesticides, fertiliser, fodder, drench, etc, are variable costs. Variable costs increase with the size of the enterprise.

A gross margin does not include fixed costs. Fixed costs are costs that do not vary with the size of an enterprise. Permanent labour, accountancy and taxation payments are examples of fixed costs. Gross margins do not include costs such as fuel for the farm utility that cannot be directly attributed to an enterprise. Such costs are often referred to as overhead or operating costs.

The Phoenix gross margin is calculated from three basic components:

Incomes

The income of an enterprise includes:

•any cash sales of enterprise products - hay, grain, wool or livestock, for example.

•any usage of enterprise products on the farm. A common example is grain fed to livestock rather than being sold. Though it does not produce a cash income for the enterprise it is directly linked to profitability. Uses of enterprise products within the farm effectively represent the sale by one enterprise and the purchase by another, with no actual cash transaction.

Costs

Variable costs are expenditures directly attributable to enterprise production for a particular management period.

As for incomes, a number of non-cash items are also considered. If a livestock enterprise uses grain produced on the farm, the value of this grain is considered as a cost to that enterprise. If the grain was not available on the farm there would be need for it to be purchased. The purchase of such grain would affect the profitability of the enterprise. Hence both cash and non-cash items are included when examining the production costs for a particular enterprise.

Change in Value on Hand

The change in value on hand accounts for any change in the size of an enterprise and/or any production that is stored rather than sold.

Produce that is stored does not generate cash income for the enterprise. Hence the value of produce in store at the end of the report period is estimated by valuing it at net market value. The net market value of a product is the expected sale price, less the cost of selling such as commission and freight, with all GST removed. The net market value is often referred to as the farm gate price. This improves the estimate of the profitability of an enterprise for the report period.

It is also necessary to account for increases or decreases in the quantity of livestock or commodities on hand. This is particularly relevant when livestock numbers are changing. If livestock numbers are increasing, the cash profitability of an enterprise is reduced due to decreased sales or increased purchases (the reverse applies for decreasing livestock numbers). Including the change in the value of stock on hand gives a more realistic evaluation of the profitability of an enterprise by offsetting the lower cash profitability.

Result

The gross margin is calculated in Phoenix by subtracting cost and any change in value on hand from the income generated by the enterprise during the report period.