Dynama+ Assumptions

The concepts underpinning the Dynama+ program

The core of Dynama+ is a ten year livestock schedule that shows the annual flow of cattle through the herd. The flow of cattle and the performance described for the herd drives all of the outputs of the model.

Measures of profit and cash flow in Dynama+

The Dynama+ program calculates a range of financial measures that include both cash and non-cash components in their construction. The key measures calculated are net worth, cash flow for debt service, net income and return on total capital (in dollars and percent). The relationships between these measures and what they mean is discussed in detail in the appendix of this user manual. In summary:

• Net worth is calculated as the total asset value less total debt as at a particular date. Net worth is also known as “equity” and may be expressed as a percentage.
• Cash flow for debt service is calculated by deducting all cash outgoings (except loan service) from all cash inflows. Note that this differs from the definition of cash flow in the discussion of accounting measures in the appendix, which is net of debt service. In Dynama+, the cash flow for debt service is put first towards the service of term loans, with any surplus going into the working accounts and any shortfall funded from working accounts.
• Cash in and cash out include all cash components of the net income calculation, plus items of a private or capital nature that are not part of the net income calculation. The latter include family living expenses and taxation, capital expenditures, receipts and other capital transactions including gifts given or received and transfers to or from other accounting entities.
• Depreciation and livestock inventory change, which are part of the net income calculation, are not included in the cash flow calculation since they are not cash.
• Net income is defined in Dynama+ as being equal to gross income, including the increase or decrease in livestock inventory value, less all variable and fixed costs including interest and depreciation. Net income includes some non-cash items (inventory change and depreciation) and excludes some cash items (tax, family expenses, capital transactions and loan reductions). Net income is thus not the same thing as net cash flow.
• Depreciation is the annual provision made in profit budgets to spread the cost of capital items such as vehicles, machinery and fences over the period of use of these items. Such capital costs, rather than being charged against net income as they occur, are smoothed over time and charged annually as depreciation. These capital costs will show up in a cash flow budget (and in Dynama) as lump sum outlays. If funded by borrowing, there will also be a cash inflow as the loan is received, and a series of outflows as the loan is repaid. Leased capital does not show up in the depreciation calculation (or in the balance sheet) but appears as a lease payment in the calculation of net cash flow or net income.

Budgets constructed in Dynama+ need to observe the limits on stocking rate (adult equivalents), working account balances and total debt that apply in the real world of the beef enterprise being modelled.

Profit versus cash flow

A profit and loss statement is one of the three main ways used to look at overall business outlook and performance - the cash flow budget (or statement of sources and uses of cash) and the statement of assets and liabilities being the other two.

Cash flow statements and budgets are regularly drawn up to monitor or predict short term cash flow but looking at short term cash flow on its own can paint a very misleading picture of the direction of a beef business. A cash-flow statement /budget show the cash expected to come into and go out of a business over a given period. It can indicate the amount of working capital that may be needed from outside sources and whether it is possible to fund the production cycles of the business within the current borrowing limits negotiated with the lender.

A cash-flow budget can bear little relationship to the actual profitability of the business as it may include things like capital income and expenditure, new loans, off farm income and personal expenses. A cash-flow budget also does not reflect the non-cash items such as unpaid operator’s allowance, depreciation or increases/decreases in the value of inventories. Estimating these things in a profit budget allows a more accurate estimate of how efficiently resources are being used.

Profit and loss statements or budgets are constructed to estimate the profit of a business over a given period so therefore focus on the efficiency of resource use within the business. It can be argued that profit can only really be measured once the investment is finalised and all of the inflows and outflows accounted for. As most beef businesses have an effective investment life that may span decades, the estimates of profit derived will apportion values to capital at the start and end of the time period of the analysis. In this way any improvement in the underlying value of capital or a change in the livestock and plant inventory due to a change in strategy can be included in the estimate of profit made.

Figures 26 and 27 indicate the differences in the standard measures of farm performance when profit and cash flow are being considered. Figure 26 identifies the various components of how we estimate profit (efficiency). The direct links between the change in equity over the period and profit can be identified.

Figure 26: Profit diagram

The important thing about Figure 26 is the direct link between profit and growth in wealth.

Figure 27 indicates the calculation of liquidity and the net cash flow before and after debt servicing. When Figures 26 and 27 are taken together they represent the balance sheet of the business, the profit and the net cash flow.

Figure 27: Cash diagram

Figure 28 provides a typical layout of a livestock trading schedule compiled to calculate the trading profit of loss on a beef enterprise. Note that livestock sales does not always (rarely) equals livestock trading profit.

Figure 28: Livestock trading schedule

Figure 29 shows the profit analysis for the example beef enterprise. The trading profit or loss calculated in the schedule is transferred to the profit and loss statement.

Figure 29: Farm management profit and loss statement for a beef enterprise

A livestock gross margin is the gross income from an enterprise less the variable costs incurred in achieving it. It excludes fixed or overhead costs.

The total cash costs need to be allocated to five main subheadings when profit is being calculated and profit budgets are to be prepared:

• Variable costs: costs which change according to the size of an activity. The essential characteristic of a variable cost is that it changes proportionately to changes in enterprise size (or to change in components of the enterprise). Variable costs are the total of selling costs and husbandry costs in Breedcow and Dynama.
• Fixed (or overhead) costs – These are defined as costs which are not affected by the scale of the activities in the farm business. They must be met in the operation of the farm. Examples include: wages and employee on-costs, repairs, insurance, shire rates and land taxes, depreciation of plant and improvements, consultants fees, operators allowance for labour and management. Some fixed costs (like depreciation or operator’s allowance) are not cash costs and will be estimated for inclusion in the calculation of operating profit. It is also usual to count the smaller amounts of interest paid on a typical overdraft or short term working capital as an operating expense (fixed cost) and deduct them in the calculation of operating profit. In a profit analysis, the larger amounts of interest or leases are defined as the returns to lenders of fixed capital and not as a cost. They are deducted in the calculation of net profit as non-operating expenses.
• Non-operating expenses (including the returns to lenders of fixed capital) - These are items unrelated to the farm business operational activity. They generally cover the amounts allocated to such things as interest, rent and leases. They include amounts paid by the business for the use of capital provided by various lenders of capital external to the business and are deducted from operating profit to calculate net profit.
• Personal costs - Family and other personal costs not incurred in operating the business and would largely continue if the business was wound up.
• Capital costs - purchases of significant capital equipment. The cost to the business of capital equipment is apportioned as depreciation in a profit analysis. Depreciation is a form of overhead or fixed cost that allows for the use / fall in value of assets that have a life of more than one production period. It is an allowance deducted from gross revenue each year so that all of the costs of producing an output in that year are set against all of the revenues produced in that year.

Profit terms

Operating Profit: is the return to total capital invested after the variable and overhead (fixed) costs involved in earning the revenue have been deducted. Operating profit represents the reward to all of the capital managed by the business.

Operating profit = (total receipts – variable costs = total gross margin) – overheads

When operating profit is expressed as a percentage return to total capital it indicates the efficiency of the use of all of the capital managed by the farm business.

Net Profit = Operating profit less the returns to outside capital (and other non-operating expenses). As the returns to lenders of fixed capital (interest, rent and leases) are deducted from operating profit in the calculation of net profit, it therefore represents the return to the owner’s capital.

Net profit minus income tax minus personal consumption (above operators allowance if it has already been deducted from operating profit) = change in equity. Net Profit is available to the owner of the business to pay taxes or to provide living expenses (consumption) or can be used to reduce debt. (See figure 27)

When net profit is expressed as a percentage return to the owners capital it indicates the efficiency of the use of the owners capital invested in the farm business.

Figure 30 shows a typical calculation for the percentage return on total capital, one of the main efficiency criteria for a beef business. It is calculated by dividing the operating profit by the total capital managed. The percentage return on equity is calculated by dividing the net profit by the owners’ equity and represents how well the owner’s capital preformed.

Figure 30 Capital invested and return on capital

How useful a measure is the percentage return on total capital or the percentage return on equity? When a change is being considered it is probably better to look at the return to the extra capital being invested not the total capital invested. This is unless the change being considered is to shift all of the capital out of the current beef business.

The profit statement shown in Figure 30 is once again a snapshot that can be useful information but does not give us much guidance as to the best strategy to follow in the future. We will apply investment and cash flow budgets to do that task. The absolute and relative value of historical Operating and Net Profit may tell us something about the capacity of the business to fund change but tells us nothing about which change in management strategy may make the most improvement in the profit generated by the business.

The analyses included in later exercises will apply a partial discounted cash flow budgeting method that looks at the difference between two strategies over time. This is done in the Investan program.

How adult equivalents, prices and variable costs are calculated in Dynama+

The calculation of adult equivalents and husbandry (variable) costs is based on the number of livestock carried for the whole year plus (sale) stock carried for only part of the year. The number carried is calculated as the opening number plus purchases minus sales minus spays. For spays, the calculation is the opening number plus new spays minus sales.

Husbandry costs are applied to each age and sex group of “kept” cattle (on hand for the whole year) and to each age and sex group of sale cattle.

Sale prices of cattle are entered in the Prices worksheet and are transferred net of selling and freight costs to the Dynama worksheet. Prices for purchased cattle should be entered as landed prices (including any inwards freight or other buying costs) unless inwards livestock freight and other associated purchase costs cannot be separated out of the general running costs of the business.

Variable costs and adult equivalents can be allocated to both the “number carried” and sale stock but deaths cannot be allocated to stock identified for sale. This is because animals identified as being sold in any period are no longer in the “number carried” and cannot have deaths put against them.

If deaths in sale stock are likely to be an issue, the expected losses in that class of livestock will need to be increased in the period prior to sale. Since sale cattle are generally sold in northern Australia before the dry season, when mortality rates increase, assuming zero losses over the wet, i.e. on sale cattle, is unlikely to be a serious error.

Steers or other classes of livestock that are purchased and sold within the one twelve month period will not have any losses automatically deducted as they will not be included in the calculation of the “number carried”.

Special attention should be paid to the variable cost entries for weaners, since the husbandry costs for weaners cover the weaning operation itself as well as the period following weaning. Weaning costs such as vaccinations and hay need to be applied to both kept and sold weaners, while subsequent supplementation, the application of a growth promotant etc. may apply only to the “kept” (unsold) weaners.

Adult equivalents are applied to the weaner group from age five months until twelve months of age. All other non-sale groups have adult equivalents applied for twelve months. Sale groups of livestock have an adult equivalent rating applied for the period from the month of average age of calving (“birthday month”) to the month of sale. These ratings are applied in the AECalc worksheet and can be varied across the ten years of the Dynama+ program.

What are adult equivalents?

Adult Equivalents are calculated using the same process in all Breedcow and Dynama programs with Dynama+ allowing users to consider the impact of change on both cash flow and grazing pressure over time.

For all Breedcow and Dynama software, the default value used for an adult equivalent is for a non-pregnant, non-lactating beast of average weight 455 kg (1,000 lbs) carried for 12 months. Animals of average weight over the 12 months of more than or less than 455 kg are rated in proportion to their average bodyweight over the period. Thus a beast growing from 450 kg to 600 kg (average 525 kg) would be rated at 1.15 adult equivalents for twelve months.

Animals carried for periods other than twelve months, e.g. sale cattle carried three months into the budget year are rated on time carried as a fraction of twelve months. A beast carried 3 months and growing from 400 to 440 kg (average 420 = 0.92 adult equivalents if carried for 12 months) would be rated at 0.23 adult equivalents (a quarter of 0.92).

An additional allowance of 0.35 adult equivalents is made for breeders rearing a calf. This allowance covers the extra nutritional requirements of pregnancy, lactation and incidental forage consumption by the calf until age five months. The rating is placed on the calves themselves, effectively from conception to age five months. Their mothers are rated entirely on weight.

Five months is an arbitrary age beyond which the former “calves” are rated purely on weight. This age may bear no relationship to the age at which they are actually weaned.

The AECalc worksheet is used to calculate adult equivalent ratings, based on weights and months carried, for each group. Values for the AECalc worksheet in Dynama+ can be imported from an AECalc sheet in Breedcow+. The values for the first year in the Dynama+ AECalc sheet are automatically transferred to the remaining nine years but can be overwritten where weights or appetite change over time. This is important where a supplement feeding program is under consideration or being altered.

Adult equivalents and feeding supplements

There are some adult equivalent calculation issues that arise with cattle receiving feed supplements that may need to be considered if systems that provide supplements are to be compared to systems that do not.

The adult equivalent rating is used to represent comparative pasture consumption. Since phosphorus and non-protein nitrogen (e.g. urea) supplements work in part by increasing feed consumption, the potentially increased consumption of the supplemented herd may only be partly captured through the increased weight of supplemented cattle. One solution is to use a lower weight as the adult equivalent standard for supplemented cattle, thereby calculating higher adult equivalent ratings for them.

There may also be issues with energy supplements such as molasses if the adult equivalents are being supported in part by pasture and in part by the supplement. A possible solution is to increase the stocking rate limit by an amount equivalent to the feed value of the energy supplement.

These issues are especially important when assessing the economics of supplementation. Care needs to be taken when comparing supplemented herds with herds that are not supplemented to avoid overgrazing. Appetite and pasture consumption may vary by more than 30% for a breeding herd depending on the level and type of supplementation.

One solution is to initially calculate the AE rating for the herd that does not receive supplements and then reduce the AE rating for the herd that does receive supplements by (an initial) 30%. Once the expected benefits of the supplementation program have been implemented in the “with supplements” model the differences between the profit, cash flow and herd numbers in the two models can be compared.

Where a supplementation program is being implemented over time and some delay is expected in the impact on such things as conception and mortality rates, the two Dynama+ models (with and without supplementation) can be compared with Investan to identify the net benefit of the strategy over time.

If the supplementation strategy is profitable at a 30% reduction if AE’s, the strategy can be tested again at a 40% reduction to test the assumptions further. This is little available evidence to identify the actual impact of a supplementation regime on consumption in the paddock so some sensitivity testing is warranted.

Age groups in the Dynama+ program

In the Dynama+ program, groups are defined either by their age at the start of the year or by a specific age. Prices on sale cattle are generally applied at a specific age.

The meanings of age group descriptions can be established early by starting the budgeting exercise in the AECalc worksheet. The peak calving time, expected live weights, sale weights and sale months for each class of cattle are declared in the AECalc worksheet.

The tables in the Prices worksheet use headings which refer to a specific age at which cattle are sold, e.g. weaners, one year, two years etc. In practice, people sell their cattle throughout the year at ages such as 15 months, 18 months, 20 months etc. One label may have to cover everything from say 12 months to nearly two years. Sale ages are defined in months in the AECalc worksheet.

In the Dynama worksheet there is provision for trading “New Calves (mixed)”. This includes purchasing calves on their mothers and selling calves in the same year they were born. Sale and Purchase prices for “New Calves” in the Prices worksheet refer to these transactions, and Table 7 of the Dynama worksheet has provision for entering sales and purchases of “New Calves”. Beneath Table 7 there is also an entry for “Closing new calves female”. This is used, if for instance a group of steer calves has been sold, to ensure correct numbers of weaner heifers versus steers going into the following year.

How mating, calving and death rates are calculated in Dynama+

Weaning rate calculations in Dynama+

The Dynama+ program can be set for one of two options as to how the number calves to be weaned is calculated.

The first option calculates new calves by multiplying the nominated weaning rate for a group of females by opening breeders plus purchases minus sales minus spays. In this option, the weaning rate is specified as calves weaned from cows mated and kept. This method is consistent with that used in the Breedcow+ program, and thus must be used if the Dynama+ program is to use data transferred from the Breedcow+ program.

The second option calculates new calves from the breeders on hand at the start of the budget year and assumes that all purchases, sales or spaying are done after calving. This option may be preferred if budgeting is done on a financial year rather than a production year.

These definitions, although mathematically convenient, are at odds with the “true” expression of weaning rate, which is the number of calves weaned divided by total cows mated. To satisfy the requirement for a “true” expression of weaning rate, the ratio of total calves weaned to total females mated is calculated and displayed as an output in the Dynama worksheet. Users need to identify the number of females sold after mating in each year for the figure to be accurate.

Spaying in Dynama+

The term “spaying” can have a variety of meanings in the Dynama+ program. It broadly refers to keeping a group of cows out of the mating group, thus “spaying” will include females that are set aside after surgical spaying before mating, or it can just mean keeping female livestock in a separate paddock away from bulls. Conversely, late spaying (or “webbing”) which will allow the cow to calve, or spaying after calving, should not be entered in the current year as spaying (though these cows will certainly be “spays” in the following year and can be shown as being spayed then if not already sold).

Calculating Dynama+ herd bull requirements

The Dynama+ program calculates bull requirements by multiplying the figure entered for the bull cow ratio (or bull percentage) by total cows mated, including those sold after mating.

If the calculation of new calves is set for mating and calving in the same budget year, the bull requirements calculated will relate to that calving. If budgeting on a financial year, with a midsummer calving, the mating for that financial year will actually relate to the next year’s calving, so the formulas will be of no use.

Manual entries may be made for bull purchases and retention of BYO (Breed Your Own) bulls. These entries will override the formulas that would otherwise have calculated retentions of home-bred bulls, sales and purchases.

Calculating the number of calves in Dynama+

Calves produced for the year are shown as “new calves” at the end of the year. If calving is towards the end of the budget year, “new calves” may include an allowance for a tail of calves unbranded or still to be born. These new calves are split into weaner heifers and weaner steers as they graduate to the start of the next budget year. Some of these “weaners” may be very young indeed, i.e. birth still expected.

If the Dynama+ herd is based on dates that place calving early to mid-year, rather than at the end of the year, it may be set to calculate calves from opening breeder numbers.

Calculations beneath Table 7 in the Dynama worksheet for cows mated and kept to calve, and total cows mated for “new calves” produced, are used to calculate “weaning rate on cows kept” and “weaning rate on all cows mated”.

If breeder numbers are thrown out by choice of budget year or sales after mating, the “cows mated” numbers can be overridden to ensure correct weaning % outcomes. These rates are for display only, so the adjustment is strictly optional.

Deaths in Dynama+

Deaths for all groups, male and female, are calculated as the mortality rate times the opening number plus purchases minus spays minus sales. Spays are transferred from the breeder groups to spay groups, where mortalities are calculated as spay mortality rate times the opening number plus new spays minus sales.

Steers or other classes of livestock that are purchased and sold within the one twelve month period will not have any losses automatically deducted as they will not be included in the calculation of the “number carried”.