# Farm finance words in a week A free short course from Farm CFO by Clunes Rural. 5 lessons, about 25 minutes in all. No sign-up. Learn the farm money words you'll hear from the bank and the accountant, in five short lessons with plain examples. Who it's for: New entrants, partners and family members who want to follow the money talk on the farm. You'll be able to: - Read a profit and loss and a balance sheet with more confidence - Follow a cashflow and overdraft conversation - Understand loans, security and the bank's main ratios - Know which tax words to take to your accountant ## Lesson 1: Day 1: the accounts Most farm money talk starts with the accounts. These are the reports your accountant prepares each year. Here are the words you'll meet first. ## The two main reports **Profit and loss.** This shows the income and costs for a year, and what's left over. It is also called a P&L or an income statement. **Balance sheet.** This shows what the business owns and owes on one day, usually 30 June. What it owns are its **assets**, like land, stock, machinery and cash. What it owes are its **liabilities**, like loans, the overdraft and bills not yet paid. **Equity** is assets less liabilities. It is the part of the business that is truly yours. ## Words about income and costs **Budget.** A plan for the year's income and costs. It shows whether the year should make a profit. It doesn't show when the money moves. That is the job of the cashflow, in lesson 2. **Variable costs.** Costs that go up and down with the size of an enterprise, like feed, drench and freight. **Overheads.** Costs that don't change much with the size of an enterprise, like rates, insurance and permanent wages. They are also called fixed costs. **Gross margin.** [NSW DPI](https://www.dpi.nsw.gov.au/agriculture/budgets/about) defines it as the gross income from an enterprise less the variable costs of achieving it. It leaves out costs such as depreciation, interest, rates and permanent labour. So it is not profit. It is a way to compare one enterprise with another. **Depreciation.** The cost of machinery, buildings and improvements, spread over their working life. It is a cost in the accounts, but no cash leaves the bank for it that year. ## Three lines the bank looks at **EBITDA.** Earnings before interest, tax, depreciation and amortisation. Amortisation is like depreciation, but for things you can't touch. EBITDA is close to the cash the business earns. **EBIT.** Earnings before interest and tax. It is EBITDA less depreciation and amortisation. Banks often start from EBIT to see how well profit covers the interest bill. **Profit before tax.** EBIT less interest. Your accountant works out taxable income from this figure, with some adjustments, and tax is based on that. ## Where to start Ask for the last three years of accounts. Read the profit and loss first. Find the income, the biggest costs and the profit line. Then look at the balance sheet and find equity. Don't worry if it takes a few goes. Everyone learns this way. Keep our [farm finance words](https://farmcfo.com.au/templates/farm-finance-words) card handy. The full [farm finance glossary](https://farmcfo.com.au/guides/farm-finance-glossary) has more terms. ### Worked example **Invented example.** A mixed sheep and cattle farm has this year (all figures invented): | Line | Amount | |---|---| | Income from sales | $600,000 | | Less variable costs | $330,000 | | Gross margin (all enterprises) | $270,000 | | Less overheads, before depreciation and interest | $110,000 | | **EBITDA** | **$160,000** | | Less depreciation | $40,000 | | **EBIT** | **$120,000** | | Less interest | $50,000 | | **Profit before tax** | **$70,000** | Each line is the one above, less the cost on that line. So EBITDA is $270,000 less $110,000, and profit before tax is $120,000 less $50,000. We'll use the $120,000 of EBIT again in lesson 3. Open the farm finance words card: https://farmcfo.com.au/templates/farm-finance-words ### Check your understanding 1. What does a balance sheet show? Answer: What the business owns and owes on one day. A balance sheet is a snapshot on one day, usually 30 June. The profit and loss covers the whole year. 2. Why is depreciation different from most other costs? Answer: No cash leaves the bank for it that year. Depreciation spreads the cost of machinery and buildings over their life. It is a cost in the accounts, not a cash payment that year. 3. How do you get from EBITDA to EBIT? Answer: Take off depreciation and amortisation. EBIT is earnings before interest and tax. It is EBITDA with depreciation and amortisation taken off. ## Lesson 2: Day 2: cash and the bank Profit and cash are not the same thing. A farm can make a profit for the year and still run short of cash in the middle of it. That is because farm income often comes in a few big cheques, but bills come every month. ## Words about cash **Cashflow forecast.** A month-by-month list of the cash coming in and going out, with the bank balance at the end of each month. It shows whether the business can get from one sale to the next. **Opening and closing balance.** The opening balance is the bank balance at the start of a month. The closing balance is the balance at the end. Each month's closing balance becomes the next month's opening balance. **Low point.** The lowest the balance gets during the year. It tells you how much overdraft you need. **Drawings.** Money the family takes out of the business for living costs. Banks look at drawings closely, because the family is paid out of the same cash that pays the bank. ## Words about the bank **Overdraft.** A facility that lets your account go below zero, up to a set **limit**. Interest is charged on the amount you use. Check your own bank's fees. **Headroom.** How far the balance is from the limit. If the limit is $80,000 and you are $70,000 overdrawn, the headroom is $10,000. **Seasonal facility.** A short-term limit to cover the months when costs run ahead of income. It is usually expected to be cleared by a set date. **Working capital.** Current assets less current liabilities. Current means due, or expected to turn into cash, within 12 months. It is the money available to run the business. **Current ratio.** Current assets divided by current liabilities. It is a quick test of whether the business can pay the bills coming up. **Annual review.** The bank's yearly look at your loans, using your accounts, budget and cashflow. **Facility letter.** The bank's letter setting out each loan and overdraft, with limits, rates, fees and conditions. Keep it somewhere you can find it. ## Where to start Find the farm's overdraft limit and last year's low point. Ask when the big cheques come in, and when the big bills go out. That one conversation explains a lot about how the farm runs. Try the [cashflow forecaster](https://farmcfo.com.au/tools/cashflow-forecaster) to see how a few months fit together. The [household drawings](https://farmcfo.com.au/tools/household-drawings) tool adds up what the family takes out. ### Worked example **Invented example.** A sheep farm starts July $20,000 overdrawn. Its limit is $80,000. All figures are invented. | Month | Cash in | Cash out | Closing balance | |---|---|---|---| | July | $5,000 | $30,000 | minus $45,000 | | August | $0 | $25,000 | minus $70,000 | | September | $90,000 (lamb cheque) | $20,000 | $0 | The low point is minus $70,000 in August. The headroom then is $10,000 ($80,000 less $70,000). If the lamb sale came a month late, the farm could go past its limit. That's why the bank wants a cashflow, not just a budget. Try the cashflow forecaster: https://farmcfo.com.au/tools/cashflow-forecaster ### Check your understanding 1. What does a cashflow forecast show that a budget doesn't? Answer: When the money comes in and goes out, month by month. A budget shows the year's profit. A cashflow shows the timing, so you can see the low point. 2. Your limit is $100,000 and you are $85,000 overdrawn. What is your headroom? Answer: $15,000. Headroom is the limit less what you've used: $100,000 less $85,000 is $15,000. 3. What are drawings? Answer: Money the family takes out for living costs. Drawings are the family's living money taken out of the business. Banks count them when they look at repayments. ## Lesson 3: Day 3: loans and security This lesson covers the words on a loan, and the numbers a bank uses to judge it. ## Loan words **Principal.** The amount borrowed. Principal repayments reduce the loan balance. **Interest** is what the lender charges you for using the money. **Term loan.** A set amount borrowed for a set number of years, often to buy land, machinery or stock. **Principal and interest.** Each repayment covers the interest and pays off some of the principal, so the balance falls over time. A loan like this is also called **amortising**. **Interest only.** For a set time, you pay just the interest. The balance doesn't fall. Repayments are lower, but you aren't paying the debt down. ## Security words **Security.** What the lender can call on if the loan isn't repaid. It might be land, machinery or stock. **Mortgage.** A legal charge over land. It gives the lender the right to sell the land if the loan isn't repaid. It is the most common security for a farm loan. **Guarantee.** A promise by someone else, often a family member, to repay your debt if you can't. Anyone asked to give one should get their own legal advice first. **Valuation.** A qualified valuer's view of what a property would sell for. Banks lend against the valuation, not the price you paid. ## The bank's ratios A ratio compares one number with another. Banks set their own limits, so there is no single pass mark. **LVR (loan to value ratio).** What you owe against what the security is worth, as a percentage. **Interest cover.** How many times profit covers the interest bill. It is usually EBIT divided by interest. **Debt service cover.** How many times the cash the business earns covers interest and principal repayments together. It is a stricter test than interest cover. Banks work it out in different ways, often after taking off drawings and tax. **Equity ratio.** Equity divided by total assets, as a percentage. **Covenant.** A promise in your loan agreement, such as keeping interest cover above a set level, or sending accounts by a date. Breaking one can give the bank extra rights, so know what yours are. ## Where to start Find the farm's facility letter. Read the limit, rate and security for each loan, and look for the word covenant. Then work out the LVR yourself. Our [bank ratios page](https://farmcfo.com.au/templates/bank-ratios) shows how each ratio is worked out. The [borrowing capacity](https://farmcfo.com.au/tools/borrowing-capacity) tool gives a rough idea of what a farm could borrow. Our guide to [farm loans](https://farmcfo.com.au/guides/farm-loans-explained) covers each type of loan. ### Worked example **Invented example.** The same farm from lesson 1. All figures are invented. - The farm owes $750,000. Its land is valued at $3,000,000. - LVR = $750,000 ÷ $3,000,000 x 100 = 25%. - EBIT is $120,000 and interest is $50,000. - Interest cover = $120,000 ÷ $50,000 = 2.4 times. So the farm owes a quarter of what its land is worth, and profit covers the interest bill 2.4 times over. Whether that's comfortable depends on the bank's own limits. It also depends on how much principal the farm repays each year. That's where debt service cover comes in. Try the borrowing capacity calculator: https://farmcfo.com.au/tools/borrowing-capacity ### Check your understanding 1. With an interest-only loan, what happens to the balance during the interest-only period? Answer: It stays the same. You pay just the interest, so none of the principal is paid off and the balance stays the same. 2. A farm owes $500,000 on land valued at $2,000,000. What is the LVR? Answer: 25%. $500,000 divided by $2,000,000 is 0.25. Times 100, that is 25%. 3. What is a covenant? Answer: A promise in your loan agreement, such as keeping a ratio above a set level. Covenants are promises in the loan agreement. They are set out in your facility letter. ## Lesson 4: Day 4: livestock units and prices Livestock have their own language. These words help you compare stock, read a price and work out what a sale is worth. ## Units for comparing stock **DSE (dry sheep equivalent).** A standard unit for comparing how much feed different stock eat. [NSW DPI](https://www.dpi.nsw.gov.au/agriculture/budgets/livestock/sheep-gross-margins-april-september-2022/background/dse) says a 50 kg wether kept at a steady weight is rated at 1 DSE. A wether is a castrated male sheep. Some areas use a 45 kg wether instead. A cow with a calf eats far more than one sheep, so it is rated at many DSE. **Carrying capacity.** How many DSE a paddock or farm can run over the year. It lets you compare a sheep enterprise and a cattle enterprise on the same country. **Gross margin per DSE.** The gross margin divided by the DSE carried. It is a fair way to compare enterprises that use the same feed. ## Weights **Liveweight (lwt).** The weight of the live animal, such as on a saleyard scale. **Carcase weight (cwt).** The weight of the meat and bone after slaughter. **Dressing percentage.** [MLA](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/fs03-understanding-dressing-percentage-final.pdf) gives it as carcase weight divided by liveweight, times 100. It lets you turn a liveweight into a carcase weight. **HSCW (hot standard carcase weight).** Used for pigs. [Australian Pork Limited's training manual](https://australianpork.com.au/sites/default/files/2023-01/Pork%20training%20manual%20FINAL.pdf) says the pig carcase must be weighed hot, and weights are reported on a standard carcase definition. That lets buyers and sellers compare like with like. ## Prices **c/kg lwt.** Cents per kilogram of liveweight. A price on the live animal. **c/kg cwt.** Cents per kilogram of carcase weight. Sales straight to a processor, called over the hooks, are priced this way. To compare the two, you need the dressing percentage. A high carcase price is not always better than a lower live price. **Cost of production.** What it costs to produce one kilogram of beef, lamb or pork, including a share of overheads. Compare it with the price you get to see the margin on each kilogram. ## Where to start Ask how the farm sells its stock: through the saleyard, over the hooks or on a direct contract. Then ask what the last sale made per head, and work it back to cents per kilogram. Our [cattle trading margin](https://farmcfo.com.au/tools/cattle-trading-margin), [sheep gross margin](https://farmcfo.com.au/tools/sheep-gross-margin) and [piggery feed margin](https://farmcfo.com.au/tools/piggery-feed-margin) tools all use these units. ### Worked example **Invented example.** A steer weighs 500 kg live. A processor offers 650 c/kg cwt, which is $6.50 a kilogram of carcase. The farmer expects a dressing percentage of 54%. All figures are invented. - Carcase weight = 500 kg x 54% = 270 kg. - Value = 270 kg x $6.50 = $1,755. - As a live price: $1,755 ÷ 500 kg = $3.51 a kilogram, or 351 c/kg lwt. So 650 c/kg cwt for this steer is worth the same as 351 c/kg lwt. Now the farmer can compare it with the saleyard price. Selling costs differ between the two, so take them off before deciding. Try the cattle trading margin calculator: https://farmcfo.com.au/tools/cattle-trading-margin ### Check your understanding 1. What is a DSE? Answer: A standard unit for comparing the feed needs of different stock. NSW DPI rates a 50 kg wether kept at a steady weight as 1 DSE. Other stock are rated against it. 2. A lamb weighs 50 kg live and dresses at 44%. What is its carcase weight? Answer: 22 kg. Carcase weight is liveweight times the dressing percentage: 50 kg x 44% is 22 kg. 3. What does c/kg cwt mean? Answer: Cents per kilogram of carcase weight. cwt stands for carcase weight. Sales over the hooks to a processor are priced this way. ## Lesson 5: Day 5: tax words to ask your accountant about Tax is a job for your accountant. We don't give tax advice, and every farm is different. But knowing the words helps you ask good questions. ## Words about time **Financial year.** [Services Australia](https://www.servicesaustralia.gov.au/what-to-do-tax-time) says a financial year is from 1 July to 30 June. Most farm accounts and tax returns run on it. That's why the bank asks for accounts "for the year ended 30 June". ## Words about GST **GST (goods and services tax).** The [ATO](https://www.ato.gov.au/businesses-and-organisations/gst-excise-and-indirect-taxes/gst/how-gst-works) says GST is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. A business must register for GST if its GST turnover is $75,000 or more. **GST-inclusive and GST-exclusive.** A GST-inclusive price has the GST in it. A GST-exclusive price doesn't. Quotes and invoices should say which. **BAS (business activity statement).** The form a GST-registered business uses to report its sales and purchases to the ATO, and to pay GST owing or get a refund. Your accountant or bookkeeper usually prepares it. ## Words about saving for lean years **Farm management deposit (FMD).** An [ATO scheme](https://www.ato.gov.au/forms-and-instructions/primary-producers-information-2026/farm-management-deposits-scheme) that helps primary producers set money aside in good years and draw it back in lean ones. For 2025 to 26, the ATO says: - The minimum deposit or repayment is $1,000. - All deposits held at any one time can't be more than $800,000. - Amounts repaid within 12 months generally don't get the tax concession, except in some cases of natural disaster or severe drought. - You can't claim a deduction for the year if your taxable non-primary production income was more than $100,000. Whether an FMD suits you is a question for your accountant. ## A word with a tax side **Depreciation.** You met this in lesson 1. In the accounts it spreads the cost of machinery and buildings over their life. The tax rules can work differently. Ask your accountant how they apply to you. ## Questions to take to your accountant - Is the business registered for GST, and who does the BAS? - When are our tax payments due this year? - Would a farm management deposit suit us? - How are livestock and machinery treated for tax? Write the answers down. Next time the bank or the accountant uses a word you don't know, ask. Good advisers are happy to explain. If you'd like someone to go through your farm's numbers with you, our [Farm Health Check](https://farmcfo.com.au/health-check) is a good place to start. ### Worked example **Invented example.** A farm buys fencing wire. The invoice says $11,000 including GST. The figure is invented. - GST is 10% of the GST-exclusive price. - So the GST-inclusive price is 110% of the exclusive price. - GST-exclusive price = $11,000 ÷ 1.1 = $10,000. - GST = $10,000 x 10% = $1,000. - Check: $10,000 + $1,000 = $11,000. A quick way to find the GST in an inclusive price is to divide by 11. How the farm reports that $1,000 on its BAS is a question for the accountant or bookkeeper. ### Check your understanding 1. In Australia, when does the financial year run? Answer: 1 July to 30 June. Services Australia says a financial year is from 1 July to 30 June each year. 2. An invoice is $2,200 including GST. How much is the GST? Answer: $200. Divide the inclusive price by 11: $2,200 ÷ 11 is $200. Check: $2,000 plus 10% is $2,200. 3. Who should you ask whether a farm management deposit suits you? Answer: Your accountant. FMDs have ATO rules and tax effects. Whether one suits you is a question for your accountant. ## Next step Farm Health Check: https://farmcfo.com.au/health-check ## Sources - [NSW DPI, About gross margin budgets](https://www.dpi.nsw.gov.au/agriculture/budgets/about) - [NSW DPI, Using DSEs and carrying capacities to compare sheep enterprises](https://www.dpi.nsw.gov.au/agriculture/budgets/livestock/sheep-gross-margins-april-september-2022/background/dse) - [MLA, Understanding dressing percentage (fact sheet)](https://www.mla.com.au/globalassets/mla-corporate/extensions-training-and-tools/documents/fs03-understanding-dressing-percentage-final.pdf) - [Australian Pork Limited, Pork training manual](https://australianpork.com.au/sites/default/files/2023-01/Pork%20training%20manual%20FINAL.pdf) - [Services Australia, At tax time](https://www.servicesaustralia.gov.au/what-to-do-tax-time) - [Australian Taxation Office, How GST works](https://www.ato.gov.au/businesses-and-organisations/gst-excise-and-indirect-taxes/gst/how-gst-works) - [Australian Taxation Office, Farm management deposits scheme (Primary producers information 2026)](https://www.ato.gov.au/forms-and-instructions/primary-producers-information-2026/farm-management-deposits-scheme) General information only, not financial, tax, legal or credit advice. These courses are not nationally accredited training.