Financial discipline takes time but it¹s worth it. Mike Butler, farmer and partner with specialist farm accountant Old Mill, identifies 10 steps that will have immediate benefits for your business.
1. Make a business plan
Running a business is a long journey. You wouldn't jump in the car and set off without knowing where you're going and how to get there, so don't do that with your business. Your business plan is your map.
Look five years ahead, 10 would be better. What do you want, where do you want to be? What about the rest of the family? Who will be living off the farm, where will they live, can the farm provide all of this? If not, you need to get a new set of directions or change your expectations.
The business plan doesn't have to be sophisticated, but it may involve some plain talking about big issues such as whether the farm can be handed on without making paupers of your successors. Whether potential successors are really committed to the business is another tricky but crucial question.
Once you have your plan, monitor it to check whether you are still on track. But be flexible. For example, if you have planned to sell up or get out of milk in 10 years' time and after eight years prices allow you to do it, don't be afraid to take that opportunity.
2. Set a budget
Maybe you've heard this a hundred times before, but still far too few farmers do a budget and even fewer do a realistic one. Budgets should be done before the start of the year. Be honest about technical performance. Don't use the excuse that "things will change as soon as I've done the budget". Monitor performance against budget to be able to make informed decisions.
3. Draw up a cash-flow
Businesses fail more often from lack of cash than lack of profit. While the budget tells you what you expect to spend and receive, the cash-flow marks the timing. Knowing where you are in cash terms gives you flexibility and reduces the risk of cash crises which are time consuming, expensive and narrow your options. Not having time to plan is not an acceptable excuse.
4. Improve accuracy and timeliness of records
Good information is crucial to good decision making. As businesses expand and markets become more volatile, the wrong decision can be catastrophic. Good record keeping for all areas of the farm should be fundamental. Monthly inputting for book-keeping is fine for most farm businesses and fits in with monthly VAT returns.
Injecting this discipline not only saves time, it also allows you to know what's happening in the business so that decisions on adjusting cash-flow and borrowings can be made sensibly. Being able to plan before the year end is worth 10 times any planning after the year end.
The closer you can produce your accounts after the year end, the more useful they will be and this will also ensure you don't pay more advance tax than necessary.
There is an increasing likelihood of a query or full inquiry into Income Tax, PAYE or VAT by HM Revenue and Customs. One in 30 small and medium-sized businesses had some sort of tax inquiry in 2007. Businesses with poor records typically have VAT books which are neither reconciled nor analysed.
5. Get computerised
Computerisation of record keeping and accounting helps a great deal but many businesses are not making full use of this. Well-run businesses and younger managers tend to be the exception. It can take a couple of annual cycles before computerisation is embedded and properly used. It won't necessarily save time in inputting, but it will enable you to produce much more useful information about your business more quickly than a manual system.
All businesses should know their costs of production to help make technical and marketing decisions, but surprisingly few businesses have this information.
Most software also requires you to reconcile what has happened in the business with what goes through the bank account, something which many do not like doing, but this discipline is needed to have confidence in your information.
Smaller businesses have often left this reconciliation to their accountant but they can least afford this luxury - your accountant is the most expensive book-keeper you will find.
6. Compare performance with expectations
Don't assume that you know why things have changed look at the figures in a broad sense. There may be reasons other than weather or markets - were there staff, supplier or storage changes which could have had an effect, for example?
Scrutinise costs, understand why things change, the impact of that change and identify areas for improvement. Some changes can have a disproportionate or unexpected effect. For example, a 2p/litre drop in milk price for a typical dairy herd will mean a 30% drop in profit.
7. Review borrowing to reduce risk
While owner-occupied farming usually has a large asset base compared with its borrowing, rapid expansion and the general tightening of credit availability will affect even some of these businesses. If you are repeatedly bumping up against the limit, your business is at risk, because this is unsecured borrowing, repayable on demand. Review what is true working capital and what needs to be put on a loan basis because short-term extensions to overdrafts may well be harder to get in future.
8. make use of your accounts
Don't worry if you are in the majority of farmers who don't fully understand a set of accounts. Like many others, you've probably never had them explained to you. People tend to focus on the profit and loss account for obvious reasons, because they want to know how well they've done and how much tax they'll have to pay.
The important relationship between the profit and loss account and the balance sheet is that only if your profit exceeds your drawings, investment and tax, will your balance sheet grow. The balance sheet is just a snapshot of the value of the business this year and last year and the difference between the two years tells you whether you are better off in terms of net asset value.
Fewer than 5% of farm businesses produce timely management accounts, but they are essential for decision making. These are produced from your annual accounts but in effect give a more realistic picture, for example, using market value rather than production costs for valuations, attributing an estimated rent against owned land and a cost for unpaid labour to arrive at net farm income.
9. Training and learning
There are people out there with experience of advising across many farming businesses and family situations. Sound them out, get the best value from them, don't be afraid to ask what may seem like basic questions you're not the only one who doesn't know.
Agriculture also benefits from a huge range of management and other training opportunities. It could have valuable spin-offs not just in what you learn but the contacts you will make and possible business developments as a result of those contacts. Make time to benchmark your business online or in a local discussion group.
10. Make time for meetings
Regular family meetings are essential but difficult to achieve in a formal sense when you see each other regularly and everyone is pushed for time.
If you don't have proper (short) meetings where everyone has a chance to update each other and have their say, the risk is that management by assumption takes over. This can lead to resentment, with people feeling they have not been consulted or informed.
Old Mill is a West Country accountancy and financial services business