26 December 1997

DIAGNOSING YOUR BUSINESSS

Dealing with risk is about

financial controls. A new

service from the UK

200 Agricultural Group aims

to ensure these controls

are in place, as

Philip Clarke reports

WHAT happened the last time you went to the doctor for a health check?

The chances are he questioned you about your lifestyle, prodded you about a bit, scribbled something on a note pad, then told you things you probably suspected (too flabby, a bit wheezy, not bendy enough) but were previously afraid to confront.

Whether you did anything about it was up to you. But at least you knew where you stood. You had a choice.

Giving "patients" a similar choice is the thinking behind a new Risk Management Service from the UK 200 Group of agricultural accountants.

The service was originally developed for banks, so that potential lenders could find out more about the financial well-being of businesses they might be lending to. But now it is being extended as a free service to farmers, to provide them with a similar diagnosis.

In essence, the service takes the form of a financial health check – or a "farm financial control review", to give it its proper title. An accountant will visit the farm, chat to the farmer about his business, prod about a bit in the accounts, before drawing up a detailed report, complete with recommendations on how to improve his financial fitness.

"With farm incomes going the way they are, now is the time to get an outsider in to assess the performance and control mechanisms of the business," says Ray Symons, chairman of the UK 200 Agricultural Group and a partner with Somerset accountants Butterworth Jones. "The more clued up farmers are constantly monitoring their figures anyway. But there are an awful lot out there who dont and who could do with some help."

The assessment is a fairly painless affair, taking perhaps two hours of the farmers time, with another couple of hours for the accountant to prepare his report.

The initial meeting is based around a detailed questionnaire, with which the parties explore the background to the farm – what it has, what it does, what are the assets and liabilities – before probing into the "nitty gritty" of accounting procedures, record keeping and budgeting.

The accountant will want to know how often the bank account is reconciled with the bank statements, and what are the procedures for doing this.

"Youd be amazed at how many people do not check these things," says Mr Symons. "In one recent case I did a check on a client and found he had mistakenly been overpaid £11,000 in VAT more than a year ago. The consequences could have been serious as he could have been charged for fraud by Customs and Excise under the Theft Act. A simple reconciliation would have picked that up."

This is just one of the areas of complaint that could jeopardise the financial health of the business.

"Farmers are also notoriously bad about raising invoices. I often come across cases where they have done a bit of hedging or ditching for a neighbour a few months ago, but have not been paid for it because they do not have the financial controls. This is damaging to cash flow and profitability."

Another area for examination is that of wages. "We are particularly keen to discuss the issue of self-employed labour with our farming clients," says Mr Symons.

"The Inland Revenue is currently having a major clamp down on this, trying to weed out people who are essentially employees, but claim to be self-employed to avoid National Insurance and to benefit from certain tax advantages. So far it has been focussing on the building trade.

"But agriculture could well be next and farmers need to get their houses in order, or run the risk of prosecution."

Maintaining a healthy business is also about cost control and budgeting, and the financial control review takes a particular interest in these.

"Most farmers tend to concentrate on variable costs and gross margins. Whilst there is an awareness of the fixed cost element, these have tended to be left to look after themselves. But by taking a closer look at this area, it is often possible to find savings which the farmer never thought were there."

Having a budget will help in this. "But a budget is not an end in itself. You need to do something with it," says Mr Symons. "You need to monitor it, be aware when the finances go astray and able to explain any variances." The accountant will make an assessment of the effectiveness of budgeting as part of the review.

Other aspects include long term strategic planning, capital expenditure plans, insurance policy, as well as the maintenance of farm management accounts and the performance of the business against industry averages.

Having completed the questionnaire and discussed the various issues with the farmer, the accountant will then draw up his report and recommendations.

"These are unlikely to go too deeply into the technical aspects of farming – though we may be able to give advice on things like acquiring milk quota or using buying groups and grain co-ops."

But on things like procedures for filling in VAT returns, raising and filing invoices, reconciling the livestock movement book, computerising the accounts and forming a business plan, the advice can be quite specific.

"Its all about identifying weaknesses in the financial control and offering solutions to correct them."

But, as with any health check, it is up to the farmer to decide whether he acts on this advice or not.

"There tends to be a lot of short-termism and introspection in agriculture," says Mr Symons. "Just the very act of getting an outside opinion can be a major step forward in getting a business back to good health. But ultimately the farmer needs to be proactive in financial management if he is to get the best out of his business."

&#8226 Currently there are about 80 firms of accountants who are members of the UK 200 Agricultural Group. The Risk Management Service is being offered free to existing clients and non-clients. Further details are available by calling head office on 01252 333511.n

HEALTH