26 June 1998

Spend time on saving costs

By Suzie Horne

GOOD managers call for help before the bank does it for them; that is the stark difference between farms in the top 10% and the bottom 25% in terms of financial performance.

Not all farmers are naturally good managers, but there is scope for many to do better, says Gary Markham, head of agriculture at accountant Grant Thornton. Pushing up from the bottom 25% towards the average will help them survive the next five years, he adds.

"Management time is under threat. Effective use of it can pay dividends, but farmers are in a catch 22; they have not got the time to make better use of their time," he says.

Poor management is the main reason for 90% of farm receiverships, warns Mr Markham. Notably, management of less obvious fixed costs is often overlooked.

Figures from Grant Thorntons annual client analysis show there is scope for reducing or at least reorganising the total spent on professional fees. The latest complete survey shows those in the top 10% spend about £17/ha (£7/acre), those in the bottom quartile more than twice that amount. "They are spending the money but are not getting value because they are poorly organised."

With less labour available, farmers spend more time doing physical tasks. At the same time they are carrying a growing administrative burden, much of which could be more effectively undertaken by a part time farm secretary, says Mr Markham.

For example, accounts, including book keeping, are often wholly prepared by the accountant, which can be very costly, as charges are made by the hour.

"Costs could be saved by employing a farm secretary for perhaps just three or four hours a month. At around £10 an hour that is good value – they are very professional. Farmers should be asking their accountant in what form he wants the books to save themselves time and money," says Mr Markham. Failure to reconcile bank statements and lack of information on items shared between business and private use such as phone and petrol bills cause most queries on the accounts of new customers.

Insurance is another aspect of fixed costs which many mean to review but never quite find the time to do so. With the top 10% paying £16/ha (£6.50/acre) and the poorest performers spending almost twice that, there is a potential £6000 a year saving on a 400ha (1000-acre) unit, for the cost of a few hours research.

Taking the time to plan the whole business, and especially the use of management time, shows up in top flight units as lower fixed costs through simpler operations, fewer crops, fewer passes over those crops and lower fuel costs.

Wheat accounts for 60% of the cropped area among the top quartile of farms, but that area slips to just over half within the bottom quartile. The latter also tend to have a bigger spread of crops.

"Crop establishment accounts for 44% of power and machinery costs," points out Mr Markham. It may even be worth accepting a small drop in yield if other aspects of management are right.

For example, the top 10% in the 1996 harvest survey saved £4/t in fixed costs compared with the average, losing only £1.50 in yield equivalent (with wheat at £75/t).

Traditionally the bottom 25% have had the highest rental income, mainly from cottages and the letting of buildings. Despite this extra income they still had the lowest overall profits because of the high costs associated with these enterprises outside the core business.

Mr Markham believes the balance of this income will shift in future towards the top 10%, whose income from other sources is already rising. "The target should be to produce this rental or other income to the level of your drawings. You are home and dry then because this element is not dependent on crop prices." &#42

Crop establishment accounts for about 44% of power and machinery costs, acording to Grant Thorntons Gary Markham. Careful management can do much to reduce this and other, less obvious, fixed costs.

BETTER MANAGEMENT

&#8226 Consider farm secretary to cut accountancy fees.

&#8226 Check insurance cover – big savings possible.

&#8226 Reconcile bank statements; split business and private use on shared items.

&#8226 Consider alternative income to cover private drawings.