29 January 1999

Trim overheads by scrutinising the farm books

In the first of our series

based on MDCs Controlling

Overhead Costs report,

Jessica Buss finds out

how to review costs using

farm tax accounts

EVEN when costs are below average there can still be scope for savings and these can be found by reviewing accounts.

Reducing an individual cost item by thousands of £s is usually unrealistic, so aim to save £100 off each cost – which can add up to thousands over all dairy costs, advises Axient senior consultant John Warrington, author of the MDC publication Making the Most of Your Tax Accounts – from the two-part series on cost control from the MDC.

He says that before working out whether overhead costs are under control, your must know how to look at your accounts.

"Accounts can be confusing in their layout and differ in how they handle opening and closing stocks of animals and feeds. But the figures you need will be in the trading account, also known as the profit and loss account."

The other two sections on most accounts are disposal of funds and balance sheet. The disposal of funds shows what money has come in and gone out, when this is not included producing one will show where profits have gone. This can reveal why your overdraft has increased when the farm made a profit. The balance sheet shows what the business is worth at the end of each year.

The figures on your trading account are the ones needed to work out whats spent on each cost, says Mr Warrington. It doesnt matter whether you compare costs to turnover by proportional analysis – working out the % of turnover spent on each cost – in £/ha or p/litre. "You are still working out the proportion of income spent on each cost."

But the easiest and most meaningful option for most dairy farms is on a p/litre basis. Using p/litre means the figures have a real value and you can relate to them more easily than a %.

The p/litre values are easy to calculate – divide income and costs by the litres sold, easily found on milk statements.

The exception, and where £/ha may be easier, is where the farm is mixed – with other large enterprises that cannot be separated from dairy costs.

But where other enterprises are small, perhaps only 10ha (25 acres) of cereals are grown, include the income as extra income and keep costs together, he says.

For a quick guide to how the business is performing, check total overheads and total variable costs are reasonable in relation to income, for example on a p/litre basis. Quota costs should be kept separate and reviewed on their own, he says.

"This will help you decide whether to concentrate on overhead costs or gross margins.

"Then you can delve more deeply into what makes up those figures and find what costs you should address by comparing them with standard figures," says Mr Warrington (see table).

"But dont make major decisions based on one years figures alone. For this, do a within farm comparison by looking at more than one years accounts – consider reviewing up to five years of accounts," says Mr Warrington.

Allowances may also need to be made for overhead costs that vary from standard figures because the farm is fully-owned or rented, ad-vises Mr Warrington. Standard figures will include both types of farm.

"On a rented farm, figures for property charges should be higher because of rent. On owned farms, repairs will be higher and interest charges will be greater when the farm is mortgaged."

Also, when there are many partners taking private drawings paid wages should be lower, but higher profits will be needed to cover the extra drawings, he says.

&#8226 If youve worked through this and identified a cost which must be cut, we will be looking at overhead costs in more detail in the rest of the series. Six MDC workshops will also be held around the country (see box).

STEPSTOCOSTCONTROL

&#8226 Look at trading account.

&#8226 Divide costs by litres sold to find p/litre.

&#8226 Compare with standard figures.

&#8226 Review up to five years figures.

&#8226 Look for potential savings.

MEETINGDATES

Feb 4: Derby; run by Midland Bank/Andersons.

Feb 9: Stafford; run by Barclays/ Farm Consultancy Group.

Feb 16: Cumbria; run by NatWest/Axient.

Further details and dates: (01952-291950)

Average production costs

for 1997-98 (p/litre)

Milk sales 21.3

Other income 4.4

TOTAL TURNOVER 25.7

Variable costs 9.5

Quota leasing 1.6

FARM GROSS MARGIN 14.7

Wages 2.4

Power and machinery 2.3

Sundries 1.7

Property charges 2.0

Interest 1.9

TOTAL OVERHEADS 10.3

Profit (before depreciation) 4.4

Profit (after depreciation) 2.4

Source: Axient FBA data 1997-98