Farm business advice for 2013

Manage cashflow

Paul WhitePaul White, Brown & Co, Spalding

The past year’s awful weather will have a serious impact on many farm cashflows.

The effect is likely to be dramatic for some and must be identified and planned for without delay. Among the things you can do are:

• Draw up new cashflow forecasts for the 2012-13 year using revised information on likely income and expenditure. This will help identify severity and timing of potential pinch points.

• Ensure input values and market returns are realistic, based on thorough research. Speak to merchants, buyers and suppliers.

• Very different arable spending patterns are likely depending on success and extent of autumn drilling and crop protection campaigns. Re-assess spring spending as appropriate.

• Record all other income and outgoings. Tax will be due for many farmers in January and July – inform your accountant of expectations of lower profitability. Earlier SPS payments will help relieve pressure.

• Include hire purchase and other regular annual payments, plus cash advances on grain sales and deferred credits on inputs.

• Enter true figures as they become known to update forecast.

• Manage the impact – change the time of sales where possible or take cash advances where quality and quantity allows.

• Defer machinery or other major purchases.

• Defer payment on inputs.

• Extend the overdraft, but prepare a 2013-14 and perhaps a 2014-15 budget to check and show that additional borrowings are realistic, affordable and/or can be repaid.

Working through these points in turn and acting as necessary will help ensure the business’ cash position remains manageable through any tough times that lie ahead.

Manage your bank

Mark WeaverMark Weaver, Complete Land Management, East Sussex

In 2013, seize the initiative and ask your bank what improvements it is going to make in its service to you.

Banking is a competitive industry and farming is a safe environment for lenders. Your business is important – or should be. If your bank is not looking after you properly, let it know.

We have seen clear examples of some banks simply not listening to their customers, making farming businesses fit their system, while others are far more flexible and creative about what they are willing to offer.

Talk to the other banks – two or three are really making an effort to increase their business within the industry and are very keen to talk to you.

If you are looking to borrow, the market is opening up, making the customer with the right project ideal for the keen bank manager. You do need to provide accurate, coherent, consistent management information, but any well-run business should not find this onerous.

It’s not just a question of rates, margins and fees – service is at least as important. However, there is always a bit of wriggle room, so provided you have reliable management information to back up your request, there is always space to negotiate on costs.

In 2013, treat your bank like any other business that provides a service to you and your business – demand service that delivers care, thought and attention.

Plan your machinery replacement policy

Giles CooperGiles Cooper, Wilson Wraight, Suffolk

Machinery costs vary enormously, and with a difficult 2012 and a demanding 2013 so far, businesses should be striving for a lower cost base to ensure they remain competitive.

Arable operations of 800ha and larger would have been pushing to get power costs down below £170/ha just a few years ago – now they are struggling to get them down to £220/ha. Below this size it becomes very difficult to achieve these levels, but it is fair to say that in all businesses there is still scope to improve machinery efficiency.

The recent increase in annual investment allowance to £250,000 is prompting many to consider machinery policy. While a thorough examination of the tax implications is required as part of this process, there are other key points:

• Analyse spend on machinery depreciation, repairs, fuel, equipment hire and use of contractors.

• Use similar businesses or industry standards as a benchmark to gauge how effective your machinery is managed.

• Allocate machinery repairs to individual items of kit so the trend over a period of years can be identified.

• Consider age and hours of machinery – also how it matches with labour available to operate it. How does this fit with any future changes, for example possible expansion or staff retirement?

• Prepare a machinery replacement schedule covering at least five years, to include expected changes based on age and hours of existing machines. What effect will this have on depreciation?

• Use the schedule as a basis to consider other machinery structures and combine with expected repairs, fuel, and so on, to see what effect it may have on overall machinery operating costs.

• When the right piece of equipment has been identified investigate hire or purchase; brand new or secondhand; ongoing repairs or extended warranty. Also resale value, fuel economy and adoption of new technology.

Take control and steer the ship

William Tongue, Berrys, Kettering

William TongueIt has never been more important to take hold of the family business, so start 2013 on the right course – grab the wheel and steer the ship in a positive direction.

Typically, family businesses bring a cocktail of different personal and business objectives across the different generations: siblings, cousins, wives, family trusts and so on.

Like a good cocktail, this combination can be interesting and exciting – but also potentially lethal. Ideally those involved in the business, usually the partners, should be:

• Running the business as a business.

• Sitting down formally to understand what all the stakeholders want, think and feel.

• Attaching accountability and transparency to decision making – this can be very difficult.

• Making sure the business is going in the right direction – there is a lot at stake, with a large amount of working capital tied up in production and potentially high business risks being taken with farm business tenancies, rents and crop volatility. At the same time we have low interest rates and some attractive investment projects in the renewables sector.

• Looking at the financial management of the business – budgets, accounts and cashflow monitoring make a good base from which to operate.

• Considering an independent third party in a “non-executive” role to bring things together. This ensures meetings are meaningful and decisions are made. It also means everyone can air their opinions, and that these are given their proper weight. This may not be as simple as the volume at which they are delivered.

• Usually the partnership agreement is the place to look for guidance on the decision-making powers in the business – though this may well be out of date and commonly out of kilter with the accounts or with wills. Check that the contents of all of these documents agree, as this may affect the validity of tax planning moves.

Review your farm business structure

Christopher Monk, Strutt & Parker, Cambridge

Christopher MonkHave you got the appropriate business structure? This could be sole trader, partnership, limited partnership, company, trust, or a mixture of these.

A partnership is the natural structure for a family farm and, if properly structured, can extend business property relief from inheritance tax to diversified operations on the farm or estate.

Partnerships are flexible and popular, but provide traps for the unwary:

• A good written agreement is essential.

• Partners occasionally fall out – agreements must provide for this.

• Volatile profits mean the requirements of joint and several liability can cause difficulties.

However, 2013 is the year to review your structure. Are you trying to expand your business? If so, the machinery and staff could be operated through a new company with lower tax rates, allowing for more re-investment.

In reviewing your business structure, consider:

• Short and long-term business objectives, eg goals/successors.

• Effective tax rates – corporation tax for small companies at 20% is a lot lower than the higher rate of income tax at 50% (45% from April this year). Consider capital tax implications too.

• Would a different structure allow you to re-invest more profit after tax to develop the business?

• The risks of trying to expand the business under the present structure.

• Sometimes it is worth using a corporate structure for the more risky operations, but ensure that land is held in the right structure – a company is not necessarily appropriate.

• Plan for succession in your review.

• Consider all implications including impact of SPS/CAP reform.

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