Time in the office is your most valuable time if used properly to review and plan your business, says accountant Robert Hatch, a partner with chartered accountant Ensors, Bury St Edmunds.

“You need to be on top of the job, not stuck in it,” he says.

When visiting farms for the first time, he’s looking for good records, allowing a manager to know at any point where the business is, whether that is the cash position, creditors and debtors, machinery repair costs or enterprise costs.

“This is what the banks are looking for to give them confidence in a business. More importantly, it is also what you should be producing for yourself to help you make the right decisions and get the right funding.”

Knowing total costs of production

This is not a new subject, but one which needs revisiting on most units. Growers usually have a good idea about direct costs, those associated with growing a tonne of a crop and getting it back to the yard. For many this will be about £90-100/t. But using this to make marketing decisions is flawed, says Richard Levin, a partner with farm consultant Brown & Co, Bury St Edmunds.

“After accounting for variable costs plus the fixed costs of labour, power and machinery, you have to add handling, loading and storage costs, electricity, admin, insurance, finance and professional costs. People tend to think this is just a few pounds, but it can easily put another £20/t on to the cost of producing grain.

“These have all got to be paid from somewhere and should be attributed to production costs to get total costs. Then you need to allow a profit margin to arrive at an acceptable selling price. That margin has to cover living costs, tax and reinvestment in the business. Most businesses need to be aiming at around the 25% mark to cover all of this. So most growers will need £100-120/t ex-farm to cover costs before profit is added,” he reckons.

Costs rule of thumb

• If cost structure is correct, fixed costs (power, machinery and labour) should represent no more than 50 to 55% of gross margin
• Rent and finance will account for a further 20 to 25%
• This leaves a potential 20% to 30% profit margin, the level you should be aiming for
• Don’t forget to cost yourself. If you don’t allow for drawings you’re kidding yourself

Sharpen up marketing

“Most growers would benefit from spending more time on marketing their crops, especially analysing their pattern of selling and recognising why it is that they sell when they do and at what price,” says Mr Levin.

“Farmers spend 95% of their effort in planning and growing the crop and about 5 %, if that, on the marketing, often needing to sell for cash-flow reasons or tending to sell because the price has reached what they consider to be an acceptable level, such as breaching the £110/t mark. But that often does not cover their total cost of production.”

Reduce marketing  risk

• Review customers and listen for any talk of late payments
• Accounts can be checked at Companies House, but are often old so are of limited use in judging the current position
• Late filing of accounts can be a warning sign
• Consider bad debt insurance
• Spread the load so that you are selling to more people and across a wider time frame
• Problems in the grain trade most typically arise in late spring – if you are concerned, consider selling before Christmas, which could also give you the chance to earn income from alternative uses for grain storage

Review banking

Despite widespread publicity about reluctance of banks to lend to businesses, agriculture is still being treated relatively well, say accountants and consultants.

But margins are higher than they were a year ago and arranging loans and overdrafts will take longer.

Margins over base on farm overdrafts are generally about 2% for good businesses, although some are still paying below this and others have been moved up to 3 to 3.5 points over base.

“Beware arranging an unrealistically high overdraft facility while it might feel comfortable to have a good cushion, you may well be paying an annual fee, typically 1%, on the total facility whether you use it or not,” says Mr Levin.

“If you have a hardcore requirement of at least £50,000, which is not going to reduce in the short term, you should consider taking this off overdraft and putting it on to a loan.

“First, this reduces your costs. Annual arrangement fees for overdrafts are typically 1% of the facility, whereas with a loan there will only be a one-off arrangement fee, also usually 1%. Second, you can argue that it reduces risk in the business, as overdrafts are repayable on demand. Third, it generally imposes some discipline for repayment.

“With loans, you need to consider fixed or variable rates. The current premium to fix is around 2-2.5%, so you would be paying 5-5.5% over, say, 15 years. If you can fix a rate in the region of 5-5.5% or lower over 15 years now, I would seriously consider it,” says Mr Levin.

“Much depends on how government policy develops, but it’s likely that inflation will rise over the next 15 years and interest rates will not remain at these levels in the medium to long term.

“If you think you will have cash to pay off all or part of the loan before the term is up, look for an arrangement allowing you to do this without penalty. For example, if you borrowed, say, £200,000 you could split it between a variable and a fixed-rate loan of £100,000 each. This would allow you to pay off the variable loan as and when you wanted to without penalty.

“Variable rate loans generally have the same margin over base as the overdraft, but have the benefit of a one-off arrangement fee and are not callable, provided there are no defaults on repayments.”

Machinery policy

Records must be good enough to allow an analysis of breakdown and repair costs for each machine so that informed decisions can be made about farm structure and machinery replacement, says Mr Hatch.

“Is every machine being worked hard enough? If not, is there an alternative, ie contractors, sharing or contract farming?”

There’s no one size fits all rule for machinery policy, however, if you replace on an ad hoc or emergency basis, you will not be in the best position to bargain on price or to plan finance and tax aspects, says Mr Levin.

Investment should not be purely tax driven, warns Mr Hatch. But with the £50,000 annual 100% allowance for each business, it’s important to take advantage of this where appropriate, so timing and planning are important.

The weakness of sterling means that the cost of new machinery is increasing. But, conversely, there is good export demand and second-hand machinery values are high.

“This highlights the value of having good management accounts which show actual rather than book or written-down values,” says Mr Levin.

“If you are replacing tractors, consider hiring, which is more expensive week for week, but, overall, can save money if it is just for short periods of 10 weeks or so. It can also reduce the risk in the business in terms of capital employed and by eliminating time lost through breakdowns and repair costs.”

Combine replacement with one or two machines is a big issue on many larger units. Here again not only the capital and running costs have to be considered, but also the implications of breakdowns and the practicalities of running one or two machines in terms of managing carting, tipping, intake and staff requirements.

Employ assets fully

Whether it is people, buildings, land, cash, water or any other asset, many businesses have some resources which could be more productive.

“Whether employees or family, people can be a sensitive area. But you have to ask whether they are all fully employed, and especially if more family members will be joining the business in future,” says Mr Levin. “There’s no point creating work that is possibly not necessary or which could be bought in more cheaply, this will just put an extra strain on the business.

“Should some be earning full or part-time off the farm, for example? This does not mean they are not contributing to the farm business, or that they are not still involved. This might mean some difficult conversations and some awkward decisions within the family. Good communication is essential and sometimes an outsider looking in can spot opportunities or weaknesses and be the catalyst for starting those conversations. But if you have a succession tenancy, beware of jeopardising succession rights by potential successors earning too much off farm income.”

Can buildings be used out of season for temporary storage of other growers’ produce, or for non-agricultural storage? Beware of planning and rating issues if you are considering this route, Mr Levin warns. It may even pay to alter your grain marketing pattern to allow you to earn extra income from storage.

Some growers have water abstraction licences which they are maintaining, but not using, he notes. “While it is not generally worth irrigating on marginal land, the volatility of wheat prices means that this must be considered on an annual basis. Alternatively, the licences could be traded to bring in extra income in years when they are not being used.”

Measure your business

Ideas and co-operation often come out of discussion groups and farm walks. Benchmarking shows that on many arable units there is still scope to trim labour and machinery costs as well as paying more attention to crop marketing.

“There’s still a huge range in efficiency and to some extent that depends on the approach taken by different managers,” says Mr Levin. “For example, the last 5% of the crop is usually the most expensive to produce, whether that’s through extra variable inputs or in harvesting or drying costs.

Identify training needs

In most regions there is generous funding available for training, especially at management level. Training needs should be identified not only in staff, but family, too, where additional office, analytical or computer skills could benefit the business.

Diversification pitfalls

VAT is the current focus of HMRC where farm businesses are concerned and it tends to be diversified businesses which fall foul of VAT rules, says Mr Levin. Charges for services such as contracting need to include VAT as do rentals and holiday lets. Repairs and VAT reclaims are a complicated area, especially when it comes to the farmhouse and what can realistically be claimed a business expense.