You may have updated your accounts software or even moved to digital accounts software for the first time in order to be compliant for Making VAT Digital (MVD), but do you realise how much you can get from your software for relatively little extra effort?
Accounting software means data is available and can be used to produce regular management accounts which provide a platform for making critical business decisions.
The information has never been so readily available and can make a real difference to the way you run your business. The benefits range from being able to manage your own business and the opportunity to collaborate with other professionals throughout the year.
Historically, many farming businesses produce year end accounts in order to comply with income tax requirements, these are sometimes prepared 6-12 months after the year end, with a meeting to discuss what happened almost 12 months ago.
It is time for this to change.
Understanding your farm profitability and cash requirements is becoming increasingly important for agricultural businesses. Uncertainty is a key risk for business, with many farming clients looking to either expand their existing business or consider new ventures to bring in extra income and enable the business to grow.
With the day to day running of the farm taking up time, it is easy for cash flow management and budgeting to take a back seat. In order to improve efficiency and profitability, management information should be used to support future business decisions.
Budgeting and monitoring cashflow gives you the opportunity to manage and control an element of the business, and ensure all enterprises are contributing to the gross profit and generating positive cash flows. If there are enterprises that are not profitable or generating cash, then it is time to revaluate and decide whether these should continue.
New projects also require detailed planning, with cash flow budgets enabling you to identify key performance indicators such as payback period and full economic cost of production.
Business decisions need to be considered carefully, and financial information is a key factor in the decision making process. With the uncertainty over Brexit looming and the threat of a ‘no deal’ there has never been a more opportune time to look at the financial health of the farming business.
A lot of decisions are based on the tax implications, and whilst tax is an important factor to consider, it should not necessarily override commercial decisions. Sitting down at the beginning of the financial year and considering annual spend and time management will pay dividends, and will also enable you to provide essential information to your lender if additional borrowing is required.
Utilise the information available
- Producing monthly or quarterly VAT returns digitally means that the bank account has been reconciled, all costs and receipts have been analysed to the appropriate nominal code and the information is there for you to use.
- Most software packages have the capability of holding fixed asset registers, so depreciation can be calculated; and a budgeting tool, so the previous year’s data can be used as a starting point for your budget.
- Sit down and go through the expected profit and loss for each enterprise. Think about expected yields, prices and input costs. This is the important starting point for the basis of a budget; software packages will then allow you to consider the timing of expenses and receipts to convert this to a cash flow forecast.
- Discuss plant and machinery requirements, and opportunities to share or pool machinery with neighbours. Understanding the useful life of your assets will ensure the appropriate depreciation rate is used and aid the production of useful meaningful management information.
- Think about stock movements and incorporate that into your budget, in order for a true profit to be reflected.
- Rolling forecasts over several years will highlight the risk of loss of basic payment scheme (BPS) from 2021, and provide reassurance or push the decision to change things if the outlook is not looking profitable. Farm businesses should be aware of the impact of no subsidy and be in a position to plan well in advance.
Sensitivity analysis
Incorporating sensitivity analysis into the budgeting model will also help you to predict changes and their impact on cash flow. How will a 1ppl variance in milk price, a 0.5T wheat yield effect or a reduced occupancy rate on your furnished holiday let effect your projected profit and cash flow?
A sensitivity analysis for new projects will enable you to look at the break-even point and how sensitive a fall in price or yield is, and if the risk of fluctuation in this makes the project unviable.
Sharing information
With up to date real time information, cash flow can be monitored and compared to budgets. Sitting down round the table once a quarter will give you the opportunity to review spend to date and make decisions regarding the next quarter. It is also a great time to discuss what went wrong and what went right.
Collaborating with professionals will be key and keeping in regular contact with accountants, consultants and bank managers enables you to make informed decisions in a timely and efficient manner.
Up to date information means profit forecasts can be prepared before the year end. This enables tax estimates to be prepared for the following January and July, and gives the opportunity to consider the timing of machinery purchase, whether additional pension contributions should be made and the timing of selling crops in store.
Conclusion
Every business needs to plan ahead and assess profitability and cash requirements. The key message is that it is never too late to start preparing budgets and cash flows and using the information throughout the year. Plans and decisions change regularly, so it is really important to revisit these frequently and consider what is being done right and what needs revaluating and changing.
Embrace change and use the information you have. If the numbers do not add up then it may be time to look at a diversification project, or stop an enterprise that is not making money. Sometimes these decisions are hard, but in a time of uncertainty these decisions are paramount to running a successful farming business.
| Considerations and discussion points when preparing your budget and cash flow |
| Price volatility |
| Price volatility will continue to be an issue for farmers. With trade agreements and the strength of sterling still unknown, it is important to assess how changes in prices will affect future cash flows, and whether there is anything that can be done to mitigate the risk of price volatility. |
| Collaboration with neighbours |
| Assessing whether the farming business is utilising its plant and machinery to its full capacity is a worthwhile project. It is important to understand the depreciation cost in your accounts, and whether it is realistic. Sit down with your accountant to establish the useful life of machinery and the expected return on investment. If the machinery and kit you have purchased is surplus to requirements, then collaboration with neighbours is an opportunity to share machinery costs as well as storage and labour. |
| Farm asset potential |
| Evaluating the potential of all farm assets could identify diversification options, or projects for the next generation to take on. If farm buildings are surplus to requirement or redundant, then there may be financial benefit for change of use. |
| Reviewing input prices |
| Review the input costs for the business over the last twelve months and compare prices with a buying group or other competitive sources. Regular checks will ensure you are not overpaying, and assist with the profitability of the business. |
| Diversification |
| If diversification is in the long-term plan, then preparing a business plan and strategy will assist decisions with regards to spend and timing of projects. Banks and loan providers will want to see up to date accounts and management information if you are looking to borrow, and will want to see a budget for the new enterprise. Having these available and ready will ensure the process moves forward without any hold ups. |
| VAT and tax implications do need to be considered carefully when considering diversification projects, and should be included in the business plan and strategy when preparing. Whether VAT can be recovered on a project could be the deciding factor as to whether it is worthwhile pursuing. |
| Where a difference has been made |
| Moving from paper to cloud |
| Using software to prepare VAT returns means the information is, quite literally, at your fingertips. Using cloud-based software will mean you have access to your data on your smart phone and ensure you know exactly what is going on daily. |
| A client who had moved from a cash book to Xero was apprehensive at first, but the result has been astounding. Daily automatic bank feeds has saved time as individual transactions no longer need to be hand written in a manual cash book. |
| Having a farming business that has both beef and arable enterprises as well as rental properties has meant that tracking can be used to monitor the profitability of each enterprise. No longer are spending decisions made blindly throughout the year, a profit and loss can be run for each enterprise easily at any point during the year, as well as cash flow reports. The fixed asset register has been imported in, so daily depreciation rates are calculated, and any hire purchase agreements have been set up so, again, the interest is apportioned over the year. |
| Hazlewoods then use this information prior to the year-end to produce a profit forecast which allows decisions about timing of plant and machinery purchases, pension contributions and discretionary spend. |
| Utilising the information already held |
| A client that had been using Farmplan for a number of years, but had just not been using it to its full potential has now reaped the benefits of using the budgeting tool. Using the prior year data as a starting point means the budget was set up in minutes, and this was used as a starting point. |
| Allocating costs and overheads between enterprises has been paramount in their business decisions. Having a family meeting with Hazlewoods each quarter, means a review of the last quarter can be discussed, with discussions then turning to the future |
| Recently a neighbouring piece of land came up for sale and having up to date budgets and management information has meant that the information could be sent quickly to potential lenders. This demonstrated the forward thinking of the business, and the detailed thought that has gone into cashflow management and budgeting. It also provided the family with the reassurance that the purchase was a positive business decision. Sometimes letting the head rule the heart is the only way to move forward in business, and budgeting and monitoring cash flow will assist with this decision. |