Diversification On Your Farm
The Importance of Utilising Farm Management Information
Lisa Oliver from LHP Chartered Accountants discusses the importance of utilising the farm management information that is now available at your fingertips.
Making business decisions need to be considered carefully, and financial information is a key factor in the decision-making process. With the economic uncertainty we are currently seeing, there has never been a more opportune time to look at the financial health of your farming business.
Farm Management Information
Understanding farm profitability and cash requirements is becoming increasingly important for agricultural businesses. As recent events show, uncertainty is a key risk for business, with many farming clients looking into expanding their existing business or creating new ventures to bring in extra income to enable them to grow.
Price volatility, weather and disease are all risks farming businesses have no control over and 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 cash flow gives you the opportunity to manage and control an element of the business, and ensure all enterprises are contributing to the gross profit of the business and generating positive cash flows. If there are enterprises that are not profitable or generating cash, then it is time to re-evaluate and decide whether these should continue.
Historically many farming businesses produce year-end accounts in order to comply with income tax requirements. These are sometimes prepared 6-12 months after year-end, with a meeting to discuss what happened almost 12 months ago. It is time for this to change.
With *Making Tax Digital underway (HMRC initiative to modernise income tax by 2023) many farming businesses are either using online accounting or will soon be required to move to cloud accounting software to submit quarterly returns to HMRC, with accounts being made up throughout the year, rather than just year-end. This gives opportunity for businesses to monitor profitability and cash flow continuously.
Once the budget has been set, why just keep that at one year? Rolling forecasts over 10 years will highlight the risk of loss of BPS (Basic Payment Scheme) 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 able to plan well in advance.
Where to start
If cash flows and budgeting have not been prepared before, then this may seem a daunting undertaking, but with information now at your fingertips, getting started should not be too much of an onerous task. The majority of farming businesses will either be using a cloud-based software or an agricultural accounting package – both of which can assist with budgeting and cash flow management using the information used for VAT return preparation and year-end accounts to form the basis of forecasts.
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.
Making business decisions need to be considered carefully, and financial information is a key factor in the decision-making process. With the economic uncertainty we are currently seeing, 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 if additional borrowing is required from the bank.
Incorporating a sensitivity analysis into the budgeting model will also help you to predict changes and impact on cash flow, plus help assist in decisions throughout the year.
With Making Tax Digital already requiring the majority of VAT registered farming businesses (turning over £85k+ a year) to use digital software, most businesses have the information at their fingertips already. It is just a case of using this information and monitoring it throughout the year.
With up-to-date real-time information, cash flow can be monitored and compared to budgets. Sitting down around 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 will enable you to make informed decisions in a timely and efficient manner. Sharing accounting information with professionals also enables them to give you the appropriate advice required.
Every business needs to plan ahead and assess profitability and cash requirements. The key message here is 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’s 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 a 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 in running of a successful farming business.
(*Making Tax Digital has been around for a couple of years, firstly affecting VAT registered with turnovers above £85k, now being rolled out for all VAT registered businesses, who need to be ‘MTD ready’ by April 2022. For the self-employed with turnovers of £10,000+ per year, the deadline is April 2023. LHP can help with this).
Talk to LHP
For help with any aspect of your farming business including how to adopt cloud to manage your farm information in real-time and do clever forecasting (and to avoid fast approaching penalties of Making Tax Digital compliance), please get in touch. Drop them a message on Let’s Talk and they can take it from there. LHP has over 85 years’ experience in helping farming enterprises thrive, adapt and grow so you are in safe hands with us.