09 May, 2018

Getting the best value from your accounts

Most farmers keep accounts to satisfy other people such as the taxman or bank manager. We believe that accounts shouldn’t be seen as an obligation for a third party i.e. taxman, but rather as a management tool to make informed decisions on your farm business.

Why keep accounts?

Farmers are business people but most farmers tend to think of themselves as working the land and don’t put enough emphasis on the financial aspect of the business. Farmers spend too much time compiling the information after the year end for their tax accounts and don’t take the time to analyse them. If your accounts are not accurate when you seek advice on them the advice can be flawed. The quality of the advice can only be as good as the quality of the information provided in the first place.

Many farmers are continuing to make serious financial decisions without having sufficient information to diagnose the current financial state of health of their farming business. Farmers in the past have restructured loans or made deals with the banks but have still ended up in financial difficulty. This arose because they did not have sufficient information to accurately measure the level of borrowings the farm could service on an on-going basis even after restructuring or settlement.

Benefits of comparing a number of years

If the net worth of the business is going down then corrective action is needed otherwise financial difficulty is around the corner. There is a danger that farmers will consider their situation to be satisfactory if the Bank Manager is happy. The example illustrated shows that the amount owed to the Bank did not increase, yet the net worth deteriorated by €15,000 because the value of stocks went down from €80,000 to €70,000 and the amount owed to creditors went up from €10,000 to €25,000.

Compare your own results against those of other farmers within a similar enterprise:

To get these comparative figures, it is necessary to do accounts with a firm that specialises in farm accounts and that has sufficient farming clients to provide a large data bank from which a comparative service can be provided.

Ifac is the most notable accountancy agency providing a comparative analysis service to clients. This type of service requires access to a large data bank of reliable information.

Ifac’s comparative analysis report draws on information from ifac’s 18,000 clients and compares a farmers own figures on output, individual costs and profit with the national average and the top 10% within similar enterprise mixes. The benefit of using comparative groups in this way is that it makes the comparisons more relevant to your particular enterprise.

The comparative analysis is very good at helping farmers to identify particular items of cost on their own farms which are out of line with the norm. The costs are expressed as percentages of gross output and each item of cost on the farm is expressed in this format.

Where farmer’s own costs diverge from the norm there may be explanations for increases or decreases in certain costs. However, the report does focus the attention on an item of cost that should at least be looked at by the farmer and his or her agri advisor.

Good advice depends on good information

It is generally accepted that the more progressive farmers have been more willing to ask for and to accept help from advisory services over the years. The same can be said for other businesses where wise and intelligent managers seek the best possible professional advice available to them. The quality and cost of good advice is governed greatly by the availability of information. You cannot expect a good doctor to provide you with an effective cure if you are unable to tell him or her the precise location of your pain, similarly an advisor or consultant will be more effective in helping you to cure your farming problems if you provide them with sufficient information to allow them to diagnose it properly.

Always remember that if you require the services of a consultant, be sure to ask what information is required to avoid wasting time and money further down the line.