Farms often have two sets of accounts, but the simplest way to measure performance is to compare costs in the same units.
Pat Tomlinson, of Albert Goodman, gives us his thoughts...
Nearly all dairy farmers will have a set of accounts prepared every year. They are usually very expensive and are often not used for any other purpose than working out what numbers need to go on the tax return.
Some dairy farms choose (or are told by their milk buyer) to have management accounts prepared; these are usually equally expensive and because they are produced voluntarily are used a bit more proactively to help the business.
Oddly enough, both sets of accounts use exactly the same raw data, but are interpreted and added up in slightly different ways. The two sets of numbers will often produce a different profit figure and the two should always be easily reconcilable. However, the fact there are two sets can be very confusing and, if not prepared and presented to the client (and third parties such as banks) carefully, can lead to more confusion than clarity about the performance of the business.
I have experienced ‘polar opposite’ conclusions in two sets of accounts for the same business.
The onus should be on the accountant to make sure when they present a set of accounts, they are used to the full in helping the client understand and interpret financial performance of the farm, not just used to fill in the tax return.
All the fabled differences between tax accounts and management accounts: herd basis, stock valuations, drawings vs. business expenses, capital vs. repairs; can all be readily explained, reconciled and interpreted, with no detrimental impact on the tax bill as is often perceived.
We find the best way to present a set of dairy farm accounts (in addition to the usual statutory pages) is to express everything in ‘pence per litre’ format.
There can be no clearer message than to compare costs and output in the same units, and thus relate everything back to the milk price.
It is a very useful format for helping understand the impact of any cost, either historic or proposed, or for any planned expansion or investment; and it is usually more enjoyable (or less tortuous) than going through the statutory pages in accounts.
We have been reporting in such a format for many years now and, in doing so, are finding some relatively straightforward modern benchmarks for profitable dairy farming, as well as identifying some substantial ranges in performance.
The table gives a brief summary for our non-organic dairy farmers in the year ended 2018.
It is not for the accountant to advise on whether any particular cost is right or wrong, but it is right for the accountant to demonstrate whether it is more or less than other farms are spending to do similar things.
This will lead to the farmer asking questions of the relevant expert, for example, the nutritionist, the vet, the machinery dealer or contractor.
Of course for more regular reporting than annually, management accounts can be extremely valuable for ongoing financial control and management of a dairy farm.
Please do not spend lots of money on a set of accounts just to complete a tax return; demand more of your accountant.