Good business and financial management improves profitability and resilience. Paul Fox, of Kite Consulting, walks us through the basics.
Farmers in control of their numbers are more resilient – normally from a personal perspective as well as financial.
This is because knowing your numbers – your cost of production, margins and profitability – means you can make more informed, rational decisions about your business.
Agriculture faces a lot of uncertainty in the current political environment and those who understand their financials will be in a better position to weather what may come.
It is worth noting that it is easy to become fixated on cost-cutting, but creating value is also important. This means thinking more holistically.
For example, reseeding grassland is a cost, but data shows that farms which reseed more frequently have improved productivity and better financial performance.
Finding value comes from analysing good data. So, what can you do?
The basics of good business and financial management mean understanding your costs of production and profitability for each enterprise, and the relationship between each.
There are numerous accounting software packages that will help with this, but you can also breakdown enterprise costs using a spreadsheet.
Break inputs and outputs down line by line for each enterprise, so if you are looking at feed costs, for example, know what you are spending on dairy cows, youngstock, beef cattle, sheep, etc.
Break it down between home-produced forage, boughtin supplies and supplements. Are you wasting any? This will be far more useful for making decisions than one single overall figure for feed.
Do this monthly or quarterly to create a set of management accounts so you have up-to-date figures to work off and make decisions accordingly. Too often, people rely on data from their end of year tax accountant, which can be 15 to 18 months out of date.
Succession planning should also be a part of farm business management.
People often have their most productive time at work between their mid 20s and early 50s. So if you don’t bring the next generation properly into the businesses management until their 40s, they have lost two decades when they could have been contributing and building up knowledge.
"Don’t be intimidated by numbers"
"A lot of farmers, particularly young farmers, feel intimidated by accounts – but I always say, if you can add, subtract, multiply and divide, then you can understand it. It’s not as complicated as you might think" - PAUL FOX
So you have got your numbers all laid out. Now what? You need to analyse them, pull them apart and question why a cost is high, or productivity low in different areas.
To do this, you will need good ‘physical’ data about your farm. This adds context to the financial numbers: Pin-point where and how you are using inputs and where and how you are achieving outputs.
So, data such as tonnes of feed bought or the quality, quantity and cost of forages made; volumes of fuel and fertiliser used; volumes of milk produced; number of cattle or sheep sold; tonnes of a crop produced.
All of this will help you analyse your financial data. This is not as hard as you might think – all good farmers are data analysts – every day they think about numbers; how many litres of milk they have produced, or litres of fuel they have used; how many tonnes of feed they have consumed, or tonnes of grain they have harvested.
Once you understand your numbers, start to benchmark against data from other farms running similar enterprises.
AHDB has several free benchmarking tools, and specialist accountants and consultants often have their own set of data you can use.
At Kite, for example, we have information from more than 400 dairy farms which can be used for benchmarking. Some universities and agricultural colleges also have benchmarking groups or data sets, as do some milk buyers.
Shape Your Farming Future is a series of informative and practical guides looking in-depth at issues pertinent to farmers when planning for the future.