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Focus on industry: Managing costs and cashflow

In the second part of FGinsight’s look at how UK agriculture can learn from the haulage, construction and engineering sectors, Joel Durkin assesses cashflow and minimising cost of production
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There appears to be recognition across the farm sector supply chains are not functioning effectively.

There appears to be recognition across the farm sector supply chains are not functioning effectively.


While dairying is seeing money being diverted back to the farmgate in the form of retailer supplements to keep producers afloat, concerns remain in arable markets about farmer access to futures, due to EU mandates, and how this will affect producers’ ability to tie down margins for their crop.


One thing experts generally agree on is much of the risk and potential for volatile price swings is passed back to the farmgate.

Part one of the series

The first part of the series, Focus on industry part one: Lessons from business management in haulage, construction and engineering examines how other industries cope in difficult times.

Businesses in the haulage, construction and engineering industries have developed supply chain models which limit cashflow risk, investing to drive efficiency in their operations.


The nature of the construction industry means jobs are priced before work begins, allowing firms to take into account changing costs of production.


Case study: Lukasz Kisiel, Kisiel Construction

Kisiel Construction is a privately-owned, London-based company which specialises in residential refurbishment, renovation, extensions and new build construction.


The company operates a ‘just-in-time’ business philosophy, which aims to minimise waste in time and materials. Mr Kisiel also admits the firm turns down jobs if working capital is tight in order to maintain a good balance sheet.


In order to aid cashflow, the company has invested in an online payments management system to reduce its costs.


Mr Kisel said: “All the processes are automated, which reduces effort in terms of admin.”

Giorgio Buttironi, policy and public affairs officer at the National Federation of Builders, said: “In housebuilding, most jobs are priced up by the developer and then passed to the client. Payments are generally staged to pay for supplies, but this depends on each company’s business model.”


Firms in construction also have specific financiers to relieve cashflow issues. But, aside from these tools, some companies have changed their business model completely to protect themselves from production cost volatility.


John Guilfoyle, from Guilfoyle Construction, said his firm had to change its model in 2007-08 when finance options dried up during the recession.


The firm now works with private financiers, building houses in the South Downs National Park on a cost-plus model, which Mr Guilfoyle said minimised cashflow risks.


For Lukasz Kisiel, managing director of Kisiel Construction, it has been a focus on reducing waste which brought efficiency gains to the firm, which has introduced a ‘just-in-time’ business philosophy.


He said: “Cashflow is important for more than one reason. We do not want to buy materials now which we will want in two months’ time.”

Mr Kisiel claimed the philosophy reduced waste by minimising the potential for breakages and also minimised the time and money spent transporting materials around sites.


“Every function of any significance on a lorry can now be monitored. You can use the information to plan future schedules."

Jack Semple, Road Haulage Association

Neil Wilson, regional agriculture director for HSBC, said there were opportunities for improvement in farming both for better contracts and improved efficiency.


He said: “There are certainly opportunities for improvement, whether this is more aligned contracts like we have in the dairy sector I do not know.


“What I have seen from the construction sector is they get a lot of things delivered on time; everybody knows what they have to do and when they need to do it. If we could get something like this in agriculture it would be a lot of the supply chain tied up.”


Industries across the UK are also seeing major cost reduction through better monitoring systems.


Haulage pays roughly 30 per cent of its total costs in fuel. The importance of this volatile cost to a business’ bottom line has prompted many in the sector to explore contracts and efficiencies to mitigate this potential threat.


David Heath, from Clugston Distribution, said the firm used a fuel index which is included in 80-85 per cent of contracts. This takes much of the pressure from the business when agreeing jobs.


Case study: Mott MacDonald

Case study: Mott MacDonald

Mott MacDonald is a £1.3 billion global management, engineering and development consultancy. The firm has 16,000 staff and works on public and private sector projects.


The company’s main costs include its payroll, services bought from contractors and infrastructure, including IT and travel. The firm uses several methods to keep costs low:


  • Having work undertaken by the lowest cost resources capable
  • Intensive management of employee usage
  • Centralised procurement to gain economies of scale
  • Internal collaboration to find work for staff or teams working in poor market conditions

But the sector is also making significant gains in the way fuel is controlled to drive cost efficiencies.


Jack Semple, policy director at the Road Haulage Association, said: “Every function of any significance on a lorry can now be monitored. You can monitor how long it takes for a driver to get from A to B, and you can use the information to plan future schedules."


Mr Wilson said this technology was in the process of being implemented in agriculture and farmers needed to think proactively about how to manage their costs and assets to make full use of it.


He suggested farmers needed to look at a range of issues, including asset depreciation and labour time, when reviewing production costs.


“Know the impacts of cutting costs,” he said. “I think it is a basic step forward the agricultural industry needs to make – get on the front foot and look at your figures.”

Main takeaways

  • Look at contracts which limit risk on costs
  • Minimise waste in time and money
  • Drive efficiency through investment in cost monitoring
  • Think about how to save costs by looking after assets
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