Whether it is the price of potatoes or the cost of fertiliser, a farmer’s cash flow can vary significantly from year to year.
Although this is nothing new, there is an ever-increasing need for farmers to keep a close eye on their business finances.
In my role advising clients I am frequently asked to assist in preparing accurate financial projections for their own use or for their bank manager.
A common question asked is how to achieve meaningful figures when commodity prices and foreign exchange rates fluctuate as much as they have done in the past few years, and when weather has a significant role in determining yields and the price of crops.
Can farmers ever get financial projections 100% correct?
Unfortunately, the answer to that question is ‘no’.
However, this does not mean that the exercise of preparing financial projections is not a useful one.
Management information is a great tool for a business to help manage and monitor its outgoings and anticipated income.
In more challenging trading periods it will also provide the opportunity to identify the early warning signs of cash-flow problems when money may be tight and agreed banking facilities may be breached.
Every bank manager will tell you that the earlier they are made aware of a problem on the horizon, the easier it is for them to deal with.
A cash-flow or budget should not be a few scribbles thought up at the breakfast table a few hours before the bank manager appears. It is something that each business should look to complete on an annual basis.
Thereafter, projections should be revisited regularly to compare against actual performance, in conjunction with your accountant or adviser if necessary.
This does not just apply to the agricultural sector alone; it is good business practice across a range of sectors.
It is also good practice to regularly take a step back from the day-to-day grind of working in the business to review the individual enterprises being undertaken.
Working ‘on’ the business is every bit as important as working ‘in’ the business. When done in conjunction with the preparation of meaningful financial projections, one can start to understand which parts of the business are working well and which areas can be improved.
A review exercise like this can be undertaken within the Scottish Government’s Whole Farm Review (WFR) scheme, whereby grant assistance is available to help fund part of the cost of the review.
The WFR scheme itself has proved very popular, and an increase to the funding available has recently been announced.
Each review must be undertaken by an accredited adviser, and since the start of this year funding of up to £2,500 is available for each WFR and the scheme remains available to new applicants and to businesses who have previously undertaken a review.
Farming businesses operate in an environment where many aspects of what they do are outwith their control.
All the more important, therefore, that due discipline and attention is applied to the areas of the business which can be measured and controlled.
* Mark Smeaton, ACCA, is a senior manager at EQ Accountants LLP in Forfar and accredited by Lantra to undertake reviews within the Whole Farm Review Scheme.