Figuring Things Out - Farm Business Reviews

BUSINESS REVIEW We are entering a new era for UK agriculture. Challenges include; increased emphasis on the environment as well as food production, reductions in direct suppor t and uncer tainty about what future suppor t mechanisms may look like.

Uncertainties brought about

by Brexit, Covid 19, volatile market forces and the weather, it is more important than ever for businesses to take stock, really understand their present system performance and where they start from on a journey of change. We would advise businesses to take the time to consider these questions now while they still have the benefit of direct support as we know it, albeit at a reduced level from 2021.

GSC GRAYS

The purpose of a review is to help a business do just that. It assesses the business structure, assets and performance which enables its strengths, weaknesses, oppor tunities, and threats to be identified.

This leads on to being able to identify areas of improvement and develop an action plan to get the business in the best possible position for the future.

This does not necessarily mean reinventing the wheel, as there are a lot of ver y good and well-run agricultural businesses we come across that may only require small tweaks to be made as a result of a review.

To make the topic more realistic let us take a brief look overleaf, at a real-life review under taken recently and its outcomes.

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A modern machiner y pool is maintained and is capable of under taking all the work in-house as well as providing contracting ser vices.

The business does have an element of borrowing both in the form of bank loans and items of machiner y on hire purchase.

HISTORIC PERFORMANCE Three years’ wor th of the business accounts were analysed and evaluated against recognised standards and benchmarking data.

TABLE 1 – GROSS OUTPUT ANALYSIS

PURPOSE OF THE REVIEW GSC Grays were instructed to carr y out the following as par t of the Business Review:

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Review performance of the current business both financially and physically; how the business was managed and a review of infrastructure

•

Under take a SWOT analysis

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To consider all potential options including letting the land on an FBT and entering into a Contract Farming Agreement

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Develop of series of recommendations/options as to how the business could be restructured going forward to increase profitability.

BUSINESS BACKGROUND A change of scale of the business has seen the area farmed

CLIENT FARM

COMPARABLE

% OF OUTPUT

GUIDE %

GROSS OUTPUT

100%

100%

VARIABLE COSTS

62%

< 35%

FARM GROSS MARGIN

38%

> 65%

LABOUR & MACHINERY COSTS

25%

30%

PROPERTY & MANAGEMENT COSTS

1%

5%

ALL FIXED COSTS EX RENT & FINANCE

26%

35%

RENT & FINANCE CHARGES

6%

15%

TOTAL FIXED COSTS

32%

50%

PROFIT/(LOSS)

6%

15%

TRADING ANALYSIS

reduced to 350 hectares. The land and buildings are in four locations, a main base and 3 outlying blocks of land.

Current enterprises are: Traditional cereal/oilseed arable rotation, Arable Contracting, B&B Pigs.

The data above shows that Variable costs relative to Gross Output appear high, whilst Fixed Costs appear low. Profit/ (Loss) is approximately half of what would be expected for a comparable business.

Additional income is received from the Basic Payment Scheme.

NOTE:

The farm is staffed by two family members, one full time

It is important to understand how each of the costs are

staff and additional self-employed labour when required at

shown within the accounts. Account presentation differs vastly

busy periods.

between different Accountants and some are more conducive to accurate comparison than others. What is most important

GSC GRAYS

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is to understand which specific costs fall into each categor y.

For example, some contracting costs can switch between

A SWOT analysis provides a simple and effective summar y

Variable and Fixed Costs.

The analysis as above helps gain an understanding of the business’s cost structure and possibly where changes could be made to increase profitability.

SAMPLE £/HA

PREMIUM ACTUALS £/HA £/HA

1,330

1,410

2,543

351

348

1,520

78

61

FARM GROSS MARGIN

901

1,002

1,023

LABOUR & MACHINERY COSTS

440

366

652

OTHER FIXED COSTS

355

359

192

TOTAL FIXED COSTS

795

725

844

NET FARM INCOME

106

276

179

ARABLE VARIABLE COSTS LIVESTOCK VARIABLE COSTS

of the Strengths, Weaknesses, Oppor tunities and Threats of the business.

STRENGTHS

TABLE 2 – BENCHMARKING COMPARISON

GROSS OUTPUT

SWOT ANALYSIS

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Good range of modern buildings

•

Enthusiastic par tners open to new ideas

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Technical performance of arable enterprise is good

•

Total liabilities relatively low compared to total business assets

•

Capital available to invest

WEAKNESSES

•

ADD: RENTAL EQUIVALENT

170

LESS: FINANCE AND NON-FARM COSTS

101

PROFIT/(LOSS)

248

High Labour and Machiner y costs relative to Gross Margin

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Distance between some of the farming units and main base

OPPORTUNITIES

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Improve management systems to generate useful management information

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Benchmark this information against comparable data

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Expansion of the B & B Pig enterprise

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Look to sell outlying land and reinvest the capital generated into the main base – fur ther pig sheds.

This should also reduce labour and machiner y costs

The table above shows the business’s actual performance

•

from the accounts analysis as compared to ‘Sample’ and

locality whether that be through rental arrangement or contract/share farming oppor tunities

‘Premium’ businesses.

NOTE: Clearly the business has significantly larger Gross Output and Variable Costs and Fixed Costs than the Sample and Premium

Look at oppor tunities to take additional land in the

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Let the farm or contract it out

THREATS

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Inaction!

structure by looking at the Net Farm Income, which is slightly

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Brexit and future trade arrangements

below the Premium.

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Health of the par tners

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Weather

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Increase in input costs through inflationar y pressure

so we evaluate how effectively the business utilises its costs

These accounts do not have sufficient detail to break down Gross Output which in this instance makes drawing comparisons harder.

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FUTURE FARMING OPTIONS AND RECOMMENDATIONS TO EVALUATE

CONCLUSION The existing business has returned strong profits historically though due to the decreased scale of the business in recent years it is struggling to meet the needs of the par tners and

NOTE:

fund the debt repayments.

These options/recommendations, or a select few of them would be looked at in greater detail, with budgets produced to

The accounts review shows business performance at a level

show their potential effect on the business.

close to that of ‘Premium’ comparable businesses though

Prior to determining whether changes are required to be made to the current enterprise mix it is impor tant to establish how profitable each enterprise is. Through analysing historic performance, a number of areas have already been identified as to where the business might make improvements.

By analysing each enterprise

more detailed information would enable a more accurate comparison and benchmarking.

NOTE: Following the review and the production of a Whole Farm Budget by GSC Grays the business took the following action.

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individually the business should be able to look at these

easily access specific financial information that was

areas in greater detail.

apportioned to each enterprise.

Recommendation 1:

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Built an additional pig shed at the main base financed by a new bank loan.

As such, it is recommended that a Whole Farm Budget

•

of the current business is produced to allow performance

Identified one of the outlying blocks of land as an area potentially that could be sold – 100 acres

to be monitored against it and credible management

over 25 miles away from the main base. The land

data to be produced. This will also allow the business to

was marketed for sale with the following outcomes

benchmark against comparable businesses.

Recommendation 2:

Upgraded their accounting systems to allow them to

expected:

o Workforce having more time to concentrate on

remaining arable areas which would allow tasks

Consider building an additional pig shed financed through

to be undertaking in a timely manner leading to

a combination of cash in the bank and a new bank loan

increased results:

as well as the restructuring of the existing borrowing

o Less wear and tear on machines from decreased

por tfolio.

road work

Recommendation 3:

o Restructuring of existing borrowing portfolio from

funds of the sale

Consider selling a propor tion of the outlying land and

o Increased profitability as the margin from the

using a propor tion of the cash generated from the sale to

additional pig shed greater than the margin from

build additional pig sheds. By selling a propor tion of land

the 100 ac of arable crops

as well as building an additional pig shed, the business has

•

The possibility of the letting the land was also explored

the oppor tunity to re structure its labour requirement as

however one of the requirements of the business was

well as borrowing por tfolio. It is recommended that if

to increase profitability. Forecasts showed a greater

this is explored fur ther it is done so on the same basis of finance as Recommendation 2. The investment must be a sound one irrespective of where the capital is sourced to fund the project.

return on capital from the additional pig building and possibility of further pig buildings funded by the land sale as opposed to a rental income from the land.

Had Capital Appreciation been the requirement of the business this of course would have been a different stor y.

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