Profit from Better Financial Management

Step 1- Make financial management a priority.

Running a modern dairy farm is, we all know, not a nine to five job. So many different jobs require attention that it is hard to find time to give each one adequate attention. If financial management is to become an integral part of running our business then it should be given priority during the working day. How often do we find that any job which involves paperwork or looking at figures is left until late evening when the `outside' jobs are done? Or, even worse, are categorised as `wet-day' jobs. Now there are, usually, a hell of a lot of wet days but quite often the financial side of the business still gets the `long-finger' treatment. This type of work should be given priority and should be done at a time when we have a clear head and can give it our full attention. A half-hour in the morning after the milking is probably the best time to fit it in. That way we are making it part of the working day and sometimes a financial problem can be solved by having a full day to think it over while doing the routine jobs.

Any of you that have computers and are using a farm management package will, hopefully, have got into this habit already. Many of these packages include a farm accounts package that can make the process of financial record-keeping very easy. It will also help Teagasc to give you a better service if up-to-date financial information is at hand. So I would encourage those that have these packages to make the best use of them.

Anyone that hasn't yet acquired a computer should seriously consider it as his or her next investment. The computer takes a lot of the drudgery out of farm record keeping and Teagasc are encouraging their use through computer training courses and also by making simple farmer friendly starter programs available to clients some of which are outlined later in this paper.

Step 2- The financial health check

Find out the financial situation on the farm today- carry out a financial health check on the farm business. For many here the only measure of how the farm business has been performing financially are the set of farm accounts, so it's a good place to start.

Teagasc has made available a Farm Accounts Worksheet that provides a straight-forward system for looking at the key figures in a set of accounts. The efficiency of the business, in a few key areas, can also be examined using this worksheet.

Is just looking at Net Profit and Net Worth enough?

These two will give some indication of how financially healthy the business is.

Average Net Profit per acre for liquid farms is £301 per acre (€744 per ha). The range of net profit figures can, however, vary widely around this average. It is important to know how your farm business profits compare and if they are on the lower side of this average to find out why. A closer examination of the figures could reveal problems either on the output or the cost side of the business.

Looking at the change in Net Worth is just like checking the farm's pulse. A Net Worth that is showing a nice steady increase in line with inflation is like a good strong pulse. A farm that shows a decrease in net worth three years running is on the way out and needs to be shocked to bring it back to life. The underlying reasons for any significant change in Net Worth, either positive or negative, may need to be investigated further.

We can also look at Debt per ha, Cash Expenses as a % of Cash Output and also how well the net profit stacks up against our living expenses.

Debt per hectare tells us the obvious- what is the level of borrowing within the farm business!

• How much debt is the farm profit having to finance?
• If we need to carry out further capital investment then does the business have the flexibility to borrow to fund it or is it already on the limit?

These are important questions that the business manager should be able to answer because they will have a major influence on future investment decisions and business planning.

Cash Expenses as a % of Cash Output will give a reasonable handle on the business efficiency. A figure of 60% here means that 60 cent of every €1 you receive for your sales of milk or stock is passing back out the farm gate to meet expenses. If this is the case then you need to pull that gate closed a bit because too much of your potential profit is escaping. A figure of 40% or less here is good as this means that you have a minimum of 60 cents of every €1 left to meet capital repayments, finance further investment and more importantly meet family living expense requirements.

Looking at how well the farm can meet family living expenses is an important measure to look at. Within this magical and mysterious drawings figure you will find family living expenses and tax. Tax is something that, while we all complain that we pay too much of, is a commitment that must be met. The figure for `Family living expenses' is supposed to be the amount required to keep the farmer and his family ticking over for the year. In effect it is the farmer's salary that he has withdrawn from the business in return for working and managing it. If the business is not profitable enough to cover this figure then it's time to take a radical look at the business operation.

Step 3. Profit Monitor- Looking at the output and costs in more detail.

Carrying out an accounts analysis on your business will give a good indicator as to how the business is performing and should highlight areas where things are going well and also areas where there is room for improvement. However, the figures in accounts sometimes do not easily allow you to look at the makeup of the output and cost structure of the farm business. Cost categories can sometimes be lumped together such as feed and fertiliser that can cause problems if you want to look at individual costs in detail.

The Profit Monitor Programme developed by Teagasc allows the entry of physical data such as cow numbers & litres produced together with figures for output and costs on your farm. Each individual item can then be broken down on a per cow, per gallon and per Ha basis. This form of analysis has many benefits including showing the contribution of each cost to the overall cost of producing milk on the farm. This can then be compared to target figures and show up any costs that are out of line and could be targeted for improvement. Problems could also become evident on the output side. Completing a Profit Monitor will allow a better understanding as to which factors have the biggest impact on profit in your business and which of these factors you can improve on.

Teagasc have developed a recording system for the collection of physical performance data on your dairy farm. The Dairy Herd Monitor is a computer programme that will be available for use by all Teagasc clients. The programme which is web-based will allow each individual farmer to enter physical performance data, such as feed & fertiliser usage, labour usage, grazing days, etc., on a monthly basis. This information will aid the completion of a Profit Monitor but will also allow comparisons to be carried out by each participating farmer. The physical performance can be compared from year-to-year or comparisons can also be made with similar farming operations to allow easier setting of performance targets (benchmarking).

Step 4. Budgeting and regular recording

Is it good enough just to be able to look at business performance just once a year whenever the accounts are prepared or whenever the annual milk-recording summary arrives? As a manager you should be more concerned with what the financial situation is with the business today and rightly so.

Management Accounts for running a business are prepared once a month by many other businesses. Farmers do not have the time to prepare accounts on such a regular basis but there should still be some level of ongoing monitoring of the business performance otherwise we could be stumbling in the dark for most of the year.

A simple method of financial monitoring is to use a cash recording system.

Ask yourself the questions-

• How many cheques do you receive in a month?
• How many do you write in a month?
• Would it take long to record this information monthly?
• Would this information be of use to me?

It is very straightforward to record the cash transactions that take place on a monthly basis and this will give a fairly good indicator of how the business is progressing.

The Teagasc Cost Control Planner allows cash flowing in and out of the farm business to be recorded monthly by category of expense i.e. feed/fertiliser/vet etc.

This recording system, which is a computer based Excel programme, will allow cash surpluses and deficits to be identified per month. Cash flows in and out of every business but it is important to have an idea how much is flowing, which way it is flowing and more importantly can anything be done to turn the flow more in your favour!

Also this financial breakdown of the output and input costs can be run through the Profit Monitor programme to give the cost breakdown mentioned earlier and provide the basis for targets to be set for the future cash-budget for the business.

As well as the actual recording the programme allows the user to prepare a forward budget for the year ahead based on the plans for the farm business for the coming year. Based on past experience and using past cash records, along with Profit Monitor records, the amount of money that will be received and spent on a yearly and monthly basis can be laid out. The budget should be prepared taking into account any proposed system changes or capital investment that is planned.

What you should have at the end of this is a financial map of the year ahead for the farm. The affect of your future plans/targets can now be seen in money terms on a yearly or monthly basis. This now gives you the information to plan your finances for the year ahead to make sure that money is there when required.

If you combine this with the monthly recording then having set the targets you are now measuring the success/failure of meeting these targets. These are the first steps towards full farm business planning.