Many times as an Agricultural Bank Manager I sat down with an apparently profitable farming business and the owners sat there open mouthed as I showed them how they could not afford to spend more money either on debt, drawings or on new purchases based upon their last three year’s results, or even how they have been bleeding cash for a decade or more. Quite literally farming for nowt!
However, there is always light at the tunnel if you can change your farming business and how it uses money or increase its income. The following is designed to give you simple tools to identify if there is a problem. This is deliberately simplified and is in no way intended to replace professional advice.
In this post we look at two factors, whether your farm is cash negative or cash positive; and what the true value of your farm is.
PROFIT AND LOSS CASH
You should have annual accounts each year that have a section called a Profit and
Loss account or Trading account that will look much like this to the right.
This appears to be a healthy business. In this case it is a Company with the wages shown being the day to day income of the three farm owners.
In addition it has a farm mortgage of £12,000 being repaid at the rate of £10000 per annum and machinery finance totalling £120,000 being repaid at the rate of £40,000 per annum.
The owners also paid themselves a dividend each of £20,000 which the two younger owners spend on school fees and the older owner on a cruise.
The Real Cash Position:
• NET PROFIT £81,093
• ADD DEPRECIATION £12,700
• ADD INTEREST ON DEBT £5,500
• SUB TOTAL £99,293
• LESS DEBT REPAYMENTS£50,000
• LESS TOTAL DIVIDENDS £60,000
• TOTAL £10,707
Explaination:
• The figure created here in the example on the right illustrates that the business, despite being in profit is worse off in its cash value since last year by £10,707. It is cash negative.
• Depreciation is added back because it is a non cash item that was paid for when the tractor or machinery that was initially purchased.
• Interest on debt is added back because it is incorporated in the debt repayments in this case.
• Repayments of debt are a direct draw on cash.
• Dividends in this case are an additional draw on cash to the wages that are already accounted for. Note: If you are a sole trader or partnership the drawings will not be shown in the profit and loss account , but rather in the Capital Account and should be treated the same as dividends are in this example.
Is your farm cash negative or cash positive?
• Do the following from your accounts:
• NET PROFIT
• ADD DEPRECIATION
• ADD INTEREST PAID ON LOANS AND FINANCE AGREEMENTS
SUBTOTAL
LESS TOTAL AMOUNT OF DEBT REPAYMENTS FOR THE YEAR
LESS DRAWINGS OR DIVIDENDS
TOTAL
If you are unsure about your calculations or wish to examine in more detail speak to your accountant. Whatever you do, in the words of Corporal Jones of Dad’s Army, “Don’t Panic”.
If your farm is cash negative it may not be a problem if one of the following applies:
- It is not a regular year on year occurrence
- The farm is cash negative deliberately to fund the needs of the owners and you and your lenders are happy with this acknowledging that ultimately the sale of assets will resolve this at a fixed point in the future.
- You have a good plan to change this that has been vetted by a trusted competent third party that you are happy to have challenge you.
The following is also a factor as it may help you weather a period of cash negativity.
HOW WEALTHY IS YOUR FARM? WHAT IS ITS TRUE VALUE? THE FARM NET WORTH
• So far we have only looked at Cash and whether the Farm is cash positive or cash negative. But an important factor in assessing where it is financially is to look at the farm’s worth.
• Now an easy way to look at the Farm’s worth is to view the Balance Sheet on your accounts. This is a value as assessed by your accountant at year end, but in reality possibly vastly undervalued. The following is a simple tool to enable you to calculate using your knowledge of your farm what the true value of the business is at this moment in time.
• Note this is important because the very seasonal nature of farming will see it vary from season to season and year to year.
Use the table pictured below to help calculate what your current value of livestock.
Use the table below to estimate the current value of growing crops. This should be done on likely yield multiplied by current price with a reduction for the stage at which the crop is currently at (say half grown equals half price). Note – do not use cost of inputs as a guide to value as this bares no relation to the end price obtained.
Use the table below to calculate value of produce in store:
Use the table below to calculate the worth of your farm machinery
List your farm finance leases and HP
TOTAL FARM LIABILITIES
Using the information gathered calculate your farm’s total liabilities:
• Calculate the farms total liabilities as follows:
• Rent owing and accrued to date -
• Balance of bank overdraft -
• Total of all secured Bank mortgages -
• Total of all other Bank loans -
• Trade Creditors -
• Other Creditors (e.g. family loans) -
• Total Leases/HP (from previous table) -
• Any other liabilities
TOTAL LIABILITIES ______________________
TOTAL FARM ASSETS
Using information gathered calculate the farm’s total assets as follows:
• CASH AT BANK -
• MILK CHQ OWING -
• SFP AND OTHER SCHEME OWING -
• BOOK DEBTS -
• STOCKS OF FERTILIZER AND SPRAY
• STOCKS OF FEED STUFFS
• TOTAL VALUE OF LIVESTOCK -
• TOTAL VALUE OF GROWING CROPS -
• TOTAL VALUE OF PRODUCE INSTORE -
• VALUE OF FARMLAND -
• VALUE OF FARM BUILDINGS -
• VALUE OF HOUSES -
• IF A TENANT VALUE OF APPROVED IMPROVEMENTS -
• VALUE OF TENANT RIGHT -
• TOTAL VALUE OF MACHINERY (from earlier table) -
• OTHER FARM ASSETS (e.g. cooperative shares) -
• VEHICLES
• OTHER ASSETS
TOTAL ASSETS ______________
• Now take your TOTAL ASSETS figure and subtract your TOTAL LIABILITIES figure.
• Based on your figures this will give you your estimate of the farm’s net worth at this point in time.
• Are you surprised? Are you worth more or less than you thought? Is it a negative value?
• Remember this is a simple tool based on your figures to help assess where you are now.
The next post will look at taking control of your money.