May and June can be a busy time on the farm with dairy farmers drying off and sheep and beef farmers preparing for winter. Often paperwork and getting information to your accountant isn’t a priority, and it shouldn’t be. However, putting good systems in place early should mean that the year-end process should be a case of tallying up closing stock on hand and dropping the information in to your accountant.
Whether you keep all your information in a folder, or whether you are tech savvy and store your information in the cloud, having all the information will mean that the accountant can spend less time chasing missing information and more time adding value to your business.
Often the best operators are the businesses with their information in early and complete, not because they are excited to see how much tax they have to pay, but because they want to understand their business. Generally, we find that our clients’ key benchmarking statistics such as operating surplus per hectare/kgMS/stock unit, deteriorate throughout the season.
LEAD-UP TO BALANCE DATE
This is a good time to check in with your accountant, mainly to look at the upcoming season and update budgets and cashflows. This is important to ensure you have the correct amount of working capital/overdraft.
Just like planning for any feed pinch, plans need to be made for when there is excess cash or cashflow is looking tight. Planning a reserve of capital or a buffer in your business for any unexpected effects on your business, such as droughts, floods or the most recent Covid-19.
Covid-19 has had an immediate impact on farming businesses with demand for our products reducing. The earlier we can identify any issues the better. Do we need to approach the bank for an extension of an overdraft or can we get any assistance from the IRD for tax?
When we are forecasting good cash surpluses, how do we make the most of opportunities? What do we do with excess cash? Plans can be made whether you pay back debt, allocate funds for any capital project, or just go on that holiday that may be well overdue. You should also be able to get a good estimate of your current and upcoming tax obligations. Tax can be estimated by using your actual data year to date plus budgeted data for the remainder of the season.
The end of year process of preparing financial accounts and tax returns should be just a formalisation of what you already know. The most successful farmers and businesses have moved away from the mentality that an accountant’s main purpose is to calculate their taxes. They see their accountant as the chief financial officer. Accounting has moved away from being a compliance-based profession. Real value is taking the most recent information and using that to make real time decisions.
HOW DO YOU USE YOUR HISTORICAL DATA?
Once the financial accounts have been completed, months have gone by since the last day of the financial year. As previously mentioned, by this time you should already have a good idea of how the season has gone and already have plans in place for the following season. However, this information is still not irrelevant.
You can use historic information to compare previous seasons and see trends occurring in your business.
Your accountant should be able to benchmark your farming business against other similar businesses to see areas that you outperform in, or maybe opportunities to improve. Although benchmarks such as production per cow or per hectare for the dairy industry or gross income per stock unit can be a good conversation starter and may be good for the ego, where the conversation gets real is how efficient your business is.
What is your operating surplus (farm income less farm working expenses) per ha/kg MS/su? This can lead on to what you have done with your operating surplus. Generally, the two non-negotiable items are interest and tax. This leaves available funds for the capital projects, repayment of debt and finally how much money you take out of the business for personal use.
Overall, book in a time with your accountant and plan for the future.
Use your historical information to identify trends and opportunities in your business.
- Jeremy Bekhuis is a director Agrifocus who are chartered accountants and farm financial advisors, based in Southland and Otago.