Overheads and cash flow can be quite a strain on smaller farms, so here we outline five ways to reduce farming costs to improve efficiency
There are many ways to improve your outgoings on a farm, but it may require adopting a new approach.
The first step is to have a strong understanding of the whole business and how it fits into the bigger picture. In order to reach that point, here are five ways you could streamline your business and potentially cut some costs along the way.
Whether with other farmers or through a buying group, working together can cut costs and boost efficiencies, says Philip Dunn, partner at property and business consultants Brown & Co. However, it’s important to deal with like-minded people and not to go into it just for the cost saving.
The two big areas where co-operation can help are equipment and labour. “Sharing of equipment, specifically high-value machines, means better utilisation,” explains Mr Dunn. “In terms of labour, everyone has different skills and farms have different requirements, so sharing these spreads the skill set and reduces the cost,” he adds.
Farmers can also collaborate when buying or selling, giving them more clout in the market.
This can be a useful way for farmers to identify cost-saving areas to focus on, for example in feed and machinery. And according to Rob Hughes, partner at Brown & Co, farmers should aspire to be in the top quartile and benchmark against the best, not just against similar sized operations. “They need to know what the best are doing; benchmarking against the wrong businesses can create a false sense of security,” he adds.
Farmers will need to address how to get where they need to be, says Mr Hughes. “If they are carrying the inertia of generations, they may need to challenge that in order to move on. There are plenty of advisers who can help; do not be afraid of taking challenging advice.”
When seeking advice on benchmarking, it’s important to consider which advisers understand the market best, providing quality and value for money rather than simply the cheapest prices.
3. Tax efficiencies
Managing tax liabilities is one way farmers can manage cash flow, according to Sean McCann, chartered financial planner at NFU Mutual.
"Averaging profits helps even out fluctuating income in different years and can reduce the amount of tax due," he says.
"Other simple steps include making sure that both spouses are making use of their tax free allowances. From April 6th, 2018, everyone can enjoy income of £11,850 before they pay any Income Tax. In addition, all basic rate tax payers are entitled to receive £1,000 of savings income (or £500 for higher rate payers) and all tax payers are entitled to £2,000 of dividend income free of tax. Moving income producing investments between spouses can help reduce the family tax bill.”
Farmers should also check if they are entitled to tax credits or other benefits.
4. Investment in your tools
Using contractors can reduce machinery costs and introduce new, more efficient technology. It may also be worth investigating renewable energy options, such as turbines, which may boost income and cut bills.
However, farmers might also look to replace older machinery to reduce repair expenditure. “To ensure their businesses do not stand still, farmers should understand the value of depreciation applied to assets like machinery, and make sure they use these funds to reinvest in essential equipment,” says Ian Ashbridge, partner at property consultants Bidwells.
“It is easy for depreciation to be overlooked, as it is effectively an adjustment made to the business’s profit position, but has no negative impact on cash. Ideally, investment should exceed depreciation in any year, to grow the value of assets, rather than just stem the decline in value.”
5. Attention to detail
Attention to detail can also reduce risks on a farm. Poor attention to detail can allow risks to creep in. “Where there are time pressures and people are rushing to complete tasks, there can be more risk,” says Mark Shepheard, director at farm advisers Laurence Gould.
That is why many farmers are now realising the need to adapt risk management as a central element of their holistic farm management strategy.
The most successful farmers will often implement this process at every level of the business. “Use of time is the most important and often farmers can end up too busy with the daily routine,” says Mr Shepheard. “It is worth taking a step back and questioning if there is a better way of doing things.”
Farmers can also reduce wastage, whether through leaking taps, silage losses or avoidable yield losses. Question everything to try and do it better and more efficiently.
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