Don’t let high farm profits catch you out

The present financial year has seen commodity prices higher than anyone can recall. This is showing now with positive cashflow on farm, which means that farm profits for the year are likely to be above average.

The positives of unprecedented profits

Many dairy farmers will record unexpectedly healthy profits for this financial year. This is due mostly to average milk prices, which are up almost 20p/litre over 12 months. For many, these rises have more than offset the increased costs of production. 

A potential consequence of these profits is that it could lead to a greater tax liability, which could cause cashflow pressure in the next financial year, when milk prices are predicted to fall more quickly than commodity costs.

Buy a new tractor?

The default option for many farms, when they have surplus cash in the bank, is to look to reinvest in the company. This may not always be the most efficient option, especially if you don’t plan for the possible finance costs. Investing in equipment if it improves business operation and efficiency is not necessarily unwise, but you may have better options.

To avoid making decisions you may regret, it’s important to plot your plan of action as soon as possible.

Make a quick start

An obvious starting point is to estimate your potential annual profit well before the end of the tax year. Assuming your tax period ends in April, then your profit/loss information up to December 2022 will be imminent. This data will allow you to budget for the rest of the final quarter. In this task, the use of comprehensive management accounting systems such as Agstute can be invaluable.

Create a strategy

With time on your side, you can move forward in a planned and measured way. Now, you could either spend valuable hours researching possible strategies yourself, or you could save time by speaking to experts. These would include:

• Farm business consultants
• Accountants
• Tax advisors

If you’re especially shrewd, you will speak to all three. We’d recommend you gather from them as much information as possible. The different perspectives of each specialist will broaden and deepen your knowledge quickly, so that you can be sure that you make truly informed decisions, which best-suit your situation.

Seek fresh perspectives on your profits

Whoever you consult, seek new ideas.

If you want guidance from a tax advisor, choose one who specialises in farm businesses. You may find one the already works with the company that does your accounts.

Farm consultants speak to a lot of farmers every week and will have good knowledge of how these organisations mitigate their taxes and control their profits and losses. Also, they are trained to help you review items such as your stock levels, and how you utilise allowances and reliefs.

Consultants are also trained to help you take a short-term, medium-term, and long-term approach. Considering financial performance over a range of years, not just one, is key. This way, you can future-proof your business. The overriding aim is to generate sufficient sustainable profit to cover loan repayments, capital investments, partners’ drawings, and tax.

Now is the right time

Given the unprecedented situation that you may be in, it’s important to act now so that you aren’t faced with a hasty decision at the year end.

To help plan how to put your unexpected profits to best use why not call me, Jonathan Hill, today on 079711 119107, or email me at jonathan.hill@genusplc.com. I’m based in Yorkshire.

If you are elsewhere in the country why not contact us via the Promar website and arrange a free, no-obligation discussion with one of my colleagues on how Agstute, our management accounting system, and our consultancy services can help your business success. We have consultants nationwide.