Cashflow is important for any business; but it is especially important for farming businesses. In this article, D J Walker of Johnsons Chartered Accountants gives 5 of the most common mistakes being made by farm business owners.
Overstatement of Income
A fault often made in producing a financial forecast is an overly optimistic assessment of income. It is important to exercise a degree of prudence in terms of expected future income.
Replacement of Capital Items
Capital equipment (such as tractors and machinery) is likely to be in use for a period of years and as a consequence it is easy to overlook making provision for the cost of replacement. Irrespective of whether this is by outright purchase or involving some form of finance, the consequences must be considered.
Payment of Tax
Due to the highly variable nature of farming income, the resulting tax payments can be equally dramatic. In farming there are specific tax breaks which can further alter the tax position such as the “farmer’s averaging provisions”. Providing accounts are up to date it is possible to advise well in advance of the likely tax due and this should be incorporated into any budget.
It is easy to become focused on the needs of the business and the likely level of business expenditure. It should not be overlooked that one of the most significant “costs” is the level of personal drawings/expenditure required by the owner(s). This will include regular monthly drawings for household expenditure but should also include the additional one-off costs which invariably arise such as holidays, weddings, birthdays, school fees etc
Despite the best endeavours to accurately forecast all likely expenditure, it is generally the case that some hidden costs will arise. Unforeseen property repairs are a typical example. The best way of dealing with this in the forecast is to include a sensible “contingency fund”