Pointers to help stay profitable

Figures published in March showed that the typical Scottish farm generated an average farm business income of £23,000 for 2014-15. We know from our own experiences that average figures can often be misleading and that there is no such thing as the “average” farm business.

While some businesses continue to make decent profits, year in year out, others struggle to turn a profit even when weather and prices are favourable. So what factors generally separate those at either ends of the profitability spectrum?

The points listed below are by no means exhaustive but do highlight the traits that are commonly found in the best-performing farming businesses.

Technical performance – As commodity producers, farmers have little influence over price, but top performers will achieve above-average yields of saleable output. They will also pay close attention to input cost and efficiency of input use. You can only run a profitable business by starting with a robust turnover and gross margin.

Financial control – Good businesses know where they stand financially, whether that is in regards to cost of production, cash flow forecasting or monitoring key performance indicators. Future investment decisions are also based on a rational economic assessment rather than emotion.

Economies of scale – You don’t have to be huge to be profitable, but if you are farming less than 500 acres these days you are likely to struggle financially unless you either have an intensive enterprise, low overheads or some form of non-farm income.

Use borrowed money effectively – With interest rates at rock bottom it makes perfect sense to borrow, provided the money can be invested in assets that will generate a return in excess of the cost of borrowing.

Diversification not “diworseification” – Successful businesses tend to be built around two or three core enterprises. Too many enterprises can lead to a lack of focus and reduced performance.

Tax planning – Strong performing businesses not only make more profit, they keep more of it. By reducing the tax cost, more funds can be retained within the business, ether to fund future investment or pay down debt.

Strategic plan – Successful businesses will have some form of vision as to where they want to be in five years’ time. Objectives or priorities could include expansion, establishing a new enterprise, better cost control or possibly even just a better work/life balance.

Succession or exit strategy – For businesses to prosper in the long term there has to be a succession plan, or if there is no succession then there is a need for an exit plan. Knowing which route you are likely to take will help you to manage your business either by having a focus on future investment or through managing the business for cash in the run-up to retirement.

If you aspire to run a successful farm business then hopefully you are already ticking off all the points mentioned above.

As commodity producers, farmers have little influence over price, but top performers will achieve aboveaverage yields of saleable output