UK Farming Accounts
Our “day job” is producing accounts for our farming clients and to help them understand the financial performance and position of their business by using those accounts. We are always hungry for more clients, so I have set my sights on obtaining the accountancy business of “UK Farming”. To help me with this I have had a quick look at their recent accounts before I “take them back” to either the Queen or Prime Minister (I haven’t decided which one to cold call yet to introduce myself and Albert Goodman). I have also read some recent press about the business and its finances. Here’s a taster of what I found:
The business has been consistently profitable since at least 1973 and in its latest accounts (calendar year 2016) it reported a profit of just under £4BN. There have been some considerable challenges throughout those 44 years in the forms of weather (drought and floods), major animal disease (FMD and BSE), political intervention (Common Agriculture Policy) and the business has remained resilient throughout.
However, in real terms it produced a profit of nearly £10BN in 1973 which has fallen to the current £4BN and the latest figures represent the third consecutive annual fall.
In the meantime, its customers have enjoyed ever more abundant supplies of healthy, safe and nutritious food – arguably the best in the world . The market is very strong and potentially growing.
The current accountant (known as “DEFRA”) is a bit slow on this one and has only just produced the December 2015 set of figures. They show that the business had total assets of £282BN and with total liabilities of £17BN, net assets of £265BN. In real terms, the net assets have doubled since 1984.
This is amongst the strongest balance sheets I have ever reported on. There are a couple of key ratios to look at -“gearing” (the relationship between debt and net assets) is a meagre 6.4%, it is usually considered safe if this figure is below 75%; and liquidity (can it sell its stock and repay its short term borrowing) is 280% against a conventional safe position of 100%
Summary – the strongest balance sheet you will ever need.
Difficult to find accurate records on this, but understand that of late its overdraft has been going up. This is probably the greatest concern in that UK Agriculture has not produced enough cash from trading to cover its needs – reinvestment, return to the owners for their work and ownership, long term debt repayment and tax – without increasing its borrowings.
UK farming is not a great user of the banks, it only borrows £17BN. It has capacity to borrow a great deal more and the banks are generally keen to loan more money to the business because it has such a strong balance sheet. However, it is already struggling to meet its commitments without borrowing more, because of the relatively modest level of profits (representing a return on equity of only 1.5%) and regular demand for investment (for technological improvements, animal welfare or improving food standards).
The absolute level of borrowing is of less concern for this business than the reasons for it and the ability to service it.
There is good borrowing and bad borrowing. Good borrowing is generally for investment and bad borrowing is to fund losses. This business has done both, but of late is has increasingly had to borrow simply to fund losses and make up the shortfall in its cash requirements.
So the business can certainly borrow more, but the trick has to be whether in so borrowing and investing that money in the business, it can secure long term income streams that will be sufficient to meet requirements.
UK Agriculture has certainly spent more in interest than it does now – even with its now record levels of debt. In 2016, it spent £421M on interest – as recently as 1990 it spent more than double that figure and in real terms produced very similar level of profit as 2016.
It is useful to analyse a large mixed business into its various divisions to see which are contributing most. This business has tens of thousands of individual units and I am afraid there isn’t enough time to research that without me having some realistic certainty that I will eventually obtain this business’s accountancy engagement.
This is where the real story is, the headline statistics for UK Agriculture are nothing more than interesting. We should not be hung up on the aggregate figures – I cannot comprehend a time when it will not be one of the strongest sectors in balance sheet terms in this country’s economy, let alone the supply chain that it is part of. However, individual farms will undoubtedly have insufficient profit, too much borrowing and / or weak balance sheets – and they should make sure that their accountant is explaining their position and prospects fully with the benefit of each year’s accounts, putting it in context with wider sector position and making recommendations for the future.
Summary of 2016 Accounts
Supremely strong business with enormous variation between individual farms and energy should be put into understanding and improving each individual farm in order to maximise profit for the business. There is a massive capacity to take on “good borrowing” for investment but only if it generates increased profit and cashflows for the future – otherwise it is inevitable that it will have to sell some assets eventually to repay that debt. Please make sure your accountant is using your accounts to add real value to the expensive accounts production process, way beyond the basic need to prepare tax return information.
To find out more please e-mail Pat Tomlinson or call 01823 286096.
To download our latest Agri New Autumn 2017 please click here.