Financial Analysis In The Irish Farming Industry Its Uses And Its Usefulness

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Chapter 5: Research Findings

Chapter 5: Research Findings

5.1 Introduction

This chapter sets out the main research findings from the interviews conducted. It firstly examines the degree of deficiency in the use of farm financial information and the explanations offered for this, and then contemplates the impact of the changing industry on the future use of financial analysis.

5.2 The Deficiency In The Use Of Financial Information

5.2.1 Planning

Empirical evidence regarding the importance of planning is congruent with the literature review, suggesting that farming is a unique industry, ‘the farmer, by and large, is involved in a biological process, all the time a price-taker rather than the price-maker’ (Sean Quinn). This uncontrollable process is also caused by factors such as animal health and the weather, ‘in farming, there are just too many variables’ (Farmer B). Traditionally, budgets should be used as targets for the forthcoming year where the actual performance can be measured against the target. Nevertheless, farmers have no control at the planning stage over the revenue received post performance, and this return is determined by the uncontrollable market-variables. Therefore, there are justifiable reasons for not budgeting for targets that are not within the farmer’s control (Farmer F).

In terms of output capacity, farmers operate at generally the same level each year, so less annual planning is necessary in this regard, ‘cash flows are fairly constant from year to year; quotas don’t give much room for expansion’ (Farmer F). In this way, the unpredictability of the future is counterbalanced by the stability of the annual output. Consequently, output levels are memorised through experience, with no need for detailed financial planning (Farmer B).
According to Joe Hickey, the assumption of this method is that these production methods are efficient. He emphasises that farmers need to use their IFAC Management Report to monitor inefficiencies and poor cash flow planning, ‘if in fact a farmer is going merrily along and if he’s not paying attention to what actually happened last year, and if he had a deficit last year, then it doesn’t make sense’.
While the literature review emphasised the importance of capital planning, the farmer may still not need much planning if the investment is a necessity, ‘you’ve a fair idea, if you’ve a shed to put up, you’d be fit to work out “can I afford it?” - you’d be able to work that out yourself’ (Farmer A). So in this case, there is little need for cash projections to determine if it is a correct decision. There is no evidence that farmers use financial comparisons in capital planning, despite their control over the actual assets purchased, and the method of financing.

5.2.2 Control

Post performance, the advantage of having prepared a financial target is that deviations from this target can then be investigated. But Sean Quinn describes how a farmer’s lack of market-control reduces the need for budgets, where he compares it to a local shop:

… you buy the packets of washing powder, you mark them up by ten percent, you sell them. So you need a set of accounts to measure if that’s what’s actually happening – whether you’ve been cheated, whether the stock coming in is right, whether the stock going out is right, whether the margins are right.
Accounts are of no use to farmers in this regard, having no controllable financial return, while stock is generally not a problem due to the farmer being directly involved in its movements.
The small quantity of actual transactions allows the farmer escape day-to-day cash management, even if the amount is outside his control, ‘as a rule here, I’d probably only get four bills a month, and most times I’d only get one cheque – the milk cheque’ (Farmer A). While the transactions are few, the amounts involved are usually substantial, therefore Farmer I believes that careful management of the timing of cash flows is needed, giving examples of where produce should have been sold at an earlier stage to meet major harvesting costs.
Although costs incurred are linked to the output level, the quantity of inputs for a given output level may be inefficient. While historical comparisons facilitate the annual completion of financial-records, the accountants feel there is a serious deficiency in their use, ‘there’s a need to see where things are going wrong. Am I responsible for it [as a farmer] through bad management or is the market place letting us down?’ (Joe Hickey). In this sense, poor control of the previous year’s farm management can be used as a guide for improved planning in the current year (Joe Hickey).
Farmer A gives the example of using the purchasing groups that are available in order to exploit the potential for purchase economies, ‘we’re buying probably meal, fertiliser, oil and insurance through the group, at a discount price’. The grouping of farmers together can have another advantage - the ability to compare the return of other operators on a per unit basis. Any variations between operators of the same size, sector and locality must be explained by management inefficiencies. Farmers not using financial information cannot possibly be emphasising efficiency.
With relatively constant output, detailed control of cash flow is only necessary for once-off transactions and investment decisions (Farmer E, J), or where farmers are forced to produce cash flow projections for loan applications (Farmer A, B, E, F). In this regard, banks prefer cash flow forecasts to be prepared by a qualified accountant (Farmer E). Conversely, Joe Hickey explains how the banks can be less stringent on farmers in demanding financial information, as farmers are asset rich and have years of expertise, thereby providing valuable collateral. He contrasts this with thinly capitalised start-up limited companies where banks would require six-monthly cash flow updates.
However, control is merely to measure that things are going to plan. Sean Quinn describes how farmers’ plans may not be financially driven, ‘if a business discovers that one sector of its business isn’t paying, they close it down – farmers don’t do that, that’s not the way they operate’. He describes farmers as ‘philosophers’ with longer-term goals, where he does not believe their only motivation to continue farming is the financial return.

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