More Need For Financial Analysis May Require More Employment Of Professionals
Discussion (Chapter 6)
Chapter 6: Discussion of Findings
Research was needed to investigate how farms are managed, and to ask if the use of financial analysis is sufficient for the new farming industry. This chapter discusses the information provided in the interviews in relation to the extent of the deficiency, what needs to be done to survive in the future farming industry, and what implications this has for financial analysis.
6.2 Is There A Deficiency In The Use Of Financial Information?
6.2.1 The Comparison With Management Accounting Best Practice
Deficient can be defined as ‘lacking something essential; inadequate in quality or quantity’ (Collins Gem, 1994, p. 136). This thesis set out first of all to conduct a literature review, which concluded that there is a deficiency in the use of financial information in the Irish farming industry.
However, this lack of financial analysis may not have been a major management problem, and therefore there is no actual deficiency recognised by farmers. Thus, farm management cannot be criticised by simply comparing it to the use of planning, control and decision-making in other commercial businesses. The first reason for this is due to the sole-trader structure of the business, ‘it [financial analysis] is one dimension of it, and in business it is unusual to get somebody who is good at selling, planning, purchasing and the technical aspects of production’ (Joe Hickey). As Joe Hickey points out, just because farmers do not understand bookkeeping, this does not cause a deficiency, as any need for financial analysis can effectively be fulfilled by the IFAC Recording System (Appendix D).
Secondly, the need for less financial information in day-to-day management is again aided by the structure of the industry; for example, banks feel secure when lending to farmers as the loans are secured on land, an appreciating asset.
Thirdly, there is little control over sales price per unit; consequently a competitive industry does not exist.
If there is no advantage in conducting financial analysis, any absence of it cannot be described correctly as a deficiency in this regard alone. Therefore, a deficiency only exists if there is a need for more use of financial information in farm management, and this need is not recognised by farm managers.
6.2.2 How Farm Management May Be Deficient
Farmers are not typical entrepreneurs, instead many prefer to continue with a structure that they know worked in the past, ‘you can’t buy experience, stick to what you know’ (Farmer B).
According to the accountants interviewed, engaging in bookkeeping services is rarely demand driven by the farmer, but compliance driven. IFAC provides the basic service needed by the farmer for effective management as part of the tax compliance work. However, the accountants feel that a lot of farmers fail to read the financial reports provided for them, or listen to the advice that is given. Instead, there are many factors emanating from culture and tradition, a way of life, which encourage farmers to remain static. Some decisions may not make business sense, but are part of the current industry culture, ‘I mean, I’m a businessman. I wouldn’t spend a £100,000 in the spring on something that’s alive, that I have to feed everyday, and that I’ve no idea what return I’m going to get’ (Sean Quinn).
This quote is from a financial expert. But farmers are not just preoccupied with financial information, being well aware of the low return that is being generated from the farm investment, but rather continue on regardless. This is an informed decision based on the financial information, and not a deficiency in its use.
It could be argued that a deficiency only arises where farmers are not using the information available to make informed decisions, or to recognise where improvements can be made. For those who wish to generate a good income in the future, these areas need to be enhanced.
6.3 A Need For A New Structure To Generate A Good Income
Earlier in this chapter, the difference between a typical business and a farming business was described as:
The farmer being a sole trader
The farmer having less use for planning, control and decision-making
The farmer having the security of land, being ‘asset rich’
It is interesting to note that the research findings indicate a potential change in each of these areas, in the future farming industry. While farmers will still operate in an industry that is relatively uncontrollable, most reasons for not needing financial information will be largely eroded.
6.3.1 The End Of The Family Farm – The New Commercialised Industry
As empirically verified, farms will need to expand, so without doubt careful planning, control and decision-making will be vital. The new unpredictable and unstable industry will require timely responses from farmers and the need for more up-to-date financial information. Farmers will also need to specialise in the future, in one or two areas of production, and outsource all raw materials and inefficient assets. Sean Quinn compares this to an industrialist who:
… wants to make shoes, he doesn’t give a monkeys who supplies the leather, who supplies the nails - at the end of the day he’ll just stick his name on the shoes; farmers are going to have to do the same.
But first of all, the farmer needs to find the funds for expansion, and in many cases could discover that the resources available may not provide a sufficient return to survive in the future farming industry. Cost and production efficiency might not be enough to save smaller operators; furthermore, financial consultancy services are not something that the future farmer can afford to cut from his budget.
A new structure is needed; smaller farmers may need to engage in machinery sharing and partnerships, where fixed costs not only of expansion but also of essential management services can be put to a more efficient use, ‘most farms could not afford the services that a professional office supplies … we’ve a deliberate policy to move away from farmers because they can’t afford to pay us’ (Sean Quinn).
Unfortunately, the Department of Agriculture has limited the number of farmers allowed in a farm partnership to three. According to Sean Quinn, one must forget the notion of trying to protect the family farm, ‘we now have to compete straight on with the Americans, and the Americans have lots of subsidisation and lots of resources.’
Farmers were not asked directly about partnerships, but as selling their land ‘doesn’t happen … less than one-percent will do that’ (Farmer D), the ability of the individual farmer to maintain rights over his own land will be critical in any partnership. Machinery sharing also did not work in the past, due to conflicts over maintenance versus use, and use versus busy seasons (Farmer H).
Partnerships, if taken up in the farming sector, will require a much greater use of financial records for control purposes.
6.3.2 The End Of The ‘Asset Rich – Monetary Poor’ Structure
A typical profit centre would be worried if it saw its net return fall below fifteen percent. The farmer, as a businessman, is operating on a return as low as one percent. Therefore, to get an adequate income of €20,000, a farmer could invest up to €2,000,000 in capital. When asked about considering off-farm investment, Farmer D responded by saying that with such a low return, all the farm profits need to be re-invested in the farm. With the return to get lower in the future, and the required investment to increase in order to maintain the same income, it is unlikely that this structure can survive.
By liquidating the investment in the land, a farmer can earn the fifteen percent return elsewhere. By renting land instead, a farmer can survive on a lower capital base and achieve a better return on investment. However, farmers interviewed suggest that lack of funds, unwillingness to sell the land and investment risk are the main obstacles. When asked if they consider off-farm investment, Farmers A, F, J said they do, while Farmers D, G and I have off-farm employment. Farmer G contends that he is achieving the fifteen percent return on-farm through the annual appreciation in the value of the land, although conceding that this is not manifested in profit and loss terms.
Sean Quinn emphasises the liquidation route:
There’s quite a bit of that going on but that’s not really with farmers; that’s with a guy who happens to be a farmer and a property owner, and happens to see himself as a property owner rather than a farmer.
Both accountants warn though that if the demand for land falls due to a large exodus of farmers from the industry, the value of the land will also dramatically fall. Therefore, the return-on-capital-ratio will be improved, but this will not be advantageous to those selling out of the industry. Consequently, the changing structure of the farming industry is one that has to be carefully managed by the Department Of Agriculture. In this regard, use of financial analysis will be vital in the areas of planning, control and decision-making.
6.4 How Can Improvements Be Made In The Future Use Of Financial Information?
This study is concurrent with Doyle (1994, p.40), who concluded that while farmers are aware of the importance of financial management, it is largely conducted through a ‘sensible attitude’ approach rather than a use of detailed information. However, this is not enough to survive in a commercialised industry.
6.4.1 Use Of The Information Available
Joe Hickey places emphasis on how farmers must use the comparative analysis section of their IFAC Management Report:
It [The IFAC System] is working for people who want it to work. If they don’t want it to work … they could have that report and never open it so what’s the point in having it. The best we can do is place at their disposal the resources necessary in order to arrive at good decisions.
Farmer B echoes the response of all IFAC clients interviewed, ‘IFAC can tell you whether you are in the top, middle or bottom of the farmers it provides services for in terms of efficient use of resources, fertiliser for example’. Farmers do realise that using this historical information can be used more straightforwardly without having to try to predict the future:
You’d have to just look at your profit more than your cash flow. If it was coming down each year you’d have to look at it – the hours you’re putting in and what you’re getting out (Farmer E).
6.4.2 Discussion Groups
‘You can pull out costs individually and see how you are comparing within individual groups’ (Farmer F).
The advantage of discussion groups is that farmers of a similar size can compare their return, and each profit and loss account line item against each other. The reasoning is that farms of a similar size should be producing the same return; otherwise there is a need to investigate the cause of the variance.
Under the Teagasc Farm Monitoring System, each farmer puts their financial figures on the table in the IFAC System Format; if somebody is producing better than the rest in the group, everybody discusses what he is doing right and then go back and reflect on how they can improve their own system (Joe Hickey). Therefore, the discussion groups are a mechanism that helps future farmers eliminate any inefficiencies in their farm management.
6.4.3Use Of Information Technology (IT)
Efficiency, it seems, is a vital component for future farm management, and one potential mechanism to achieve this would be the use of IT, which has been promoted by previous researchers (Ruane, 2003). Farmer J, who spent a short time marketing agri-software on the ground, believes that, ‘consultancy services can tell you what your accounts tell them, an accounts package can do the same’.
Software can in effect replace employment of financial consultancy services, which has already seen a greater uptake among the new generation of farmers (Farmer J). However, it is not as simple a solution as has previously been presented. The problem remains that farmers must see a use for financial analysis. Then, those educated in the use of information technology must weigh up the benefits of the computer versus its time consumption and the alternative services available from the professionals. Only then will it be efficient, ‘I have to say, honestly none, not one of them used it, of all the farmers I sold it to, and I sold it to hundreds’ (Farmer J).
6.5 The Role Of The Agricultural Accountant
6.5.1 In The Past
There was little need for the farmer to use financial information in the past, and up until the nineteen-eighties, farmers were not fully assessable to income tax. Therefore, in an industry that has been somewhat sheltered from economic reality (Farmer F), and largely steeped in culture and tradition, becoming assessable to tax meant employing an accountant for precisely that reason.
The main reasons for not employing an accountant in the past were:
The uncontrollable, and yet relatively stable nature of the farming industry, rendering financial analysis useless.
The small sole-trader nature of the business, where decisions were largely based on experience and historical data, where it was not financially viable to employ consultancy services.
Financial implications of decisions were not the only motivation, which were often taken for tax saving reasons or a love of the lifestyle.
6.5.2 In The Future
While there were logical reasons for not employing accountancy services in the past, their under-use remains a stumbling block that has to be recognised and resolved in the future farming industry. As major decisions are taken about the future of farming, and the industry becomes more precarious and dominated by larger operators, the logical step for farmers is to employ the consultancy services of accountants. The emergence of partnerships may see the employment of in-house bookkeepers or financial advisors on some of the larger farms.
The accountants interviewed do not agree with Argilés (2001), who suggests that means must be identified to aid the farmer become a financial manager. Instead, the farmer can embrace financial implications by simply engaging the services that the accountants are currently providing.
The extent of the uptake of future financial consultancy services is difficult to estimate. For those who recognise the advantage of financial analysis, but feel that the employment of the further services of an accountant are not worthwhile, will prefer to do it themselves. According to Farmer G:
I remember when we were at agricultural college, there was an enterprise account book – your dairying book, your pig book, your suckler book. You could appropriate costs to each enterprise, it doesn’t have to be a computer or a big elaborate program.
Farmer G suggests that these pre-printed agri-books for farmers should be circulated by the Department of Agriculture once again.
While there are some legitimate reasons for not using financial analysis, many farmers do not recognise its usefulness in making informed decisions and improving efficiency.
Farmers who want a farm income that is comparable to off-farm employment, must look at their options to improve farm efficiency and off-farm investment - using financial information is the only effective way of doing this. But the farmer cannot ever be an expert at all aspects of the business, so therefore the best option is the employment of more financial consultancy services.
The recommended structural changes towards partnerships and selling land are unlikely to happen, largely due to cultural factors. Yet, the current asset structure cannot support comprehensive consultancy services for smaller operators, so the options available for efficient financial analysis are the IFAC Management Report, discussion groups, use of information technology, and pre-printed agri-accountancy books.