Farm accounts

Essentially, a business is obligated by law to produce financial accounts, also termed end-of-year or tax accounts, mainly for tax calculation purposes. They are primarily:

  • The profit and loss account, which describes the business's financial transactions and the resulting profit (or loss) for the trading period; and,
  • The balance sheet, which provides a 'snapshot' of the company's capital position at a given time - usually at the end of the financial year - stating its net worth in terms of its assets (what it owns) minus its liabilities (what it owes).

While these accounts will be of some use to the managers of that business, they tend to be too historical to have an important role in planning future strategies. Neither may they contain sufficient information to ascertain why a particular enterprise has performed well, or badly, in comparison to a previous year's results or to similar enterprises.

Management accounts, on the other hand, tend to be calculated in advance, such as:

  • A partial budget used to estimate the potential performance of a future enterprise.
  • A cash flow forecast calculated from likely or predicted future costs and outputs.
  • A gross margin calculation, used to indicate the potential level of productivity of a business enterprise within a farm business or of the whole farm itself.

Predicted management accounts can also be compared with actual figures obtained at the end of a term, say on a 6 monthly or annual basis, to show how the actual figures have deviated from predictions and provide an indication as to why this has happened. Lenders are also likely to request predicted management accounts before they lend money for business investment.

Benchmarking (also known as comparative analysis) makes it simple to compare fairly the best and worst performing farming businesses to this end, but requires detailed management accounting and demonstrates why knowing the farm's finances using these measures can help to keep it profitable.

Management accounts and similar forms of business performance analysis can contain a usefully high level of detail and can be structured to allow accurate and fair comparison between farm businesses of a similar size and type, and can enable a farmer to identify, for example, where costs may be saved or productivity improved.