In the first of our autumn and winter recordings for Grounded Live, we partnered with Planning for Profit to discuss what it takes to run a profitable, resilient farm business.
Hosts Stuart Johnson and Kyle Richardville were joined by Sam Charlton, who set up Planning for Profit in the UK, adapting it from the internationally respected Ranching for Profit course in the United States.
The five-day programme works with farmers to take a practical look at understanding economic and financial management to support them to make better decisions and help build a business that works for them. The course takes a unique approach to business leadership and management with a clear focus on the people side of farming.
You can find more information on dates and booking here: https://www.planningforprofit.org/course-dates-booking
Jamie Leslie, a mixed farmer from Shetland - who is also a member of Planning for Profit’s executive link board - joined the conversation to give his perspective on putting some of the principles he learned on the programme into practice.
You can watch the full recording below.
What kind of farm business are you running?
Sam, who farms with her family in Northumberland, began her career in agricultural banking before setting up Planning for Profit.
She says a fundamental first question for people to ask themselves is what they really want their farm to be, whether it is a lifestyle project or side hustle, or a full-time, agricultural business.
“It is possible for a business to be economically profitable, but financially insolvent. Others can be quite happy with cash in the bank but economically they are running at a loss.”
“If it's a business and you want to run it like a business, then that's the route we go down at Planning for Profit,” she says.
“We're going to adopt that business owner mindset. We're going to be working through a set of tools and business principles, and skill sets that support you to become the best business leader you can be.”
The difference between finance and economics
A key distinction which will help farmers understand their business and make good decisions is the difference between finance and economics.
Sam says finances are primarily about cash flow, while economics is about profit.
“Always start with the economics, ” she says.
“When you are considering whether you should take an action in your business, always start with the economics. Ask yourself: ‘Is this profitable?’
“The next question is the financial one. It might be profitable, but can I afford it?
“It is possible for a business to be economically profitable, but financially insolvent. Others can be quite happy with cash in the bank but economically they are running at a loss.”
Tax accounts can be misleading
Sam says it is important to remember the limitations of tax accounts in giving a true reflection of the business’ position.
“Tax accounts can be one of the worst records to use to effectively manage our business,” she says.
“They are presented for the purposes of tax and they tend to circle only around that.
“The other thing is that they look behind, not ahead. That can be insightful, they can tell us about what's happened and where we've been. It's not going to tell us about where we want to go.
“Everything that we do across the five days within Planning for Profit is about how we use an economic model and financial ratios to give us a projection going forward.”
Understanding the true costs within your business
Focusing purely on cash coming in and cash going out of a farm business will also give a limited picture of how it is performing.
It is important to factor in the cost of labour - including work done by machinery and the subsequent wear and tear - and the fluctuating value of products and livestock.
Jamie says he has spent time analysing the depreciation of the value of livestock within his system, something which has allowed him to make more informed decisions for the future.
Sam Charlton, founder of Planning for Profit
“It can be quite shocking when you first do it,” he says.
“But the exciting thing about a shock like that is it gives you the opportunity to fix it, manipulate it and take advantage of it. You can find ways around it or even do better because of it.”
“It’s about understanding the appreciation and the depreciation and what kind of strategies you can implement within your business to maximise value and reduce the loss of value,” says Sam.
“If it’s not something that you physically pay for with cash out of your business, you can think that it doesn't exist. But it absolutely does exist, especially in agriculture, when we have such high inventory values.”
Putting a true value on the time people spend working on the farm and whether that labour is paid or unpaid can also bring home the reality of how sustainable a business is.
Jamie says it is important to realise the relative value of time spent working on the business rather than working in it.
“Working in the business is fixing fences, fixing troughs, moving the cows. Then you can go into working on the business, which is running your economics, looking at your financials, planning for the future, deciding which enterprises are successful, all those bigger business decisions,” he says.
“Every farmer loves being up against it in bad weather and battling on. We all love that. But working on the business can be much more valuable. It’s a matter of getting the balance right. If you get that right it's actually quite enjoyable.”
Planning for a successful business transition
It is also necessary to take a rounded view when the time comes to discuss business succession.
Although planning for the transition of assets is important, Sam says it is equally pressing to have a clear vision for the new structure of the business.
“What will it take to continue to run a successful business? What does the management structure need to look like? Who's coming into those roles? What do the people within the business want?
“One of the first principles is also to hand over a profitable business. You're going to make the process much harder if you are handing over a business that has a significant amount of debt that it's struggling to meet, or it’s been running at an economic loss for a number of years.”
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