I reviewed a set of limited company farm accounts recently. On the face of it, to the uninitiated person, the company had enjoyed a cracking year with much improved results, turnover up, gross profit up and net profit up. It might have been a case for high fives.
Unfortunately the reality was rather different. At the beginning of the year the company still had a lot of the 2019 bumper harvest crop in store. The crop was sold in the current year, giving turnover a boost. The 2020 harvest, by contrast, was disappointing and the company had sold most of the crops pretty much off the combine prior to the year end to at least get some warmth whilst prices were relatively high. The consequence was that the turnover shown in the profit & loss account was largely the combination of two harvests.
Quite how poor the 2020 harvest had been was confirmed when the farmer advised me that the wheat yields were the lowest ever recorded since the family had first farmed the land pre second World War.
The company will likely show weak results for the current year, particularly if it holds on to the crop and the crop is still in store at the end of the year.
One has to be so careful when preparing and interpreting the results for a farming business. I like to make sure that, as much as possible, we cover the following areas:
1. Get a cropping plan to know what crops we are likely to see being sold.
2. Establish what the tonnages sold were of each crop.
3. From 1 and 2 above, we can then calculate what the yields are for each crop. We can then establish whether the yield was average, below average or above average. In particular, if we are getting a yield return off the scale, it may tell us that something is wrong. It could be that a crop has failed entirely. It could be that the intended Winter sowing could not take place and there had to be a Spring sowing instead. It could simply be that a crop has been mis-categorised.
4. Undertaking this statistical check can alert one to other dangers when preparing farm accounts. Double counting is a risk. One has to be careful where crops move off the farm around the year end date. The risk is that they might be included in the closing stock take and then also be included in debtors when one reviews receipts after the year end.
5. The opposite to double counting could be that the crop is missed out entirely, being neither in closing store as it has already moved from the farm and then not being picked up as a debtor.
6. Reviewing receipts immediately after the year end is a critical exercise.
7. To try and provide a further check, I do always look to identify the subsequent sale of crop held in store at the year end. This can also provide useful statistics on how much of the deferred profit from harvest is actually recognised in the following year.
We once had to defend a West Country accounting firm who were being sued because they had double counted closing crops in store and crops in debtors over many years. The accountants were the party sued despite the presence of farmer, contractor, land agent and solicitor, with regular management meetings of these plenipotentiaries.
We did help to get them off but it was a stark reminder of the need to take care when doing farm accounts.
If you need any help with your Farm Accounts, please get in touch.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.