Chapter 1

The Farm Office

Agricultural and Allied Businesses

In recent years, there has been a shift towards specialisation and larger farming operations. A well-resourced farming business may provide labour, machinery and expertise to neighbouring smaller farms, benefiting all parties from economies of scale. Farm diversifications are now commonplace - for example, let property, environmental schemes and non-food crops - providing important additional income and, generally, more paperwork. Whatever the size and nature of the business, there will be a farm office.

Farm Office Handbook is intended as a practical reference source. We look at setting up straightforward accounting and recording systems for farming and allied businesses, using spreadsheets and computerised systems. Areas such as VAT and payroll processing are covered in detail. However, legislation is far-reaching and the structure and scope of a business will determine what legislation is applicable, therefore we aim to highlight legislation that may apply and point the reader to the appropriate website for up-to-date information. Website addresses used in the book are current at the time of going to press but if a particular website cannot be located - for example, due to government departmental changes - try using a search engine for the topic concerned.

Farm administrators come in two varieties:

1. Professional: The first category might be the professional who has come to specialise in farm administration following work experience in accountancy or other disciplines in industries either related or unrelated to land-based enterprises. The greatest proportion of UK land is farmed in large holdings, owned or rented, perhaps from estates of even greater size. Many such businesses require full-time administrators, qualified and skilled in the particular range of expertise that characterise agriculture and horticulture, possibly with equestrian, tourist or other appendages. An alternative career choice may lie in self-employment, servicing a number of clients. See Chapter 15.
2. Family members managing farm records and accounts: Whereas most UK farmland is in large units, the remainder is made up of a huge majority of smaller holdings. In terms of enterprise size, a very small percentage of holdings employ more than five people. So who 'does' the farm accounts and recordkeeping? This traditionally falls to the proprietor or a family member.

Farm accounts and recordkeeping falls into two main categories:

1. Statutory: Compliance with the requirements of statutory regulations and standards of farm assurance schemes. These include:

• Financial records, particularly those regulated by HM Revenue & Customs (HMRC) including Value Added Tax (VAT), tax assessment on profits, wages (also involving other legislation) and Pay As You Earn (PAYE).
• Physical records regulated by other government departments such as Department of the Environment, Farming and Rural Affairs (DEFRA), Natural England; Environment Agency (EA), Health & Safety Executive (HSE), Food Standards Agency (FSA) and the Office of Fair Trading (OFT).
• Evidence of compliance with statutory regulations involved in farm assurance schemes - voluntary schemes that producers can join to assure customers that certain standards have been maintained in the production process, such as 'organic' and 'free range'.

2. Management: Management records and accounts will depend upon the nature of the business but may include:

• Financial records - to facilitate control of cash flow, and comparative analysis year-on-year and with national benchmarks.
• Physical records - monitoring crop and animal husbandry, pedigree records, etc.
• Stock records - crops in store, seed, fertiliser, crop protection products, feed stuffs, fuel, machinery parts, etc.
• Property records - records of condition, inventories, etc.
• Machinery records - service records, etc.

The Basis of Good Recording

Basic to any business is recording details of day-to-day (or month-to-month) financial transactions. The form in which they are recorded must comply with several principles:

• Amounts must be accurate and the layout must lend itself to cross-checking.
• Analysis must be used to reveal information useful to management.
• The system must ensure that there are no omissions.
• Full values of goods and services must be shown, even in cases of part exchange where the cash sum represents only the price difference.
• It must be possible to keep data in step with what is happening to the bank account.
• It must be easy to extract information required for VAT returns.
• The eventual totals should, as far as possible, be in a form suitable for transfer to the annual accounts.
• Where a family farm is run on a single bank account, it is necessary to be able to distinguish between business and private transactions.
• Provision may need to be made for the main accounts to be integrated with the wages book, petty cash account and any separate capital, loan or reserve account.

Choice of Accounting System

A great deal of thought and expertise has gone into devising 'user-friendly' systems suitable for farming and other small rural businesses. The choices are:

• Cashbook, single-entry systems: Computer spreadsheets based on the traditional cash analysis book are easy to set up and use. Paper-based systems are still widely used - a variety of forms are available commercially, pre-printed or blank, in book form or loose-leaved. See Chapter 4.
• Computerised accounting programs: These can be either general or agriculture-based. There is a choice of single-entry system, like the analysed cash book, or double-entry simulating a ledger system, where moneys owed to and by the business may be tracked and an asset register maintained. Refer to Chapter 6 for more information.

Taking the Accounting System a Step Further

Most businesses now have to file statutory reports online such as VAT returns and payroll information. This may be an incentive to computerise accounting and payroll records. See Chapter 5.

Whichever system is in place, the primary aim is to produce a profit and loss account and balance sheet after 12 months of trading. Where a computerised accounting programme is used to its full extent, it should be possible to produce final accounts having entered the valuation and made manual adjustments if necessary to the opening balance. See Chapter 6.

The Profit and Loss Account

This is a summary of the working of the business during the past year. It takes account of:

• money paid out and received
• debts owed to and by the business
• values of the business assets (livestock, growing crops, stocks) at the beginning and end of the year and changes (depreciation) in the case of machinery.

Refer to Chapter 9 for more information.

The Balance Sheet

Whereas the profit and loss account covers a period, the balance sheet is more like a flash-photo: it shows the state of the business at any one time, normally the end of the financial year.

It lists everything the business has, its assets:

• crops and animals
• machinery
• land
• credit balance at bank
• debts owed to the business
• cash in hand.

Against which are set its liabilities:

• mortgage
• loan
• overdraft
• debts owed by the business.

To reveal the net worth of the business at the specified date. See Chapter 10.

Purchase and Sales Documentation

Although the accounting side of farm office work is the aspect that springs most obviously to mind, many items of paperwork may precede the final transaction. Each document performs a specific function, and the farm administrator must know not only what to do with each one, but also which ones may be safely thrown away and when. See Chapter 3.

Budgeting and Management Decisions

The essence of planning is to ask, 'What would happen if.?' Changes must be investigated before being put into effect. Finances must be worked out in the form of a budget before investments are made. The...