It’s hard to recall a time when farmers faced more volatility and uncertainty and taken more risks within their farming businesses.
Reflecting on the season at hand, the risk that the natural environment brings stands out. The devastation of the current flooding and unseasonal weather across much of eastern Australia will be what springs to mind when we remember 2022 in years to come. However, as Australian farmers, you understand that production risk through drought, flood, hail and frost is ever-present.
Couple this, however, with global political uncertainty, substantial commodity price fluctuations, major inputs including fertiliser, chemicals and operating expenses at historical levels for some time now. Not to mention a rising interest rate environment leaves you as farmers more exposed to financial shocks to your business than ever.
Although we cannot control the weather, it’s important for businesses to understand what things fall within their circle of influence. Focusing on tasks that can positively affect overall performance and potentially reduce exposure to areas of the business of the greatest concern.
For businesses who have or are hoping to expand, invest in equipment or execute a succession plan, the importance of knowing where you are at, knowing your numbers and stress testing your operation’s ability to absorb, weather and overcome potential shocks is critical. These are a fundamental part of the conversation we are having with clients now and in the coming months. As we attempt to understand the year that’s been as well as prepare for the year to come.
The old saying ‘cash flow is king’ is very relevant at present with the need for a good budget to be developed. Importantly being reviewed constantly as we look to plan for what’s to come. A good budget allows a business to focus on key areas.
Firstly, understanding with confidence the income being generated and the cost of the operations that are expected to be able to generate these income streams.
Secondly, to better understand the projected operating profits and to what extent this covers the ‘before you get out of bed costs’ and what remains a buffer for the business.
Thirdly, a well-considered budget allows you to understand the working capital needs for the business to fund the above plan and ensures you can be proactive rather than reactive with the key banking stakeholder within your business.
In addition to the three areas above, it also allows us to run stress test scenarios to judge the capacity of the business to overcome unexpected rises in costs and understand the impacts that lost or reduced income streams may have, ultimately allowing you to plan better for the future of your farming business.
The next key area to understand is around the health of the business’s balance sheet and where a client’s key industry metrics sit, such as equity, loan-to-value ratios, gearing and the balance of liquid v’s fixed assets. These are very important to know, as these things give an understanding of the levers available for your business to pull and push if needed in the years ahead.
In addition to good planning, having someone to help pull all the above together, who knows you, is knowledgeable about farming, business and finance, plus who is independent of the operations is important. Also, ensuring the planning completed is highly detailed, useful for you as the farmer and unbiased as to accurately reflect the capabilities of the business. Ultimately it needs to be to a standard that empowers you as the decision-maker to have the tools at hand when you need them for making those key decisions that will inevitably come as the season progresses.
This is why working with Planfarm Advisory could be a perfect fit for your business. Our Advisors are specialists in farm business analysis, cash flow budgeting, and dealing with financiers and are experienced at helping to guide farming families with knowledge, empathy and, most importantly, honesty.
If you think this could help your business, reach out to our advisor on the ground to start your planning for the coming season ahead.
