1. Understand your current and medium financial position well.
We expect farmers to be good at pasture management, animal management, people management, to be able to fix most things on farm and to be financial managers.
Very few people are outstanding in more than two of these five categories. If financial management capability is not in your top two suits, then you will most likely need outside assistance to assess your financial position.
Just as you cannot solve feed budget shortfalls without an accurate picture of grass cover, supplements on hand and grass growth projections, you cannot solve cashflow issues without knowing your true position.
2. Financial decisions you need to make.
Once you have a clear understanding of your current and pending financial position, identify the areas that you need to address:
- Increased income
- Lower unit cost of production
- Cost deferment
- Deferred payment terms
- Optimized debt servicing package
- Additional term debt
- Injection of capital
3. Identify if you need someone to help address and solve those issues needing resolution in point 2 above.
It is quite likely the skillset required to take the x-ray in point 1 above is different to the surgeon or specialist required to fix the issues needing resolving in point 2 above.
4. Profitably increasing your income.
Increasing farm income usually comes about by "spending" your way to higher income and/or "managing" your way to higher income. Most likely only the latter will add any value in low income cycles.
"Managing" your way to higher income means making better use of the resources you have available. Can you grow more grass by better management? Can you utilise more grass by better management? Can you milk more cows through the spring as a result of lower wintered cow wastage? These are all income increasers that require no monetary investment. They require knowledge to be applied, extra sweat with electric fence feed allocation, more farm walks, less pasture damage etc.
“Spending” your way to higher income means buying fertiliser or feed where you outlay capital and expect to show a financial return. This method may work at high income cycles but is unlikely to work when product price is low. Even in high income cycles this method will be questionable for the lower 50% capability farmers (we never see 50% of farmers admitting they are below average – it is always someone else).
5. Lowering your cost of production.
Cost of production increases when we get sloppy when milk prices are high. They also increase because marketers are professionally trained to sell you product you may or may not require, or higher spec products than what are required, and at the highest possible price.
So many modern products are priced for the maker/supplier to capture all of the benefits. For example parasite pour-ons are much more expensive than oral drenches. The maker/supplier pockets all of the convenience of an easier job. A visit to rural retailer shelves demonstrates that the use of oral drenches is now the exception rather than the rule.
100% nitrogen application on 90% of pastures, away from drains and races will give better results than 90% nitrogen on 100% of the area. The first 15% saving of cost of production can usually come about; buy 5% less product, use a brown-paper-bag-vanilla 5% lower spec product, and better negotiated at a 5% lower price.
6. Cost deferment where costs can be delayed one or two years without any undue impact.
Examples of this are; painting the house, maintenance on low volume farm races, control of non-threatening weeds and some deferment of fertiliser. The deferment in all cases will have some negative financial impact. Those impacts will likely to be less than penalty overdraft interest rates and certainly not worth losing the farm over.
There will of course be some vital elements of farm expenditure required to ensure farm value is maintained and increasing compliance industry expectations are satisfied.
7. Optimizing debt servicing packages.
For many, perhaps most farmers, interest cost will be your largest single expense item. This is an area where the sort of advice discussed in point 3 above can add real value.
- Is there a way you can reduce your bank overdraft, or term debt, by selling non necessary assets (animal, vegetable or mineral)?
- Can you demonstrate to your bank that you have a good financial understanding of your business, that even though your cashflow is tight it is quite manageable, and that debt principal repayments can be suspended for a period?
- Can you demonstrate to your bank that despite your cashflow being very tight, you have a clear and planned pathway, and that some of your overdraft can be converted to lower interest cost term loan?
- Can you demonstrate to your bank that you have a planned pathway that is all quite manageable and that the bank needs to share some of the load by reducing the interest margin to a good customer – providing good information and then asking for a margin reduction has better chance of success than waiting for the bank to offer.
8. Introducing fresh capital to your business.
This could come about by the sale of some assets, capital injection from a family member or outside capital. If it is outside capital, and it can be injected at full value (without any discount applied) then the matter is as simple as "will the business be better for a stronger balance sheet versus any ownership control lost".
If the business is in more desperate need of a capital injection, then the chance is greater that a value discount will be required to attract fresh capital. In this case the debate is around whether the business can survive adequately without the discounted fresh capital or is the discount a reasonable price to pay for stabilising the business and peace of mind.
For those who worry about a tight financial position, discounted fresh capital injection may be a wise option.
9. Surround yourself with positive people.
This is a key component when facing financial hardship. Attach yourself to people who are positive, but realistic as well. People who have been through tough times or are experiencing similar financial challenges to you will be good places to start.
If you do not like the feedback or advice you are getting from someone, make sure they are not just delivering you a tough but realistic message you might not want to hear. Do not shoot the messenger.
10. Do not delay when decisions or actions are promptly required.
If you need to act in terms of your cost of production, introducing financial advice, managing cashflow or recapitalising your business, every week of delay is likely to carry the dual cost of lost opportunity and greater degree of difficulty.
There may be options that your advisors can provide with regards to tax related options, benefit entitlements, income equalisation etc that only have windows of application or entitlement. The quality of advice you get will often be most beneficial within a certain time frame that may be limited, so timeliness is important.
It is far easier to climb out of a one metre deep hole than a two metre hole. If you keep digging then a three meter hole it is very difficult to climb out of without cost or other negative implications.
11. Limit your financial constraints to as few people as possible.
Delaying payment of monthly accounts should be an absolute last choice option because:
- Farm servicing businesses need to be able to operate successfully in their own right, and they will be required by your business in the future. It is a fact, that when financial adversity hits the farming sector, farmers tend to do a lot of the complaining and rural servicing industries take the pain as farmers stop spending.
- When the period of financial constraint has passed, do not expect quality service and sharp pricing if you used those businesses as banks through the tough period. The cost of servicing a higher bank overdraft is more honourable than stressing your service providers.
- There is nothing wrong with pre-purchase discussions with suppliers or service providers about delayed payments options. The supplier then has the options of agreeing to your request, agreeing to your request with some reasonable cost consequence or declining to supply.
12. Prepare yourself mentally and physically for the added pressure.
Sleep well, eat well and be active. No matter what age or shape you may be, exercising three times per week is refreshing and you do some good clear thinking.
Help friends or family that you may be worried about - they should be the first to help you in return. Take some time off or throw a "hard times" party, a good laugh is a tonic and everyone will be going through some form of constraint.
Going to the doctor for a warrant of fitness is worthwhile at any time. Even more so in tough times as the most likely outcome is reassurance that your health is fine. That in itself is a tonic.
13. Share the knowledge you gain with others.
Periods of financial constraint occur every three to five years. These require discipline but are quite manageable. The more serious once-in-a generation type financial periods are defining and life changing.
This season (2015/16) looks to be a once-in-a-generation constraint type event. Life-changing that means they can make you or break you. Those with the fortitude, discipline and capability to prosper in times of adversity, have a responsibility to help others in the future who experience the same sort of challenges.
In farming very few of us invent things and most of what we learn, we learn from others and usually at no cost. Those who benefit from the wisdom of others as we go through a difficult period, have a responsibility to help others in the future.