To give your banker confidence, you need to know where your business is now, where it is going and what you will do to get there.
This requires a plan and budgets which demonstrate business profitability (that the business will be able to meet its debt servicing commitments in the next three to five years) and liquidity (that your business has sufficient cash to meet commitments in the short run).
You’ll need to:
- know your financial position now – assets, debt and liabilities.
- have your cashflow budget for the current financial year – showing actual versus budget and updated to show year end position.
- know how your business is performing relative to others, and its relative risks. For example are your farm working expenses, personal drawings and debt servicing costs relatively high?
- have a business plan, budget and cashflow for the year ending May 31, 2017. Then look at the opportunities to improve results using budgets for at least a further year, or more likely two, based on income projections agreed with your bank manager.
- look at medium term profit first – you and your bank both want to know your business is on track to be profitable in the future. By looking longer term, you can consider changes to the way your business is set up and operated, as changes will take several years to take full effect.
- seek expert advice and support, if you are planning significant changes. You will need to show your changes are considered, realistic and well planned.
Your banker can provide support and information but they are not advisors. This is your business and your banker needs to see you are in control of it and where it is going.
Acting with honesty and openness is key for any interactions. A ‘no surprises’ policy always works best.
Knowing where you are now
Use benchmarking such as DairyBase, available at dairynz.co.nz, to help you understand how you are positioned compared with past years and local benchmarks. Ask your banker, farm consultant and accountant to comment on areas where you appear to be out of line and address these in your business plan.
It is also important to:
- have a good understanding of your security – stock on hand, assets, liabilities.
- have the last three years’ financial accounts and/or accounting system year to date position with a revised budget printed out.
What you are going to do and what results do you expect?
Do you have a plan for the coming 12-18 months? And a longer term business plan? Document these and be prepared to explain and discuss these with your banker.
Can you clearly communicate changes you have made this year; why and what impact it will have on your performance and profitability?
Include key production information for the current season and targets for 2016/17. Show that you have made informed decisions by including key factual information – how much grass do you grow, does your feed supply and demand match? What does this mean for supplement needs?
Be prepared to produce a current cashflow position and forecast for next season.
What milk price have you used to create a forecast budget for 2016/17? Using the banks’ recommended payment schedule will ensure these are aligned.
What are the other key assumptions around production, input costs and rates?
It is a good idea to develop a sensitivity analysis for your budget which looks at the ‘what if?’ scenarios around milk price, farm working expenses and production levels. This will help outline the risk and volatility your business is exposed to. For example, what will your budget look like if milk price, farm working expenses or forecasted production are not what you initially budgeted on? See examples to right.
Make sure you are on track financially and productively
Essentially, you are asking the bank for money to back your plan for the season.
Demonstrate that you have a monitoring and measurement plan – how are you planning on keeping this information up-to-date and what will you do with the information?
Make sure budgets/cashflows are built and delivered upon – in particular the cost items. Wherever possible, exceed expectations. Under promise and over deliver. Actively running budget to actual reports and reporting these to the bank monthly with a variation report will be a show of strength in respect to monitoring and delivery.
Bring in support from your business partners and wider farm team, including your accountant, advisor and/or farming mentor. Having them involved in business discussions, reviews and/or bank meetings shows you are organised. Visit dairynz.co.nz/budgets
Be prepared to answer the following types of questions:
Have you considered the impacts of the changes you will make to your budget?
Do you know what working capital you will need? Make sure you clearly identify and correct any potential hard-core debt that may be carried forward from previous losses and identify appropriate working capital requirements for the next 18 months to two years.
Is there any required capital expenditure?
What are your plans for personal drawings?
This article was originally published in Inside Dairy June 2016