Uncertainty and change are inescapable parts of life, and the agriculture industry has undoubtedly seen more than its fair share of turbulence in the past few years.
Fluctuating prices, border closures, isolation requirements, labour shortages, increase in transportation costs, rising input costs, WHS changes, new industrial manslaughter laws, and the list goes on…
Most farmers will, at some stage, have a time of difficulty where things look bleak and the future uncertain. Unforeseen circumstances can reduce income and or increase expenses to a point where the business cannot meet its financial commitments.
Businesses can take proactive steps to provide more confidence in business viability during unstable times.
Assess external debt
Financing through debt is common for farming businesses. Pressure from likely interest rate rises can add to feelings of financial distress. While improving cash flow and decreasing expenses can allow options for reducing debt, this can be challenging in turbulent times.
Regularly assessing your debt can make a difference.
- Follow up on late and outstanding payments
- Prepare regular cash flow forecasts
- Prioritise your energy on profit creating activities and products
- Make full use of supplier payment terms, but do not pay late
- Review and assess supply levels
- Sell any unnecessary assets to reduce debt
- Utilise budgets to stress test the business for different interest rates
- Consider the effect fixing interest rates would have on the business's financial position in two or three years.
- Consider what rate would be required to make the proposition attractive.
Evaluate productivity
Productivity is the ratio of output (crop and other farm income) to the input used in production (labour, capital, land, material and services).
Businesses that regularly review their productivity ensure optimal efficiency and effectiveness.
- Identify what factors can affect the success or performance of your business (key drivers) and set goals for these.
- Collect and analyse data relating to crop production and compare it to previous performance, industry benchmarks, and the business's strategic goals.
- Document crop inputs, analyse outputs and assess whether changes positively impacted yield.
- Regularly evaluate crop production and performance of key drivers against your goals and identify areas for improvement, risk and trends.
- Monitor the effectiveness of strategies and adjust when necessary.
Evaluate cash flow
A cash flow budget measures the amount of cash coming into a business and when it comes in against what goes out and when it goes out. It is a powerful financial tool in business management because it can specify when your cash flow will be tight or plentiful; thus, allowing you to plan for those situations well in advance requires careful consideration of business plans.
Cash flow budgets:
- Aid in ensuring the business meets its day-to-day commitments.
- Assist in understanding and planning for likely surpluses and shortages in cash flow.
- Provide important indicators of what you want to achieve
- Allow businesses to make informed decisions when planning additional expenditures.
- Demonstrate to banks the business's cash flow management and whether additional borrowings are affordable and warranted.
A cash flow budget can be useful in testing farming plans to identify whether there will be sufficient income to meet cash needs for a farming strategy. They can also be utilised to stress test the business for changes in financial circumstances, e.g. increases in interest rates, changes in input or transportation costs.
In the times of increased uncertainty that we face today, it is recommended that businesses complete longer-term planning and test for various possible scenarios.
Compare cash flow budgets monthly with the business's actual results and calculate any positive and negative variations. This will highlight how well the business is doing and allow corrective action if necessary.
Find savings in cost structures
If a business cannot bring costs under control or pass increased costs onto customers, then both cash flow and profitability are reduced. This can impact the future viability of a business.
Regular review of costs can improve cash flow and profitability.
- Review costs under the business's control. Do this strategically to ensure cost-cutting measures don't need reversing in the future.
- Compare cost structures with other businesses in your industry and past results to identify areas for improvement.
- Assess cost inputs for strategic farming plans, and evaluate whether or not an increase or decrease in input costs has affected the crop quality or yield.
- Review supplier agreements. Are there other providers who offer a lower cost for a comparable product, can ordering quantities be adjusted to reduce overall costs, etc.
Implement risk management strategies
Uncertain times expose businesses to risks that could compromise viability. A risk management strategy can aid during these times, and regular reviews ensure the business remains on top of key risks.
Creating a risk management strategy involves identifying risks and assessing the likelihood of them happening, the impact they could have on the business, and how to treat them.
Up to date business plan
When business conditions change, it's good practice to revisit and amend your business plan and budgets to reflect the current circumstances.
- Review assumptions underpinning the business plan. If they have changed, then update your plan accordingly.
- Evaluate the performance of the business and incorporate improvement strategies.
- Adjust budgets and cash flow forecasts to reflect any business plan amendments.
Opportunities for business growth in the agriculture industry can emerge even during economic uncertainty. Thoroughly investigate possibilities before making commitments. Initially, this involves establishing whether they are consistent with the business strategy and can be properly funded.
In summary
Monitoring the various aspects of a business enables the owner to have a deeper understanding of the capacity of the business and allows focus on the most critical elements; this allows a business to respond quickly when an opportunity presents itself.
In times of turbulence, planning, reviewing and adjusting business strategy becomes even greater importance. Taking the time to plan and monitor your business regularly can make the difference between whether or not your business has a viable future.
For more information
Rural West is a free, mobile, confidential and independent strategic business financial counselling service. Supported by the State and Federal governments, Rural West works with a wide range of primary producers and regional small business owners to improve their position and profitability. If you are experiencing or at risk of financial difficulty, our team of counsellors are ready to support you.
Contact Rural West on 1800 612 004, email enquiries@ruralwest.com.au, or visit https://www.ruralwest.com.au.
