March 9, 2011 – RSM Bird Cameron offers advice for farmers facing the long and short-term hardships caused by drought and other recent natural disasters.
Geoff Hall, head of agribusiness at RSM Bird Cameron said, “It’s no secret that many farms and the rural communities they indirectly support are under financial pressure. Many carry large amounts of debt and feel they have few options going forward – particularly after the latest bout of natural disasters. In our experience, however, there are always options. The big challenge we find with farming enterprises is that many farmers plan based on ‘one good year’ restoring their fortunes, when in fact it makes more sense to make plans that incorporate poor and average seasons. A good year is a bonus in many districts, not the norm and market prices can vary widely from season to season.
“There is a Drought Assistance Package for farmers and small business offered by the government when financial help is needed, this package is intended to relieve stress in the short term, but debt management becomes a major concern in the long term. Financial relief won’t happen unless long term financial plans are made”.
RSM Bird Cameron offers the following advice:
1. Create long term financial goals. This will allow you to have a sharp focus and perspective on the future. Be prepared to be flexible in how you achieve those goals. There will be some unexpected windfalls and problems along the way. Study your finances, including opportunities and threats. Regularly review your budget and cash flow. Create regular profit and loss statements, balance sheets as well as an estimated annual cash flow and anticipated revenue. Model best and worst case scenarios and decide early what your response will be if they eventuate. Use historical evidence for planning, not gut feel.
When there is money to spend, invest in infrastructure that will help mitigate future bad seasons and drought-proof your farm. This has the benefit of reducing your future exposure to risk but it also improves the value of your farm so you can borrow against in the future. Focus on improving water security, seed and feed storage or fences and yards for example. Even small changes can make a big difference. Aim to eventually put yourself in on the supply side of the equation when prices are high and on the demand side when prices are low. Prioritise this kind of spending over almost everything else.
2. Consolidate debt and refinance where possible. Reduce the administrative costs, and the management complexity of running multiple loans. Consolidating debt can often produce a lower interest bill too – as often high-interest, small personal loans and credit card debt is also part of a farm debt structure. Look around for new banking products or mortgage-linked lines of credit that may suit your purposes better than commercial overdrafts.
3. Diversify enterprises where possible. The damage to farm income in the event of a major weather event can be catastrophic, particularly for single-enterprise farms. One step to reduce risk can be introducing additional, alternative crops to reduce exposure to market prices. However a single major weather event like hail or wind can still destroy all crops. It can be worth considering diversifying into unrelated enterprises such as livestock. Another diversification strategy is to create a separate farm enterprise, through share-farming, in a different district to insulate against local weather events.
4. Sell depreciating assets and use the proceeds to pay down debt. Use contractors to carry out major farm activities as an alternative to doing it yourself. Carrying expensive farm equipment is a burden on cash flow and can expose you to risk if it fails at a crucial time. Using contractors can also smooth out cash flow as many will accept payment plans for their bills. Often contractors use the latest equipment and can introduce improved techniques for spraying, seeding, harvesting and other activities which are simply not possible with your own equipment.
5. Consider pooling expensive equipment with neighbors and share the burden of debt on equipment you all use. In a similar vein, discuss the possibility of creating a local co-op that can bulk-buy expensive farm inputs like fertilizer, fuel and fencing materials.
6. Form a community support group, talk and confide in each other, remember that others are experiencing the same issues you are and may have some novel solutions you haven’t considered. Before making a major financial decision look for an objective opinion from advisors who are at arms-length to your daily operations. Making well informed decisions is critical.
About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia and offers a full range of specialist advisory services, including business consulting and advisory, assurance and advisory, taxation consulting, corporate consulting and turnaround and insolvency. RSM Bird Cameron is a core member firm of RSM International, the sixth largest network of independent accounting and consulting firms in the world.