Managing cash, having a budget and increasing productivity without adding costs are most effective strategies for remaining profitable in tough financial times.
George Collier’s advice for managing tough financial times
At a glance:
- Managing cash is key.
- Maintain fertiliser applications over the medium term. Possibly skip phosphate for a year if Olsen.P levels are high, but sulphur should still be applied.
- Communicate with the bank, your trusted team and friends.
- Down cycles tend to be much shorter than up cycles. Dig deep and hang in there.
- Consider what an optimal farm system looks like: model options for high revenue and medium cost.
- Levers can be pulled to reduce expenses, increase income or delay cash outgoings, but you need a robust medium to long-term strategy.
On a recent Beef + Lamb New Zealand webinar, Managing in Tough Financial Times, George Collier, Chartered Accountant and Director of ICL Chartered Accountants in Alexandra set the scene by saying while current conditions were challenging, in the past they have been a lot more difficult.
Looking back at the financial performance of sheep and beef farms over the past 22 years, generally the balance sheet has gone from strength to strength.
“While there have been some roller coaster years, the upcycles are always longer than the downcycles.”
He said increasing productivity without adding costs is the most effective way of remaining profitable in tough financial times and he encouraged farmers to look for opportunities within their business to grow and utilise more feed to increase production.
Drawing examples from his practice’s long-term farm survey, he says costs are typically similar between the top and median performers, the difference is the top performers have a higher stocking rate, lambing percentage and production.
Their economic farm surplus per stock unit is $98 versus $58/su.
“Increasing productivity will reduce costs per stock unit.”
He says the trick is to increase productivity without adding costs and this comes down to being more efficient at converting feed into saleable product.
Mr Collier told farmers managing cash was key and he advised farmers to have a budget and to revise it regularly.
He suggests when budgeting for the bank, delay income and advance expenditure and be realistic when making assumptions.
“If it doesn’t work, don’t overinflate income-rework the plan.”
He says it is important farmers communicate with their banks and be clear about their strategy for navigating tough financial times and provide funding limits well in advance.
Collier’s tips on reducing farm expenses in the short-term included slowing the pasture renewal cycle by double-cropping, using contractors instead of employees (saving wages, accommodation and vehicle costs) stopping development, and thinking abouts needs versus wants.
This might mean repairing and maintaining equipment rather than buying something new.
“Postpone principal repayments for 12-24 months but climb back on the bus when the inevitable upswing occurs and restart with small one-off lump sum payments.”
He says drawings are an issue for some farming businesses (the mean drawing in the ICL survey were $72,000/annum or $1,400/week). Collier suggests setting up an automatic payment from the farm account into a personal account while minimizing both personal expenses and spending on farm cards.
Tax payments can be delayed through Tax Management NZ or through arrangements with IRD and there may also be an opportunity to revise tax payments.
Other options for generating cash including cashing-up life insurance, sub-dividing and selling off land, selling surplus machinery, looking at opportunities within the ETS and generating income through a partner going off-farm to work.
Medium term cost reduction strategies include being strategic with fertiliser inputs. If Olsen.P levels are high, phosphate levels rates can be reduced, but applications of sulphur need to be continued, says Collier.
Pasture mixes should be limited to two to three species. Research has shown that there are no production benefits to increasing the number of pasture species in a mix above three. It just adds costs.
Collier suggests buying chemicals and animal health treatments in advance and in bulk and taking the opportunity to run a ruler over the cost of insurance.
“Get an independent view on insurance as people are often over-insured.”
Long-term cost reductions come down to feed which Collier described as being the core constraint and the core cost in any farming business.
Reducing feed costs by matching the farm system to the pasture growth curve, maximising the use of pasture while minimising the use of supplementary feed and managing pastures to maintain quality and drive regrowth will all help with long-term cost reduction.
“Pasture persistence is critical to reducing costs and grazing management is key.”
Other long-term considerations include the use of improved genetics to drive productivity and at the same time reducing costs associated with internal parasites, the smart use of technology, incorporating the “Lean” concept and where possible, protecting income streams through the use of contracts such as fine wool contracts.
(The Lean concept is producing goods of the highest quality at the lowest cost by being time efficient, reducing waste and implementing smart systems.)
He says there is no substitute for mixing with progressive farmers, getting off the farm, networking widely and getting top advice
Find out more
View the webinar here: Managing financial tough times: June 2023
B+LNZ, in conjunction with Rabobank, is running Financial Skills Workshops at locations throughout the country. Go to our events calendar for locations and times.