This year can be chalked up as another of those ‘character building’ seasons. If the drought wasn’t enough, then COVID-19 gave farmers additional challenges to negotiate. Those that have experienced droughts in the past know how important it is to try and limit the financial impact to a shorter timeframe as possible. Te Kuiti-based ANZ Agri Manager Sian Mitchell provides some timely financial planning advice.
Winter 2020 – managing two budgets
Many of you are trying to manage two budgets; feed and financial. At this stage of the season they are not in sync. Decisions such as selling a line of stock now to protect next seasons production can be a good choice from a feed point of view but can impact income as well. The reverse can also be true.
While you are managing the feed budget daily it is a good time to review this season’s financial budget. Not only has income taken a hit this year but expenditure is likely to be higher with additional animal health, fertiliser, feed or grazing costs. How is your cash flow now and what does it look like over the winter months?
Next season's budget – be honest
Draft a realistic budget for next season. In these uncertain times we are fortunate to be food producers however this does not mean that we are immune to up-coming challenges.
Budgeting on the high lamb or beef prices we have received recently might not be wise, neither will budgeting on record scanning results. Weights are back on a lot of cattle and lambs still on so this needs to be factored in too.
Stocking rates are mixed on farms currently. Reduced capacity at meat processors and a quieter store market has resulted in some farms having higher than normal stocking rate for this time of the year. In other cases, due to restricted feed conditions, additional trading stock haven’t yet been purchased. Both of these scenarios can negatively impact next season’s cash flow.
Be honest with yourself on both production figures and schedule prices. Seek out any information or help you require from your trusted advisors – farm consultants, accountants and bankers.
Expenditure – the last three to four years has seen an increase in expenditure. While a lot of this is inflationary some has been discretionary. Be realistic – what is required to run your business? What are the benchmarks for your system or location? Your RMPP action group or benchmarking information could be useful.
The below-the-line expenditure should also be reviewed; drawings, tax, plant replacement and debt servicing. Talk to your accountant about your tax estimate for next season. Many have paid some healthy provisional tax bills on the expectation of a high income year and this might now not be the case.
Many have taken the opportunity to put savings from recent interest rate reductions towards debt repayment. Take a look at your loan structure to work out the best option for your business now and into the future. Given interest rates are low compared to historical levels then it could be a good time to reduce some debt levels. Conversely, for others your cash flow might suggest you need to reduce principal repayments for a short term.
What does your cash flow peak look like? More than normal, earlier than normal? This year it is unlikely that you will have high credit balances to support your cash flow peak in the spring. Talking to your bank manager early about your requirements reduces the surprises for everyone later on. It also aids everyone to put a long term plan in place rather than a short term fix.
Plan early and communicate
Your budget is like a map. You likely have a destination in mind and an expected way of getting there but some unexpected detours may pop up along the way. As the Covid-19 situation unfolds around the world and impacts of the 2020 drought continue there will be disruption to the budget, but having a plan will help you and your trusted advisors get you through.