When one truck of lambs sells for $100,000, one load of hay for $18,000 and a load of wheat for $16,000, surely these MUST be the good times! So how do we capitalise on these good times to be prepared for the tough times?
Building financial buffers is one way to provide a future benefit. Financial buffers can be liquid, such as Farm Management Deposits (FMDs) or cash in the bank or they can be equity, such as borrowing capacity in your land or off-farm investments.
But how do we build a financial buffer without the burden of large tax bills? Debt reduction is often our first thought. Yet, a $5,000 tax deduction on reduced interest when paying back $100,000 in debt reduction seems less appealing than receiving a 100% tax deduction for spending on grain and hay storage. Likewise, FMDs and Superannuation contributions also provide a 100% tax deduction.
If your business goal is to grow scale, then you are looking for the balance between building equity to put into the next expansion and needing to build your operating capacity by expanding infrastructure such as grain/hay storage or machinery capacity.
In amongst this you also need to meet personal and family goals.
It’s OK to spend the profits in the good years, let’s just make sure they are spent on the things that help achieve your longer-term goals.
- In defiance of the forecasts, it’s still raining
- Forward pricing for grain for next harvest
- Preparing Business Plans to communicate business and personal goals