FBU South, South Australia series
Preparing for your banking relationship – Matt O’Dea
The way banks are required to do business has changed since the Royal Commission and COVID 19 is causing additional disruption to financial services.
We discuss the key factors to managing a successful relationship with your bank and talk through what the bank needs from you to optimise your business position for investment opportunities or extension of borrowing.
- The royal commission has led to tighter regulations for agricultural lending and services including creating greater independence between valuation and lending and in linking bankers experienced in agricultural lending, with growers where loans become distressed.
- Banks appetite to lend to agriculture remains strong as an essential industry, however there is a tighter focus on lending criteria – demonstrating serviceability and maximising compliance with criteria are key for growers.
- The application process for lending is much longer in the present environment. With consideration for your cashflow, allow 8-12 weeks for the process.
- Minimise the turnaround time for your lending application by providing all the key evidence upfront AND tell the story of your business to maximise the prospect of successful outcome.
- Key aspects of a finance application include current financial statements, cashflow and equity position. Accompany applications with actuals to budget, monthly meeting minutes and explain your processes for management decisions to drive a deeper understanding.
- If equity isn’t strong, focus on demonstrating serviceable cashflow (on or off-farm) and other assets available for security.
- Engage professional help to prepare your lending application or to negotiate a better deal with your lender if required.
- Growers prefer strong relationships with specialist agribusiness bankers who understand the farming environment. If this is not possible, or a not key factor for you– maximise potential for a successful outcome by providing strong evidence upfront and telling your story well.
Machinery Investment – the million dollar question – Will Martel
Machinery and equipment is a key production asset in a cropping enterprise. The balance between machinery investment amount and efficiency, impacts the profitability of the farming operations.
Will & Jane discuss how you can achieve optimal outcomes for your own situation and show how the investment allocation impacts the long-term profitability.
- Avoid rules of thumb – do the analysis for your own business to inform decisions on your optimum investment in machinery.
- Treating machinery as a separate enterprise can simplify gross margins for your other enterprises, highlight the ‘true cost’ of operations and help you identify efficient or under-utilised plant.
- Assessing your options and the economics of machinery investment can start with a simple spreadsheet calculating the return on asset (ROA). Compare and test multiple variables, including hectares required to achieve your target return, size of plant, new vs second hand or contracting.
- Analyse how efficiently you are using your resources by calculating total plant & machinery and labour costs (TPML) as a % of farm income. A TPML ratio greater than 54% indicates low efficiency, whilst a ratio less than 28% is considered strong.
- Analysis provides a decision-making feedback mechanism and helps us understand the trade-offs or other considerations such as timeliness, tax, cashflow and total investment in plant compared to business income – particularly useful when communicating with other decision makers in your business or, to secure finance.
Enterprise mix and the profit outcomes – Cam Nicholson
Achieving the right balance between risk and return that works for your own farming system will optimise the profit opportunities and manage risk. Increasing livestock returns have drawn increased focus on the profit contribution this enterprise can generate.
- Risk management strategies will differ for each farm – resources and fundamentals of the system create a unique set of influential factors for both upside and downside risk.
- Understanding the risks for your business will highlight practical management decisions you can consider.
- Tools such as the @Risk program can help identify influential factors driving your risk profile, assess your enterprise risk profile for a range of values and calculate the probability of different combinations occurring.
- Your risk profile can be affected by capital improvements, changing your enterprise mix or improving an influential factor.
- Combining enterprises with different risk profiles such as in a mixed farming system may reduce your risk exposure IF other factors such as skills, labour and infrastructure are not limiting.
- Practical ways to manage risk in your existing enterprises include informed decision making, timeliness of operations, and maximising the potential of good years – whether it be through crop production or pasture utilisation.
- Management strategies for risk include identifying timely decision points/trigger points in your business linked to an action – monitor, review and act as the season develops.
- While @Risk assesses the risk profiles of different scenarios, it doesn’t consider factors such as capital investment required, infrastructure improvements, skills limitations or impact on cashflow with changes to the system. You can potentially add more risk to the business than what you take away if those other factors are key influences.
Getting & keeping staff; it’s not just about the $$$ – Alex Thomas & Nathan Burke
Alex and Nathan will discuss some of the main reasons why employees leave and how employers can ensure that they don’t lose employees for avoidable reasons.
- The culture you design for your business directly affects your ability to attract and retain good staff. Employees value the relationship with their direct manager, feeling appreciated and learning new skills above rates of pay.
- Develop your culture by showing how you value your people, publicly. Reward people appropriately and endorse their work by explaining how the role fits into the big picture.
- People are motivated by control – give responsibility, confidence – build skills, and connectedness – working as part of a team. How are individuals in your team motivated?
- Drive accountability and ownership of work by engaging your team in designing the plan and developing the solutions.
- Give open, honest and timely feedback. Make communication easier and save time by telling the whole story up front.
- Good leadership can develop effective teams and empower them to support and regulate each other.
Priority skills development – the things I would have liked to have known earlier – Robin Schaefer, Marty Collins and Grant Pontifex
Are there things which would be of benefit to growers to have known earlier in their farming life? We examine the priority skills developments which can save time and money and create a more productive farming experience.
A panel of presenters discuss the skills and competencies which can avoid some of the common farm business pitfalls.
- Continually refine your farming system to manage and sustain your resources (land and water).
- Target production efficiency & timeliness of critical agronomics by making capital improvements where possible to reduce input requirements, wear and tear on machinery and to increase efficiency of labour and machines.
- Prioritise profit utilisation to maximise return on investment.
- Match machinery investment for timeliness, scale and optimising profit considering depreciation, labour requirements, production benefits and functionality. Target harvest logistics as a priority to maximise potential profit.
- Drive machinery efficiency in a variety of ways – for example select crop varieties to extend/shift your sowing window.
- Outsource the jobs you are not getting done on time, or well. Take advantage of others’ expertise to enhance decision making and drive accountability in the business.
- Build strong relationships with your advisers and suppliers to keep your finger on the pulse.
- Understand the risks in your business relative to location, people and farming system and develop strategies to manage risk.
- Knowledge informs decision making – know your cost of production, tax position, grain marketing triggers etc. to be ready to act on opportunities when the time is right.
- Benchmarking your business helps you make proactive decisions to improve the bottom line and gives you a framework to tell the story of your business to others.
If any of the key messages listed within this newsletter have identified areas for improvements within your business and you would like to learn more, please contact ORM Pty Ltd (convenors of the livestream series and Farm Business Consultants) at firstname.lastname@example.org or on 03 5441 6176