
7 minute read
Strengthening farm businesses
How well do you and your partners know your farm and your business, and its fitness for the future?
It’s a key question to ask – particularly at the end of a financial year – and one that Agriculture Victoria has been posing to horticulture businesses as part of its Farm Business Resilience outreach.
Agriculture Victoria recently hosted a "Business Skills for the Future" workshop, supported by the Australian Table Grape Association, Dried Fruits Australia and other horticulture industries.
Where is your business on the business lifecycle?
The growth of a business can be likened to the growth of a plant. Often the plant starts off slowly until it has enough reserves to take off. It could be warmer weather, irrigation or rainfall, or the supply of nutrients that really makes it grow. Similarly, in a business lifecycle, we can position our businesses on the growth curve.
We spoke to host Gavin Beever from Cumbre Consultants about the key take-aways for table grape and dried grape businesses, including the importance of understanding “the stories behind your figures”. The first step to understanding whether your farm business is fit and healthy – and therefore able to achieve goals, be profitable and succeed long term – is to ask the right questions at the right time. So, we asked Gavin to point growers in the right direction.
Questioning Business Performance
Here are a series of questions to help consider a farm’s performance.
Net Worth Or Equity
If Net Worth Or Equity Is
HIGH, ASK:
Return on investment
- Are you getting enough return?
- Do you have a good disposable income per household?
Diversification
- What is the balance between farm and non-farm assets?
Where we are has implications for some of the options that we have available and the sort of plans that must be made to be successful into the future.
We could be new to the business (emerging). We could be in a growth phase or we could be aiming to redesign our business; at each stage we need to have a good plan in place. We also need a good plan if we are to retire or relocate, which are two of the choices when our business is in stage four.
- Do you have sufficient business buffers to protect against downturns: Markets, climate, costs, labour, health, disasters, etc? Diversification can be a buffer by providing a range of profit centres.
Buffers
- Can you cover the current season and next season operating costs?
- Do you have reserves that can cover finance costs, living expenses, health and education expenses?
- Examples of buffers include: Cash on hand, stored products, inputs on hand, equity that can be drawn down, insurances, assets that can be sold without impacting productivity and input costs that can be reduced.
Business cycle or lifecycle
- Is the next generation about to start farming?
- Can you afford it?
- Is there enough to fund your retirement?
Lifestyle
- Are you happy with the lifestyle that high assets should allow?
IF NET WORTH IS LOW, ASK:
Reasons
- Are you an emerging business, just starting out?
- Are too many families reliant on the farm business?
- Have you been making losses and eroding assets?
- Did you not have assets to erode?
To continue operating you would require…
- Strength in productivity and cashflow (i.e. high production levels, good cost control) and/ or non-farm income to survive.
- Low living costs. What is happening to asset growth?
- Is it growing, staying still or declining?
- If the farm business is to survive, (i.e. for the next generation to continue) do you need to generate ‘another farm’ for each household added?
- If staying still – ultimately the business will decline/finish.
- If growing – is it growing enough to accommodate the next generation?
DISPOSABLE INCOME PER HOUSEHOLD (FARM PROFIT PLUS NON-FARM INCOME)
IF DISPOSABLE INCOME IS HIGH, ASK:
Use of money
- What happens to the money?
- Are any drawings squandered?
- Is there asset creation for:
- Retirement?
- Next generation?
- Business growth?
- Business buffers?
Environment
- Are there environmental sustainability issues, such as run-down of nutrients, vines, landcare issues?
People
- Are there people issues?
- Are individuals satisfied?
- Are family goals being achieved?
Potential
- Can you do better? Do you want to?
Lifecycle
- Have you got education or retirement costs looming, are more families going to be dependent on the farm? Are you preparing?
Generating Profit And Wealth
What drives our farm business profit and how can we best convert profit to wealth?
The two key components of generating wealth are to increase annual profit and to increase your net worth (by investing profit and by capital gain).
By increasing farm or non-farm assets, you have capital gain working for the business, as well as the business income. This is often the key for successful farm businesses. Long-term wealth is generated from both profit and capital gain. Increasing annual profit can be a way to generate wealth (by allocating a percentage to growing your net worth).
Increasing annual profit can be done in a variety of ways. It could be achieved by simply improving production or being more efficient. It could also require a change in the nature of the business or investment in other industries or enterprises.
IF DISPOSABLE INCOME IS LOW, ASK:
Could be fine
- Is there capital gain – is low profit offset by capital growth of the business?
- Is there deliberate running down of assets – e.g. late in a business lifecycle?
- Are you just starting off and putting it all into development?
- Do you have a simple lifestyle and very good skills in making money go far?
However, if you are not happy
- Are you under-resourced, i.e. just not enough assets?
- Look at individual strengths/ weaknesses. Can you do something?
- Should you cut your losses?
- Are there too many families involved in the business?
- Are their education or retirement costs about to make it worse?
- Is there another generation, which may bring new skills or new business opportunities?
- Are there non-farm income opportunities?
Owning land in agriculture means that, on average, it increases in value at 4-6 per cent per annum –far greater in the last two years. Increases in land value (capital gain) are key to increasing farm wealth, independent of productivity. The value of water rights can also influence the wealth of irrigated properties – also independent of farm performance.
Assets and liabilities (the balance sheet)
The farm balance sheet is one of three financial statements that provide critical information about a farm business.
Completing an annual balance sheet, profit and loss (income) statement and statement of cash flows, is critical to helping farm businesses understand their financial health. It is a whole farm approach to financial assessment and planning.
The balance sheet provides a picture of your farms financial position on a specified date.
Profit and loss statement
A profit and loss statement shows where the dollars come from, where they go to and what profit remains. Farm profit then has any non-farm income added to it to give the disposable income that is available to the farm family.
Disposable income is what pays for living expenses, capital repayments, developments and tax. Disposable income is farm profit with any additional non-farm income included. Disposable income is really the part of the business which “drives” decisions. It is similar to taxable income, but not quite the same as business structures and taxation structures make taxable income different from disposable income. Essentially disposable income is what a farm family has to spend.
Remember that disposable income (which includes non-farm income) requirements vary according to our age, number of dependants, etc. However, disposable income is a bottom-line indicator. Insufficient disposable income means that you will have to make increasingly severe compromises. Both farm income and disposable income should be considered on a “per household” basis. This is done to allow for the fact that different businesses may be supporting different numbers of households.
Key cost factors
Outside of finance costs, labour costs and machinery costs are two key areas farm businesses should explore to question whether they are getting effective returns from them.
Machinery costs
Machinery Investment: Machinery investment (dollars invested) / gross farm income, gives a guide to the scale of the investment and an ability to ask questions on the level of investment. A typical result is 1.2 to 0.8, outside of that range, the business should question the return they are getting from their level of investment in machinery and whether the machines can be better leveraged.
Depreciation
Depreciation is usually calculated by estimating the value of the machine at the end of its use in the business and allocating this reduction in value on an annual basis over its years in the business.
Another approach is to use a percentage annual reduction in value (for example, 7-12 per cent, depending on the machine).
For most depreciating assets, you can use the Australian Tax Office’s (ATO) determinations of effective life, published in taxation rulings (which are updated annually). For some types of transport and agricultural machinery the ATO’s determination of effective life is capped by statute (a legal limit).
Repairs and maintenance
Repair costs are often a trade-off to owning newer machines, but repairs as a percentage of farm income are not necessarily related to the age of machinery. Expenditure on repairs and maintenance is mainly influenced by operators’ skills in owning and operating equipment.
A guide is:
Low <4% of gross farm income
Medium 4 – 8% of gross farm income
High >8% of gross farm income
Transport costs
Transport costs will vary depending on the distance to travel. Many businesses will not pay for transport for produce and will provide their own. Owner-supplied transport shows up as higher fuel, repairs and maintenance and depreciation.
A guide for paid transport costs is:
Low <1% of gross farm income
Medium 1 – 4% of gross farm income
High >4% of gross farm income
Farm Business Checklists
Agriculture Victoria have developed a series of Farm Business Checklists to help farmers get a good sense about where they and their business are at – the now
This is an important step in the planning process, once you know your “now” you can follow it by identifying your “where and how” and, preferably, get it down on paper.
Each section of the checklist is designed to prompt your thinking about different aspects of your business. It’s a “selfassessment” and there are no right or wrong answers. Your job is to identify areas that might be a priority for you by ticking the box that best describes where you are at for each question. v
More information can be found here: agriculture.vic.gov.au/ farm-management/managingfor-and-during-drought/farmbusiness-resilience-program
The horticulture business checklist can be found here: https://agriculture.vic.gov.au/__data/ assets/pdf_file/0004/953293/ Horticulture-BusinessFitness-Checklist.pdf