A regular January business health-check can make the difference between profit and loss. If last year’s targets were met, you need to understand why, and if they weren’t, it’s important to work out why not. If you didn’t set targets last year, get started now. The key point is to make sure your aims can be realistically measured in financial terms alongside normal yield and output figures.
Producers often believe setting a budget is a waste of time. The -common line is: “What’s the point? It’ll all have changed in a month!” No -matter how true such an argument might look six weeks later when your crops have been flooded out, the no-budget approach misses the point. Even a basic budget is a target to aim for, an early warning system. I’ve never met anyone who, having prepared a budget, hasn’t learned something new about their business.
Assessing business performance over the past year, and using that as a platform for any changes, is the core structure to follow. With most farming businesses still being -family concerns, it’s also vital to involve the whole family in any review.
Partly to avoid family disputes, I believe in including a ‘trusted adviser’ in the process. An outside view, provided it’s well-informed and soundly based, can be a huge help in challenging long-held opinions.
Any worthwhile stock-taking will inevitably include a review of debts attached to the business. Although many UK farm businesses still operate entirely on their own funds, borrowing is an unavoidable part of life for most. This doesn’t have to be a problem, provided the business is properly geared.
We’ve had an unprecedented number of years of low interest rates with agriculture generally faring better than many other sectors of the economy, both in terms of borrowing costs and credit availability. As economies around the world improve, however, and the pressure to reduce the quantitative easing continues to build, interest rates can be expected to rise.
Having become used to base rates at 0.5%, there’s a tendency to forget to include some sensitivity to future rate rises. Farming businesses, by their very nature, can’t stand very high borrowing or gearing levels for long periods. There are always exceptions, of course, but if a farming business is struggling to meet interest payments at current rates, it’s going to struggle more as rates edge up again.
A critical assessment of debt -levels and how vulnerable the business is to any upward movement in rates is therefore a must for any New Year financial review. Longer-term fixed rates still look attractive, as a means of securing business certainty, but should never be looked at as a way to save money. It’s unlikely that you’ll beat the market!