Keep watch on farm running costs
There are some wonderful agricultural four-letter words - rain, work, soil, cash, wife and debt.
At the risk of repeating myself, farmers owe it to themselves to be level-headed about their debt and tuck away some of their earnings each year for a rainy or dry day.
Debt is king.
There is good debt, bad debt and ugly debt. You will never make money without it. Do not be afraid of debt because liabilities drive you to the most amazing efforts, but be respectful of it and always keep an eye on your cash management.
The best business risk management is having sound, sustainable, bankable profits - nothing comes close to that.
For a dairy farmer looking at a milk payment of $8.40 a kilogram of milksolids in the 2013-14 season the temptation might be to go on a nice shopping excursion. Resist this urge and at the very least do your homework and triple quote before spending your hard earned cash. Don't spend anything until you understand the cost and the probable result. Remember that people listen much better when they are in a down cycle than an up cycle. When you receive an unexpected windfall don't waste it. This might be commonsense, but in my experience many do waste it.
Already we are seeing the official cash rate rise and that will have implications on mortgages and the dollar. The commodity milk price horizon for the 2014-15 payment is not crystal clear and at this stage farmers are looking at a $7/kg start. Every farmer knows they are exposed to constant market and weather cycles. The experts tell us the market shifts will come and go faster, harder and sharper.
Furthermore, old age is creeping along for many of our grey-haired farmers and there will come a day when the knees will tell them it's time to stop. Farming couples and anyone servicing farming must build their financial reserves almost before anything else. Why? Because of these severe and regular agricultural commodity cycles, because of overseas issues, because of prices and because of business volatility. You need 20 per cent of your gross farm income in reserves - it may take some time to do this but do not fight this concept. The absolute minimum must be 10 per cent. Generally the people and companies that you will have the most trouble with will themselves have poor or weak balance sheets - burn this into your memory bank.
In my mind the most serious ongoing problem inside the farm gate is the neverending relentless upwards creep in farm working expenses. Inside our farm accounting practice the average varies depending on the farm, but increases over the last five years would be in the order of 4 to 6 per cent each year. That is compound annual increase year on year. It's all the more sobering when you realise that your farm working expenses will double every 14 or so years. It's never been more important than now to keep a firm hand on these expenses.
Farms are the best bottomless pits you will ever strike. You must manage the farm and not the farm manage you. Some men are compulsive developers and are very good at it, but sometimes their advisers and spouses would do better to show them a helicopter view of where they are in terms of the farm's maturity which I would argue is, on average, about 93 per cent of its production potential in financial terms. Are you working in your business or are you working on your business? There is a difference.
One of the hard lessons I learnt in my troubleshooting days is that a farming family must never let their problems grow. Put the problems on the table early on and never put them in the freezer. Try to give people in your business responsibility for a division that suits them and not because they have been there the longest. Generally you are better to have your best employees manage the profit centres, but you manage the loss leaders.
* Pita Alexander is a specialist farm accountant at Alexanders.