Make good decisions now to secure your future financial flexibility

       

For many businesses, especially here in South Australia, this season’s harvest is one of the best they’ve seen in years. But as the payments roll in, it’s important not to get too carried away with that healthy bank balance. Making considered decisions now will provide future financial flexibility.

Financial flexibility in a nutshell

While there’s no set definition, financial flexibility means you can do what you need to do on your farm, when you need to do it.

You may need to respond to a crisis (a major machinery breakdown in the middle of harvest or seeding) or avoid a risk. At other times, you might need funds to take advantage of new market opportunities or to buy stock and machinery.

Being financially flexible gives you a solid foundation to build your business on. It means you can plan for the future, while making the best financial choices along the way.

Benefits of having a financially flexible agricultural business.

There are several benefits of being financially flexible in agribusiness.

• When you’re financially flexible, you can make quick decisions when situations arise. This could be the difference between scaling production or losing a sale.
• Financial flexibility helps establish future stability, plan for long-term growth and build a sustainable business. Removing long-term debts gives you the option to pursue new opportunities.
• When your finances are flexible, you can pivot, adapt to change or grow easily.
• Rather than wasting time thinking about how to make a change or organising finance, you can get on with running your business.
• If you’ve built financial flexibility into your business, you’ll be calmer and your business will run more smoothly. Instead of juggling finances every time something needs fixing or you want to start something new, you’ll be less stressed.

These are all general benefits that apply across most types of business. There are also several specific benefits of having flexible funding in agribusiness.

Flexible funding:

• helps with seasonal operations and cash flow
• provides for Farm Management Deposits (FMDs)
• supports your retirement and succession plans
• assists when you need to buy assets at short notice
• makes it easier to deal with June 30 tax planning

Using a good season to create financial flexibility in your business

You might wonder how you can shift from your current situation to have greater financial flexibility. It can be tempting to see higher than expected profits to pay down debt, buy new equipment or pay staff bonuses. But without a solid plan and budget, this may not create long-term financial flexibility.

Obviously, the first step is to consult your financial advisor, broker or accountant to draw up a solid business plan. Together, you can identify where you might need flexibility in the future.

Once you’ve developed a plan, you need to create a detailed budget. Knowing when regular expenses occur and allowing a buffer will ensure that you can build long-term financial flexibility.

Work with your broker to ensure you have the right financial mix in place. Debt can be a useful instrument when used strategically, and that’s where your broker will ensure you get the best outcome. Taking advantage of redraw facilities on existing loans could also be an effective way to build financial flexibility. Alternatively, if your harvest has been bigger or more profitable than usual, it might be a good time to pay down some debt, especially while interest rates are still rising.

As tempting as it can be to use the rewards from a good season to buy new things, you want to avoid tying up all your funds in machinery or buildings that don’t generate profit. With machinery, consider whether hiring a piece of equipment gives you greater flexibility, especially if it is something you only use a couple of times a year.

Leasing equipment also frees up credit for investment opportunities or to respond to a crisis.

Creating financial flexibility by changing the way you do business

Building financial flexibility is more than just planning and restructuring your finances.

Does having surplus cash give you the opportunity to diversify your revenue streams? For example, are there other crops you could plant? Could you open a farm shop or offer farm stays? Being able to bring in more revenue with your existing resources will create greater financial flexibility.

Avoid costly mistakes. Before you jump in and launch a new ‘side hustle’, you need to do your research, get advice and plan. A poorly thought out additional revenue stream could turn into a costly mistake, which is hardly going to secure your future financial flexibility.

Financial flexibility is more than just tax and debt

While paying down debt and preparing for tax might be the first things that come to mind when the bank balance looks healthy, another important element of future financial flexibility is looking at expansion, succession and retirement.

Now, that doesn’t mean you should just rush off and buy a beach house, although housing is something to consider.

A good harvest can provide the opportunity to ensure that you have enough housing to meet the goals of your succession planning. It might also be an opportunity to purchase off-farm assets that will provide an income in retirement or assist with distribution of assets to off-farm children.

Don’t forget to celebrate

After the advice I’ve just given, this might come as a surprise.

But having spent my whole life on farms and the last 25 years working in agrifinance, I know just how hard most farmers work. After years of tough conditions, it might seem frivolous to spend money on yourself.

As you’re making your plans and setting a budget, make sure you leave a bit in the kitty to reward you and your family. Perhaps it’s time for a holiday, a new couch or a garden refresh. After all, you’ve earned it.

Conclusion

The path to a more financially flexible future will not be the same for every business. Just as every farming operating is unique, so too are the options available to you.

The first step is to have a chat with your trusted financial advisor, accountant or broker who can help you get the right plans, budgets and financing in place.

Over to you

What changes could you make to build greater financial flexibility in your farm business?

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