Fact one: Your land value is likely to change.
Fact two: You have no control over this.
Fact three: What you can control is what you do from here.
There has been plenty of market chatter of late, about farm values dropping 10,20, even 30%. This might be right, it might be wrong, but let’s not waste our energy entering into a debate about it.
Where we need to be focusing our time and efforts is into navigating through the process when it presents.
We understand the level of unrest this will be causing for farmers, and we want to arm you with the tools to respond effectively.
So, your bank rings up and asks for an updated valuation on your farm – where do you start?
First things first , let’s get real. Let’s address the bad before the good and then set it aside and move on;
- Land valuation drops do have an impact on your banking.
- If managed poorly with your bank, a land value drop at credit review time (particularly if you’re asking for more money or rollover of loans) will lead to some bad results.
- These could be pricing increases or a “demand” from your bank for greater action to reduce debt faster.
- In line with this, Banks are pelting out the same tune at present – “If we have a poor payout in the future, we probably won’t be able to fund any losses you create”.
Now to the positive – you can manage this process well and get ahead of the game.
That involves a clear and well stepped out financial plan that holds weight and meets the needs of your farming business as well as the banks, and you need to act now:
- Generating great cash and using it wisely:Finding ways to use current on farm resources to create long-term sustainable profit, thus reducing debt. This might mean operational performance needs to be addressed, but how do you know if you’re performing as well as you can be? Reducing debt leverage is not just about shoring up the balance sheet (lower LVR), it’s also about shoring up viability (lower interest cover). It does not mean that you shouldn’t continue to invest into productivity that delivers immediate cash benefit, well above the costs of capital (either on or off farm).
- What’s the back up plan when we have a lower payout?I don’t mean asset sales here, I mean, how will you run your farm operationally in low commodity prices? Clear actions and resultant financial implications area must here. We see in many cases that the break-even payout is actually much lower than what people think.
- How do the results of your action translate into real progress over a longer period?By this I mean, how do the actions you’ve taken translate into real gains in your balance sheet? It is important to map this out.
- How and when are you going to apply decisions to “make right” the business if it wanders from the financial performance? What milestones will you put in place to protect capital?
- If the plan is agreed, how do you gain support from the bank for it(and hold them to it) - so you can focus on the business of farming and not worry about every hiccup in the road?
This might seem daunting and a lot of work, but it’s a no-brainer. Jotting down three years’ worth of forward projections with a few assumptions is not going to cut the mustard. That is not a robust financial plan.
My parting sentiment, but an important one at that - DO NOT create unrealistic expectations with your bank by working off aspirational budgets that require everything to go perfectly to plan. A bank will only “sensitise” this budget (make smaller) in behind the scenes and within 3 months you will be having uncomfortable conversations about covenant breaches or additional working capital requirements that you would have needed in any case.
Failing to plan is planning to fail.
Don’t let this cause you undue grief – give us a call and we can help you.