Hedging decisions risky
With an 80% likelihood the Reserve Bank will lower the official cash rate by 25 basis points next month, many rural borrowers are wondering if now is the time to look at fixing rates.
Increased volatility driven by to swings in international commodity prices and the value of the NZ dollar is now the new normal according to professional services firm Crowe Horwath.
In this context, Crowe Horwath says a strong case is made for agribusinesses in general to invest time and effort into careful budgeting and cash flow planning to weather unexpected difficult times.
"The dairy sector witnessed the heady payout levels of 2013-14 rapidly give way to the current trough and associated uncertainty around a recovery timeframe. This has created real pressure for many," says Larry Mitchell, agribusiness advisor at Crowe Horwath. "However, while this is a case in point, it illustrates that as a globally traded commodity any agribusiness faces volatility risks where markets can and do change regularly."
That, Mitchell notes, makes a strong case for optimising cash flow through careful planning and preparation.
"Getting a clear handle on budgets and cash flows is good business practice that should be undertaken in the good times as well as bad. In fact, the point of planning is to give your business the resilience to ride the lows – even though you may have little-to-no idea when they might come," Mitchell adds.
Take stock of spending habits
Putting together cash flow and budgets starts with taking the time to honestly evaluate spending patterns for the business. "Once budgets are established, stick to them. Avoid the temptation to spend a little bit extra here and there; the extras quickly add up and soon you could be looking at a significant amount of unplanned expenditure over the year," Mitchell points out.
The temptation is likely to be stronger in good times; don't fall into the trap of spending money just because it is available. "That's a dangerous mind-set which can be difficult to break out of. When the market shifts downwards, it will be harder to cut back spending. Tough times call for tough measures and potentially there are a lot of negative impacts if you don't plan ahead," says Mitchell.
Budgets and cash flows are working documents
Budgets and cash flow analyses should be routinely adjusted as situations change throughout the year. Planning in real time means taking into account the inevitability of change and, thereby, responding as it happens rather than well after the fact.
"Using good accounting software and working with your advisor provides for adjusting budgets and forecast cash flows based on the most current information available around your revenue and associated costs," Mitchell says.
For example, he points out that Fonterra made seven announcements during the 2015/16 season to advise the forecast milk price for the season. Of these announcements, four resulted in a forecast price change. "Good practice would be that at a minimum, Fonterra's suppliers should have altered their original budget four times during the season to account for these changes - and then reforecast their position."
While farmers should be proactive in reviewing their affairs, engaging the services of budget and forecasting specialists can be invaluable, adds Mitchell. "A suitably qualified and experienced rural professional will ensure regular reviews take place, while providing insight, advice and support around strategies and financial management practices to help deal effectively with volatility".
