Don’t be a slave to your debt
OPINION: Clicking through some news of late, I have noted the odd headline referring to credit card debt.
"You wouldn't fly a plane without instruments these days, would you?" he asks. However, when it comes to farming, he believes that is happening too often on New Zealand farms.
Many farmers only get a fully detailed account of their financial position following a review of their end-of-year accounts with their accountant. Sanders say this is often too late to make adjustments for a better financial outcome.
Sanders stresses this is no longer good enough, farmers need accurate and real-time financial information.
"While volatility is nothing new for New Zealand agribusinesses, large increases in farm debt over the past decade, particularly in the dairy sector, have put pressure on the industry during the recent fall in milk prices."
Sanders says while all farming operations face pressures like rapid price fluctuation, highly leveraged operations often have less room to move.
"Rapid or unforseen changes in circumstances such as a major climatic event or a fall in the payout can lead to severe outcomes for under-prepared farmers, especially those with highly leveraged operations."
Farming businesses need to be fully aware of their financial position. Farmers should know what drives their costs and be prepared to review budgets regularly as things change.
Sanders points to selling stock as an example, "It can often look fantastic for the farming business, in terms of a cash situation at the time of sale, but depending on what price was received and the costs incurred, the true impact might be very different when reconciling at the end of the financial year. Without a real-time accrual accounting system in place, it's hard to know."
Farmers need to have an up-to-date, accurate picture of where their finances are so they can make decisions knowing what impact they will have on their bottom line.
"There are some great cloud-based accounting software platforms on the market now, which will enable the farmer and the advisor to work closely together using real-time financial information to manage the farm effectively," he notes.
Sanders also points to the opportunity for greater collaboration between rural professionals that can occur with real-time financial information from cloud accounting platforms. "They can produce reports in real-time for the farmer, the accountant and the bank manager, tracking key metrics like funding headroom for example, allowing adequate overdraft facilities to be maintained well in advance. It saves some panicked conversations I can assure you!"
