Friday, 03 June 2016 12:55

Talk to your bankers, accountants

Written by  Pam Tipa
Craig Sanders, principal of Craig Horwath, Te Awamutu. Craig Sanders, principal of Craig Horwath, Te Awamutu.

It is amazing how people don't ask questions of their accountants, says Craig Sanders, principle of Craig Horwath, Te Awamutu.

"You are the boss, you are paying the money for the fees, so you need to ask the questions," he says.

Many people struggle with change and when they are told things aren't going right they struggle to come to terms with that. "A larger percentage than you would think would be in that camp," he told Dairy Womens Network.

"Sit down with your bankers and accountants and use them as part of your team because they are there to help."

Don't put your head in the sand if things are not going well, he says. You need to be upfront and talk to people about it.

"If you are having trouble paying the bills don't leave it too late and say 'I need an increased overdraft'. If you get in first life is a lot easier.

"A lot of people, when they get into financial difficulty, like to pretend it is not happening.

"That is the worst thing they could do. You need to be upfront, to talk to your bank."

It is better to ask for money ahead of time than turn up saying you have $200,000 in overdue debts, he says.

Sanders says accountants traditionally have talked to clients when things go wrong rather than beforehand.

"We need to change our relationships to being more forward thinking. We need to be on the front foot and talk about things before they happen rather than afterwards.... Accountants generally tell you after 12 months how much your costs were. How useful is that to you?"

In a presentation 'Riding the Milk Price Roller Coaster' Sanders said farmers should focus on controllables in their businesses. Farmgate milk price, stock prices and fuel prices are not controllable.

But they have some control in dealing with seasonal conditions, legislative changes in health and safety and environmental matters, interest rates and feed prices. They could hedge or mitigate risks around loss of key personnel, fertiliser, repairs and maintenance, tax and drawings.

Sanders says drawings is the toughest issue to discuss with clients and the biggest thing husbands and wives fight about. Yet drawings are among the few things a farm business can really control.

In prioritising risk he advises farmers to handle those with the greatest loss or impact and the greatest probability of occurring first, including interest rates.

He personally favours fixing interest rates because you then know what your position is and can go forward.

Sanders says the dairy industry is praying for a rise in commodity prices. "[But] you really need to say, 'let's budget for it not increasing and work out how we can change our businesses to meet what the prices are now'."

You need to assess the value of the resources used against the value of risk (loss) being mitigated.

"You could talk about life insurance, for instance, which can be really expensive. You might be insuring mum or dad and it's a very high cost because they are getting into their late 50s or 60s and it is costing $10,000-20,000 to insure them; but you have to work out whether they are worth $1 million to you; is it a good scheme?

"We can look at the cost of things or the value of things; you've got to put it into perspective."

Farmers need to review their debt risk.

"If you have a debt-to-value ratio of 45% and if your drawings and farm working expenses will be more than a $2/kgMS loss -- which is what I am seeing out there – that means you will be going backwards a couple of hundred grand a year.

"If the commodity prices don't change and you don't change the way you do things, you could go from a healthy loan-to-value ratio to a ratio where you might need to talk to credit [personnel]. Your bankers might have you talk to the credit teams in Auckland or similar.

"You could be only a few seasons away from [switching] from being quite healthy to being unhealthy from a risk point of view.

"I am seeing systems where they are losing $2/kgMS via farm working expenses -- before drawings. You can't rely on the price going up and the banks can't back your losses forever. You need to look at your business and where the costs are."

Three major credit risks to consider:

Your underlying rate moving up

Your credit costs increasing due to changes in your creditworthiness or a bank's credit appetite

The risk that you cannot access cash to fund losses or future growth.

Underlying rate: "At the moment the interests rates are working out well for us but if they go up sharply.... When you are used to paying 5-6% interest and it goes to 9% that makes a big difference."

Credit costs: "As your equity decreases the banks might want more margin. You don't want to find yourself all of a sudden [unable] to pay your creditors. It has happened in the farming sector before."


Products – fixed rate loans, derivatives such as swaps and options

When considering products think about what you are hedging, i.e. underlying vs total cost.

Management decisions: additional security to improve credit margin. Clarify how you will improve credit margin, i.e. no surprises, no excesses, sticking to budget.

Risk should be a standing agenda item as part of your annual and ongoing review process.

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