With increasing regulation and legislation farm businesses are exposed to more risk than ever. Farmcare’s David Gardner introduces the first academy in a series of six which helps you identify, and mitigate, the risks to your business.

Understanding risk usually comes after the painful process of being on the receiving end of something going wrong in your business. But margins are now so tight that there is no room to absorb the impact of financial and physical accidents occurring in your business.

Risk is in every corner of the business and is hard to recognise on your own. When you walk past it every day or read it every week in your own documents the chances are you will fail to recognise the risk for what it is.

The first step to minimise the threats is to identify them with a thorough audit. Don’t try to audit risk yourself. For physical risks around the farm bring in a consultant or even a neighbour or farming friend who can act as a fresh eye on the subject.

For more intricate risks take professional advice to make sure you have all bases covered. Spending time and money up front to identify and plan a risk strategy will almost certainly be one of the best investments you make this year. These are the key areas of risk in any farming business:

Personal

Farming is a way of life as well as a business. The downside is that your whole life style, home and future are all on the line and vulnerable to success and failure. Often whole families are involved in the business and its future, so extending the risk through the generations.

• Family matters – it is important to do everything possible to protect the ongoing asset of the business against changes such as death or divorce. Are changes in the business increasing exposure to tax or other risks
• Succession – whether owner or tenant, succession is a key issue. Are your successors in place? What are the management options?
• Retirement – Do you want to retire early? Can you afford to? Will the business support another generation or do you have to start now to make alternative provision? Is housing an issue?

2. Financial 

Financing the farm business is a key issue but today, money is regarded by many as “just another input”. Farms, just like other businesses, are far more prepared to switch banks and to take their money from a range of providers.

• Interest and service – few farmers will put up with paying more than their neighbour for key inputs. But do you check your finance package regularly? Are you running checks on your other suppliers including utilities, feed and chemicals? Could you do better by joining supply co-ops or rings?
• Total finance – consolidation of debt is a modern business approach. Can you improve terms of trade by putting all your finance with one institution? Should you take your single payment in euros?
• Project or “big ticket” loans – specialist finance providers can often provide better rates. Do you shop around? Are you budgeting, forecasting and monitoring financial performance? What about private drawings – is this an area under constant monitoring?  

3. Marketing and purchasing

Marketing risks revolve around the security and reliability of the buyers of your farm output and knowledge about how markets work and how you, as a seller, can protect yourself from market movements. Similarly, as a purchaser it is important to manage relationships carefully and constantly check that the prices you are paying are competitive.

• Seller beware – exposure of too much of the business to one customer or supplier can be an issue. Do you have a credit limit for customers? Are you exposed to their failure? Do you have other buyers or suppliers in the wings should one fail?
• Protect your margins – volatility in markets and currencies can play a pivotal role in determining enterprise profitability. Do you understand market management tools such as futures, options and forward contracting? Are you, or your bank, managing your currency risks
• Chain reactions – few farmers sell directly to consumers so are you checking on your buyers’ performance in the chain? Where do you stand if he loses customers or contracts? Is there anything you can do to make the chain shorter and more secure?

4. Legal and Institutional

Today’s farm businesses are more diverse and complex. Access brings the public on to farms either as invited visitors, purchasers or ramblers just passing through. Each will have legal rights that must be protected.

• Know the law – are you up to speed with planning and employment law, health and safety, food hygiene, handling of chemicals and management of machines?
• Cross compliance – small mistakes can lead to big losses and endless hassle. Do you get second opinions on the small print?
• Contract contents – as official support takes a back seat, selling contracts are crucial to profitability. Are you compliant? Do you know the consequences of delivering out of specification? What are your rights?

5. Production

The risk of failing to achieve the farm’s performance target is often perceived to be the biggest risk in farm businesses. Weather is a factor, but in reality the risks are more complex and can be split into the following distinct areas:

• The Business Strategy – is it specialised or diverse? Is it expanding or seeking to minimise its activities to minimise risk?
• The Enterprise Risk – is the enterprise competently managed? Are threats, such as pest and diseases, fully understood and planned for?
• Specific Risks – these are associated with the farms operations such as dependence on casual labour or on one particular machine. Are you exposed?

PLEASE NOTE: the test yourself does not have right or wrong answers and is for guide purposes only.