Take care to keep loans in check
Borrowings could rise rapidly
on farms that have been
culled out due to foot-and
mouth. Careful management
will be needed to prevent
this from happening, as
Suzie Horne discovers
LIVESTOCK farmers who have had their stock slaughtered in the foot-and-mouth outbreak could owe more money by this time next year than they did before the disease struck, warn agricultural bankers.
Even a business that has been mothballed needs planning and budgeting, especially those which face up to two years with no trading income and huge uncertainty over restocking costs.
"My biggest concern is that there may be some knee-jerk reaction going on. Some people are spending compensation money on doing things now that they have not been able to afford to do in the past, such as buying the new tractor or the new Land Rover," says Dick Mason, senior agricultural manager at Lloyds TSB.
"It is perfectly understandable following the ordeal of F&M and the recent years of poor profitability, but there is a great danger that they could end up in more debt than before."
A further risk is that farming families will drift back into exactly what they were doing before the outbreak, says Mr Mason.
"This wont necessarily be the right thing for them. They need to sit down and look at where they want to be in 10 years time, because some of these will be people who have been saying over the past few years that there is no future in farming and that they want to get out."
With cash-flow under severe pressure, any capital investment should be postponed until it is known in what direction the business is to go, says Lloyds TSB in a guide* published in response to customers experiences of F&M.
Approach the bank for loan restructuring and help with cash-flow management, it says. Tax payments can be deferred, including income tax, PAYE and VAT, and interest on late payment can be waived for F&M victims.
"Shut the cheque book in the drawer," advises Promar principal financial consultant John Warrington, who helped produce the guide. "While many affected farmers are earning an income from DEFRA for cleaning and disinfecting, that may end soon.
"The most effective use of compensation cash initially will be to repay borrowings, so that overheads are reduced," he says.
Where there is a surplus after this, most people have invested sensibly at relatively low risk, but some have not yet done so and need to address this, says Mr Mason.
The guide advises repaying hire purchase, leasing and point of sale credit schemes where appropriate. Tax advice on the treatment of compensation and reinvestment is essential to maximise the value from compensation, it says.
Working family tax credit should also be investigated for both farmers and employees. This benefit lasts for 26 weeks at a time, but cannot be backdated so it is important that claims are made now.
There are several areas which may offer opportunities to cut costs or to earn extra cash (see panel). Labour is a particularly difficult area, Mr Mason acknowledges. "Understandably, you may feel tempted to create jobs, tidying up and repairing the farm, but please remember that this could prove extremely costly."
A detailed budget and cash-flow is essential for any business. But the seasonality of sheep production makes this the area where a thorough management plan is more important than ever, warns the guide – it could be 2003 before cash begins to flow again for some.
Both Mr Mason and Mr Warrington urge all those culled out by F&M to take advantage of the five days of free advice being offered by Business Link through the FBAS plus scheme.
*Foot-and-mouth disease and loss of livestock: Your guide to managing the way forward – from Lloyds TSB Bank, Business Banking Agriculture, PO Box 112, Canons House, Canons Way, Bristol, BS99 7LB (or e-mail email@example.com). *
• Preserve capital.
• Repay borrowings.
• Invest sensibly.
• Cut costs.
• Construct detailed budget + cash-flow forecast.
• Use free business advice.
WHERE TO CUT COSTS
• If restocking is likely to be delayed and the farm has arable registered land, consider increasing autumn planting to maximise 2002 IACS returns.
• If sufficient fodder can be conserved, reduce fertiliser use for the rest of the season.
• Keep fuel and repair costs down – use machinery only for essential tasks.
• Sell surplus equipment – if finance deals are still running, it may be best to repay the loan debt and buy a replacement when it is needed, so that the loan does not drain the business.
• There may be more management time available than usual – use it to check up on input costs and discounts for electricity and other utilities.
• Check miscellaneous items like monthly costing services, which could be cancelled during the inactive period – also remove any items from insurance cover which are temporarily not required.
• Rent may be deferred or reduced by negotiation. Rates on diversified businesses can be temporarily reduced – apply to Valuations Office.
• Be wary of spending on major items but do not neglect essential maintenance of parlours and machinery mill-and-mix units, feeder wagons and bulk tanks.
• Are there opportunities to contract out farm staff to local farmers or contractors?
• Could you reduce hours to a minimum with lower income levels?
• Can the business really afford to keep people if restocking is a long way off?