Plan to beat cashflow crisis
Plan to beat cashflow crisis
By Amanda Dunn
LOW yields coupled with high growing costs are set to push borrowings up this year.
To deal with that growers need to plan a strategy now, say financial advisers.
The usual borrowings peak could be significantly higher than normal this year, warns Simon Bennett, senior manager with Deloitte & Touche Food & Agriculture.
And it is not just tenants who need to beware, he stresses. "Owner-occupiers who fail to manage all aspects of their business properly are just as vulnerable, while those locked into land payments or FBTs may struggle to honour payments."
Harvest 1999 was a comparatively good year, with high yields and some growers using pools to benefit from early payments and ease cashflow, he says. "But early indications are that returns from harvest 2000 are not good and 2001 is likely to be worse."
He advises producers to tackle the situation now. "Do not ignore it, plan for it and inform advisers now while it is still possible to reverse or stem the trend."
Possible tactics include fixing interest rates, using financial tools to manage risk and, if buying capital items, to base the decision on affordability rather than personal preference.
"If you anticipate an overdraft problem, sit down now before you get to harvest and go through the figures. Get sorted in your own mind what the business is capable of and what opportunities there may be to generate extra cash.
"Armed with a draft cashflow and outline budget, contact your bank immediately and plan ahead."
Such a strategy is endorsed by Graham Simons, HSBC Agriculture manager for Essex. "Although every case is different, the earlier a farmer talks to us the better. We can sit down with the farmer, discuss options and treat each case on an individual basis.
"Fixing interest rates can reduce exposure," agrees Mr Simons. "Although UK interest rates are 0.5-1% higher over the medium term than the US or the rest of Europe, we have had a fairly lengthy period of stable rates. Farmers need to ask themselves how exposed they would feel if rates were to move against them and then consider fixing a proportion of their borrowings."
Rates may be fixed or capped. The latter puts a ceiling on rates should they rise, but enables borrowers to benefit from any downward turn. "Other financial tools available include forward contracts, options and grain pools, although futures trading and currency hedging may be more for the informed," says Mr Simons.
"Diversification and sourcing income from outside agriculture is also on the increase. "But farmers should take care," he warns.
"While diversification does spread risk it also creates risk in its own right. The farmer is trying to manage an enterprise with which he is probably not familiar. Carry this out properly to ensure risk to the business is minimal."
Financing new equipment also needs thought. "In the early 1990s leasing was a favoured choice because of the tax advantage," says Mr Bennett. "But as profits improved in the mid-1990s cash became the more popular option. Today, farmers no longer have cash and with cessation of leasing tax advantages, hire purchase has now taken preference.
"Variations between deals makes it worthwhile assessing finance choices for each purchase."
The example above shows different options for financing a Challenger with a list price of £82,700.
"If the cost of capital is 6%, buying clearly is not the right deal. While a three-year hire purchase is best, some analysts might say the decision is marginal." *
HARVESTCASHFLOW
• High costs, low returns.
• Inform bank now of anticipated overdraft problem.
• Consider fixed or capped interest rates.
• Employ financial tools to manage risk.
• Base capital purchasing on affordability.
Financing equipment
List price £82,700
Cost of capital 6%
Buy £75,599
Three-year hire purchase £70,428
Five-year hire purchase £71,565
Hire £71,086
All figures include interest and cost of maintenance contract.