26 February 1999


As arable farming profits shrink lenders are becoming

more nervous about the financial security of their

borrowers. Suzie Horne finds out how growers can best

go about reassuring their bank manager

FARM business consultants are getting busier by the week, working for the main agricultural lenders to assess the financial strength of their farming business clients.

"What the bank is increasingly looking for is accuracy in forecasts and the elements which make up those forecasts," says Andrew Knowles, a consultant based at the Edinburgh office of the Laurence Gould Partnership.

Banks are also looking more closely at the abilities of the individual running the business. "If a business is experiencing problems, the bank will be looking for early recognition of that by the farmer and a willingness to discuss it. This is the first step to addressing the problem," says Mr Knowles.

Banks have generally been very understanding of the extreme pressures many farms face, he says. However, if problems need addressing, the sooner assistance is sought, the more avenues there may be available.

Problems with banking relationships can arise for all sorts of reasons, he says. Common items include forgetting revolving credit for input purchase schemes in cash flows, or poor assessment of the quantity of crop in store, leading to a shortfall of income in the cash flow.

Changes to strategy which may occur during the year and affect cash flow also need anticipating. For example, land may become available on a short term basis at relatively high rents for potatoes or carrots, which will increase requirements. A spur of the moment purchase may require a large, unplanned HP payment.

"This is not a disaster. But changes should be communicated to the bank," points out Mr Knowles. "Bouncing cheques is not good for anyone involved."

Future cash flows should also take into account the likelihood that Agenda 2000 reforms may mean IACS cheques are paid between January and March.

Documentation such as facility letters following meetings or discussions with the bank must also be checked, says Mr Knowles. "Sometimes growers may misunderstand what has been agreed. The letter arrives and it is put away without having been read properly."

It is also in the account holders interest to make his or her own notes of meetings and telephone conversations with bank staff. "The farmer is also going to have to become more adept at talking to different people within the bank as systems change and people move."

Include assumptions

When cash flows are drawn up, it is important to include details of the basis of calculations, such as crop areas and yield assumptions. "They should be realistic and achievable," says Mr Knowles.

It is also sensible to build in a margin rather than ask for a facility which would only be realistic if everything goes to plan. "Assuming you need a facility of £100,000 if everything goes to plan, it may be better to ask for £110,000."

If you are going to have to ask for an increase in your facility, it is better to ask for the correct amount the first time to avoid having to keep going back, as this can ring alarm bells at the bank, warns Mr Knowles.

For all farmers, accuracy of valuations is paramount, but this is particularly important for tenants, he adds.

Costs overlooked

Processing, grading and transport costs are often forgotten in valuations of crops in store, such as vegetables. That means the price in the cash flow is not net, which can make a significant difference.

HP payment timings can sometimes be moved, but beware of penalties for doing this. If the alternative is a breach of the overdraft limit, it may be worth paying the penalty, suggests Mr Knowles.

However, if you are being forced by cash flow requirements into selling grain at a bad time, it may be more sensible to approach the bank for an extension of facility than to take a poor price for grain, provided there is a realistic expectation that holding off will bring a better return.

Key cash flow tips

1. Produce accurate, reliable, realistic forecasts – include yield assumptions and areas.

2. Attention to detail – dont forget tax, drawings, HP payments.

3. Valuations must be precise.

4. Cash flow forecasts are just that – changes will happen. But they should be communicated early and explained to the bank if they are significant.

5. Check documentation of arrangements agreed with bank.

6. Build in a margin.

7. Monitor actual performance against budget.

8. Keep reliable, up to date farm records to help in planning.

Cash flow planning myths

There are several myths about cash flow plans which Kevin Bewsher of Lloyds TSB is keen to explode. First they are only for borrowers. Not true, says Mr Bewsher. "Most businesses will benefit from sensible planning and monitoring.

"The second is that they are only done when the bank asks for them and the third is that they are a waste of time." If you complete one and then never see it again it, it certainly will be a waste of time, says Mr Bewsher, who is regional agricultural manager for the north-east and Cumbria.

"When monitoring a forecast the bank will seek to track events, to identify whether or not the predicted event has taken place, whether the budgeted figure was accurate and the effect, if any, on short or medium-term cash needs.

"The bank manger is not sitting in judgement – he or she really wants to help." But problems can often arise when the information being kept at farm level is not current. "There is a persistent belief that if you overspend on one item it can be balanced by an underspend on something else. But the underspend does not always happen!

"The cash flow is not set in stone." However, difficulties are not always intercepted quickly enough to give time to review farm practice. Significant changes should be discussed so that arrangements can be made to accommodate requirements. Last minute requests on poor information make that difficult.

Consultants acting for the grower or for the bank offer a third pair of eyes over the business. "We do not feel it is our position to be prescriptive of farm practice," Mr Bewsher concludes. &#42

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