by Donald E Fraser
HOW TO SERIOUSLY CUT BACK ON FARM EXPENITURE
Firstly get out your Balance Sheet and have a serious look at it. Get your accountant or consultant to help here. How does your expenditure compare with industry levels? What are your true cash supplies? After drawings and tax is there anything left, of are you going backwards? Are you having to go to the bank every year to borrow more money?
Complete an assets and liabilities like the following:
ASSETS
Farm say 100,000 kg/ms production @ $45 4,500,000
300 cows x $1200 360,000
70 yearlings x $600 42,000
Farm Plant 100,000
_________
$5,002,000
LIABILITIES
100,000 kg/ms @ $18 debt per kg/ms 1,800,000
_________
Assets over Liabilities $3,202,000
While that seems OK, if you are continually borrowing to meet your deficit every year, you will rapidly be going backward. eg $50,000 per year, equals 50c per kg/ms more debt. This equates to an additional $1 of debt per kg/ms production in just 2 years. Eventually the bank will reach a stage where they wont let your overdraft out any more.
Do an Income & Expenditure based on you historical balance sheet.
It might look something like the following:
100,000 kg/ms @ $4 400,000
Boners & Bobbies 30,000
_______
Gross Farm Income 430,000
Less farm running costs @ 60% of Gross Farm Income - 258,000
_______
Profit before interest and drawings 172,000
Less debt servicing $1,800,000 at 8.5% Interest - 153,000
_______
Net Profit $19,000
Now you can see that there is not enough profit. So what can you do? Can you increase income?
ISSUES
Most farmers are near maximum production levels without increasing input costs. So it leaves you with no other option than to reduce costs.
Attack the big items first. It is easier to reduce big items than the small ones.
- The big ones are: Feed
Labour
Fertilizer
Animal health
Vehicle expenses
Personal drawings
By now you’re probably feeling not so good about all this cost cutting, but if others can do it successfully, so can you. Bill Gates tells us ‘Life’s tough, get over it.’ And so it is. Action cures fear, so take some action. A half hearted effort does not get the result you are looking for here.
We need to get those farm running costs down. Find somebody who is runny a low cost operation and go and talk to them, ask “Can you help me?” You’ll find nobody can resist a call for help!
In the above Income and Expenditure scenario, a 10% reduction in farm running costs puts an incredible $43,000 more on the bottom line.
We’ve got to get away from productiion based farming and back to profit farming.
Here are some ideas:
- Feed. I accept that there are reasons for high input and many are making a success of it, but many are not either.
- Grass first. We should be growing the maximum amount of pasture and utilizing it fully and as carefully as possible. Undersowing and pasture care is cheap on comparison with buying in feed.
- Labour. Do we need to work together again? Can we minimise labour inputs? Is all the staff necessary? Can we embrace more labour saving technology? If you have got a spare labour unit at $43,000 per annum including some sort of an allowance for extras that 10% of gross or $43,000 straight on the bottom line. Could you milk once per day or 3 times in 2 days to save labour? Can your family help? My daughter is going to school where one of the boarding girls goes home to milk every weekend and help dad on the farm! I’ll bet she’s a self starter and appreciates things in life.
- Grass seed, can you source it cheaper from the South Island? It may not be certified but it is very realistically priced and has stood the test of time. Research is essential here.
- Fertilizer. Are you trying to keep P levels at 60-70, or will a good dose of lime, reducing locked up nutrients help? They tell me that for every 200kg/ha of nitrogen you need 200kg of lime just to keep the balance. Fertilizer use is a crucial area to look at and there is a number of people suggesting that they can improve your costs in this area.
- Machinery. Do you need all that gear tearing around the farm? Every time you start up a motor it costs you money. Is there an easier way to do it? Would a farm car do instead of an expensive four wheel bike. What about walking? It may save you from going to the gym! If you have spare plant, can you sell it? Get rid of the cost and get back to basics.
- Boutique. Watch out for sales people pedalling boutique products. Why pay expensive rates when you can often purchase products more cheaply elsewhere and in a more direct form.
- Drawings. These are rapidly increasing, when I started in the Rural Bank we used to allow $25,000 pa. Now they allow up t0o $50-75,000! Open a separate account, transfer a monthly amount into the drawings account and when it’s spent, - that’s it! No dipping from the farm account!
- Call a meeting with your whole family and discuss the issues. Set up a meeting agenda and try to get everybody to buy into it. You could use this philosophy as a starting point for discussions around it.
In summary, we New Zealand farmers are facing really tough times. We all need to be very careful with how we spend our money. It is the toughest margin squeeze we have seen for a decade. Face up to it and take action because action cures fear.
Those who fail to make necessary adjustments, will suddenly find the bank won’t let out the overdraft and will find it very difficult. If you feel you are rapidly going backwards or are concerned, call your professional advisors, bankers and/or us at Fraser Farm Finance.
