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Working capital – the life blood of your business

Full of emotion, we go and purchase the property of our dreams. Unfortunately, we can get a few things wrong, just as I did when I purchased my own dairy farm. Now after years of experience in rural banking, valuation and finance, I have found that there appears to be one common factor that follows success, or failure and difficulty in the first season/year, and that is working capital.

Insufficient working capital is one of the major traps to new property purchasers, or any business venture for that matter. This will bring more headaches and threaten your business more than any other factor.

What do I mean? Take a dairy farm for example:
200 cows, producing 60,000 kg ms
Loans - say $15.00 per kg $900,000
Interest @ 8% per annum $62,000
Monthly interest cost $5,100

It is basically six months before you receive a decent dairy cheque, therefore funds are required to cover the following costs for those first six months:
Loan payments for six months $30,600
Drawings @ $4,000 per month $24,000
Fuel and oil $15,000
Stock health $10,000
Food $10,000
Total $89,600

So you need a buffer of $90,000 before you start to get a decent dairy cheque.

The same applies to drystock, dairy grazers, rural financiers etc. Working capital is the oil, or life blood that keeps you afloat until the money starts to come in. I have seen it with my clients, but I also know it for a fact as I have been there too.

Consider also the unexpected costs that turn up too? eg. the vacuum pump is too small, the cows need to be treated for mastitis, empty cows are not detected etc. Insufficient working capital in these circumstances is a nightmare.

Also, just because some piece of equipment, tractor or bike is not working perfectly is not sufficient reason to go and buy a new one, using up your precious working capital. Capital purchases need to be spread forwards, so they do not gobble up your working capital.

So how do you do it better? Ensure that your financier has put aside sufficient working capital until the money starts to flow. Do some simple costings as shown in the above example to ensure that you have plenty. Nothing annoys bankers more than clients going back for more money after a few months.

Also, consider employing consultants. Employing consultants really means that you are paying for brains. I had a client whose income went from $500,000 to $10 million in 10 years explain to me his key success point: "I am happy to pay for brains".

I know everybody wants to keep their total borrowings down and as low as possible, but skimping on working capital is not a solution. You are better to borrow an extra $20 - $30,000 at the start and be comfortable, rather than go back for more later.

Summary

Be prepared to listen and then action good sound advice. Be prepared to pay for intelligence. Ensure that you have more than adequate working capital at the start of your new venture. Failure to do so could spell disaster before you get your new farming venture off the ground.


 

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