with Don Fraser
Fraser Farm Finance
Before I forget, I thought I would pen out a story on what I learned during 50 years of valuation, finance and mediation for farmers.
If you find yourself heading down the wrong road, the faster you can turn around the better.
Contract milking springs to mind. By the time contract milkers meet all the costs expected of them they often make less than a decent management position with a decent salary package.
Why keep going back to that mode when it does not seem to work that well in many cases?
Insufficient critical mass on too small a business to be profitable.
Small farms of all descriptions fit here. You need sufficient income size and critical mass to get a profit after all outgoings.
If you are going financially backwards every year and battling, maybe it is time to change your business mode.
Excessive personal drawing
A farm might post a profit after all outgoings and taxation of say $70,000 – but what if you are spending $100,000. Your debt will be increasing at $30,000 per annum and your banker is going to be knocking on your door.
You may be half deaf and not listening anyway, but if your banker, advisors and accountant are saying no, listen! They know better than you.
Many farmers suffer from always wanting new tractors and gear. And yes, you need a certain amount, but the smell of a new tractor cab is like a drug to many and they just have to have.
I can relate to that, but expensive HP and lots of them can suck a business dry of working capital.
Avoid expensive projects that are either unnecessary, loss makers or too expensive, such as new houses, cowsheds, land development projects, and so on.
It may seem a good idea at the time, but the additional debt costs and cost overruns that have to be met from revenue, fit in here.
Many businesses have failed because money is being siphoned off for the ventures such as beach houses and helping family, so watch out there.
Like it or lump it, if a relationship breakup happens you are going to divide your net worth in half.
Assets minus liabilities, in half. There is just no way around it. Yes, you may think you can borrow her/his half to pay her/him out, but will the business stand the extra debt costs? Often not.
I have a degree in this stuff, and it is sure not for the faint hearted.
The best thing is to have a deep and meaningful conversations with your partner and look after her/him better than you look after everything else.
Only spend what you have
To wrap up, don’t spend more than you earn – end of story.
As an old fart with a lot of experience, my recommendation is to have a think about avoiding losing money.
Making money is one thing, but hanging onto it is another.
Sadly, we get very little economic education at school, so it is a learned lesson.
Disclaimer: These are the opinions of Don Fraser. Any decisions made should not be based on this article alone and appropriate professional assistance should be sought.
Don Fraser is the retired Principal of Fraser Farm Finance and was a consultant to the farming industry for many years. Contact him on 021 777 675.