Webinar housekeeping Program overview Financial Intelligence webinar series

Webinar housekeeping

Program overview Financial Intelligence webinar series 1. Financial basics 2. Longer term financial decisions 3. Medium term financial decisions 4. Short term financial decisions 5. Managing financial risks

Learning outcomes Risk management needs to focus on the positive and negative Understand your tax strategy Work collaboratively with your bank (and others)

Managing risk Establish the context Identify the risk Assess the risk Treat the risk

Establish the context Strengths and weaknesses • • • People Operations Stakeholders Finances History Opportunities and threats • • • Market Economic Social Technology Environment Constraints • • • Geography Weather Legal Financial …

Identifying risks in farming Production: • those issues and events that affect the quality and quantity of plant and livestock commodities produced (e. g. climatic events) Price: • the uncertainty around the price you will receive for produce and around the markets the produce is sold into Operational: • the factors that affect your ability to get a job done in a timely and cost-effective manner (e. g. machinery breakdown, input cost increases or decreases) Financial: • the ability and capacity of a farm business to borrow money and repay debt Statutory: • the impact of government policy and actions People: • the influence of personal misfortune or welcome event that comes unexpectedly and the needs and goals of the key people within a farm business.

Very likely Likely Unlikely Likelihood Assessing risks Medium High Low Minor Extreme Medium Low Medium Moderate Major Impact

Treating risk Avoid Accept Transfer Mitigate

Treating farming risks Prices • Average prices usually higher than the most frequent prices as market forces create skewing and floors in prices paid… • use a range and probabilities in your estimating. • historic data can indicate probabilities for prices (agprice. grainandgraze 3. com. au) Yields • Use historical information to “frame the odds” for yields • ABARES AGSURF database for regional averages (apps. daff. gov. au/AGSURF) • Your own farm data: arranging the information in order from lowest to highest and then looking for ‘clusters’ in the results that will represent ‘best’, mid-point and ‘worst’ groups of values. Finance • In lending fixed rates are the market estimate of variable rates over the fixed rate period. • Over the past decade inflation has averaged 2. 5%pa General • Be careful to consider the impact of major events: for example the higher yields achieved in the 2013 wheat harvest in WA were a once in a lifetime event! • In general there is a positive correlation between grain prices and a negative correlation between grain and livestock (wool, meat). This creates a natural hedge against risk in mixed farming enterprises

A banker’s view of the farm Character Communication Capital Financial risk Cash flow Conditions Collateral

Reducing finance costs • Review your bank from time to time - find out what terms other financiers may offer your business • As the risk level reduces in your business - re-negotiate terms with existing financiers • Have an optimal structure by replacing any hard core overdraft with cheaper term debt and add an off-set account • Understand the bankers view of risk (6 Cs) – e. g. offer the lender more security in exchange for lower interest rates • Consider fixing interest rates if you cannot afford for them to increase or you want to avoid this risk. • Allocate part of profits to debt repayment – effectively replacing debt with equity.

Understanding your accountant Accountant figures Management figures • In accordance with accounting standards and Australian Tax Office (ATO) rules • Often prepared by your accountant for the ATO covering the tax year • Many figures are based on historical rather than current market values (e. g. land) • Can be cash if turnover <$1 m, accrual of >$1 m • Based on financial year • Family drawings not tax deductible • Prepared by the business to support decision making • A more pragmatic approach, often aligned to cropping seasons • Option to use current market values and seasons rather than tax years • Mix of cash and accrual to help decision making • Based on season (eg Mar to Feb) • Use the notional management fee concept to recognise “drawings”

Additional accounting matching entries Prepayments and depreciation • you pay for expenses up front then use them over time until they run out. • depreciation is the allocation of the purchase price of an asset over its useful life Provisions and accruals • have to pay an expense in the future based on what you have done now.

Taxation tactics Manage the timing of income and expenditure • deferring income • bringing forward expenditure Use tax effective investments in line with the farm life cycle • Farm Management Deposits (FMDs) • superannuation contributions (public vs. SMSF) Take full advantage of tax concessions and deductions • split or average income • allowances/rebate schemes • acquire essential plant and equipment Get a second opinion at times • seek out further tax and financial planning advice, particularly if you’re not completely satisfied with the services provided by your current accountant or financial planner Always keep after tax position in mind when making a decision.

Understand your business structure Sole trader Partnership Company Trust John Smith John and Mary Smith and sons trading as ABC Pty Ltd as trustee for the Smith Family Trust Example Ownership Individual Partners Shareholders n/a Partners Directors Management Owner Trustee for beneficiaries Ongoing via trust deed Trustee not individual Continuity At owners discretion At partners discretion Taxation Personal tax Partners personal Corporate tax and Beneficiaries on tax franked dividends amount distributed Costs Minimal Low Documents ABN Partnership agreement Ongoing via shares Corporation not Legal liability Personally liable Joint and several individual Highest Moderate Memorandum and Trust deed Articles of Association

Management accounting software ? ? ? Who currently uses management accounting software to support this process? How much of your software’s capabilities are you using? What is your level of satisfaction with your software?

Selecting a software package 1. Define your needs (now and in the future) • Number and variety of enterprises • Scale of operations • Define end users (accountant, bank, family, employees, …) • Set a budget – up front and ongoing 2. Match features to your present and future needs • Ease of installation, customisation and data entry • Functionality: - Cashbook, budgeting, invoicing, payroll, reconciling livestock and commodities, gross margin reporting, banking, link to other software (e. g. excel) • Reporting: - by enterprise, editing, tailoring, transmission to others • Check with other producers to get their unbiased opinions 3. Consider practicality issues • Fit with your hardware and can sync with other software to avoid double entry of data • Compatibility with bank, accountant • Training and ongoing support • Take up the opportunity for a free trial prior to purchase

What will you now start, stop, continue doing? Be able to produce a financial risk management plan for your farm Understand your tax strategy Develop a plan to work collaboratively with key financial stakeholders including your bank and accountant.

References and further reading Nab survey of farming practices news. nab. com. au/sustainability-at-the-forefront-of-farmers -concerns-says-nab-survey/ Risk management principles and guidelines iso. org/standard/43170. html Farm decision making grdc. com. au/__data/assets/pdf_file/0033/16989/farmdecis ionmaking_final_lowres 2. pdf Assess price risk of commodities agprice. grainandgraze 3. com. au/ Understanding a bank’s approach to a farm business grdc. com. au/resources-and-publications/allpublications/factsheets/2014/02/understanding-a-banksapproach

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