Navigating the fields of success: financial accounting for new farming businesses
Starting a new farming business is an exciting venture, but it comes with its fair share of challenges and, like many businesses, the risk of failure in those first few years is high. Cash flow challenges can top a long and painful list of teething problems for new farming business owners.
However, with the right financial accounting support and advice as well as sound business management practices, you can pave a smoother path for your farm during those crucial first years and set yourself up for long-term success.
Cash flow challenges
The Achilles Heel of a new farming businesses is cash flow instability. Depending on the type of business, a new agribusiness often requires significant upfront investments in land, stock, equipment, seed, feed, and labour before any revenue is generated. Moreover, seasonal fluctuations and unpredictable weather conditions can further complicate cash flow management.
Here's how good financial accounting advice can help:
Finding and retaining good quality staff has always been a challenge but the labour market during and post-COVID has exacerbated this, especially in recent seasons. New business owners, often lacking HR experience, face challenges in recruiting, training, managing, and retaining workers while balancing work-life and personal wellbeing. Navigating compliance in HR, from employment law to payroll and health and safety, adds further complexity, with one misstep potentially derailing a vulnerable new agricultural business.
Especially for contract and share milkers, but also for those leasing a property to operate their business, the devil can be in the detail with contractual arrangements. What seems like trivial financial details between the farm owner and the contract or sharemilker can often be a significant burden to farming business owners if commodity prices change or unforeseen expenses arise. Not having appropriate minimum recompense levels when the payout gets low can often sink a fledging business before it gets off the ground.
Knowing your numbers is critical, and not just bottom line or cash flow, but profitability and return on investment. These aspects of financial accounting can give you a real understanding of the future viability of your business model and are important components of an agri farming business plan; something you may need to help secure funding, especially if you’re a small business looking to grow. Failure to understand a business balance sheet and P&L will make it hard to make the right decisions for the business in the long run and can often lead to the business digging itself into a financial hole it cannot escape from.
Here are a few ways owners in the agribusiness industry can increase the likelihood of developing a sustainable agricultural business over the long term:
Budgeting and financial forecasting
Effective budgeting is key to managing cash flow. Create a detailed budget that realistically accounts for all your expenses and predicted income. Regularly update these budgets to reflect actual expenses and income, helping you track your financial progress and make necessary adjustments. It’s even worth building in some scenarios to test the resilience of your business, these ‘what if’ exercises allow you to model how you might respond to lower-than-expected commodity prices, dry years or higher than expected farm inflation, for example.
Expense tracking and record keeping
Maintaining accurate and organised records is essential. From financial information to health and safety, keeping your records in a safe and accessible format is critical and can be extremely helpful should something unexpected happen. Use financial accounting software such as Figured and Xero to track expenses and income and upload your receipts and invoices. This not only simplifies tax preparation but also provides valuable insights into your financial health. Do the same for health and safety so your team can keep their daily records on their phones, and you have access to them should you need them in one place instantly.
Seasonal planning and saving
Recognise that farming is seasonal. Allocate profits wisely during peak seasons to cover costs during lean months. A dedicated savings account can help you set aside funds for unforeseen emergencies or investments in the business.
Managing debt responsibly
It can be tempting to kit yourself out with the best gear when you start your new farming business but spend your loan money wisely and avoid excessive borrowing, as high-interest loans can cripple an agribusiness. Seek advice on financing options and ensure you can comfortably manage the debt load.
Tax planning and incentives
Work closely with an accountant who understands agricultural tax regulations. Farmers often benefit from various tax incentives and tax deductions, which can significantly lower their tax liability. Plan for your tax payments well in advance and you can even utilise tools such as Tax Pooling to support cash flow when things are looking tight.
Diversification and risk mitigation
Reduce reliance on a single crop, livestock type or even on the agribusiness itself if there are not on-farm options. Diversifying your offerings can help stabilise your income and mitigate the impact of market fluctuations, and having a couple of off-farm investments can provide more options in the future and help with your retirement plan down the road.
Modern financial accounting software and farm business management tools can streamline your financial processes. These technologies offer real-time insights into your financial position, helping you make informed decisions.
Gather your team
Seek professional advice and get a good team to help you with the financial, legal, HR and H&S aspects of your business. They can help you identify areas where you can cut costs, optimise revenue streams, and improve overall profitability, as well as reduce your regulatory and legal risk areas.
Monitor and adapt
Regularly review your financial statements, and other performance information and assess your progress against your budget and financial goals. Be prepared to adjust your strategies as needed to stay on track.
The journey of establishing a successful farming business is challenging, but good financial accounting advice and practices can be your steadfast companions during those crucial early years.
By diligently managing your cash flow, budgeting wisely, and seeking professional guidance, you can navigate the inevitable obstacles and cultivate a thriving farming enterprise. Remember, the first few years are often the toughest, but with the right financial foundation, you can reap the rewards of your hard work in the seasons to come.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.
The title 'Partner' conveys that the person is a senior member within their respective division and is among the group of persons who hold an equity interest (shareholder) in its parent entity, Findex Group Limited. The only professional service offering which is conducted by a partnership is external audit, conducted via the Crowe Australasia external audit division and Unison SMSF Audit. All other professional services offered by Findex Group Limited are conducted by a privately owned organisation and/or its subsidiaries