“You wouldn’t fly a plane without instruments these days would you?” questions Craig Sanders, an agribusiness and cloud accounting specialist at Crowe Horwath. However, when it comes to farming, that’s exactly what he believes is happening too often on New Zealand farms.
“There are too many farmers effectively flying blind without the right kind of financial information to make sound farm management decisions,” says Sanders.
Many farmers only get a fully detailed account of their financial position following a review of their end-of-year accounts with their accountant, which is often too late to make adjustments for a better financial outcome.
Given the current market situation Sanders stressed that this is no longer good enough, and now more than ever farmers need accurate real-time financial information. “While volatility is nothing new for New Zealand agribusinesses, large increases in farm debt over the past decade, particularly in the dairy sector, have put pressure on the industry during the recent fall in milk prices.”
Sanders explained that while all farming operations face pressure when aspects such as prices fluctuate rapidly, highly leveraged operations often have less room to move. “Rapid or unforseen changes in circumstances such as a major climatic event or a fall in the payout can lead to severe outcomes for under-prepared farmers, especially those with highly leveraged operations.”
Sanders continued, “This means those farming businesses need to be fully aware of their current financial position, know what drives their costs, be prepared to review budgets regularly as things change, and be able to make decisions based on the best possible financial information.”
Sanders noted that farmers are often very good at tracking cash, but when it comes to the true impact of decisions on their bottom line, things are often a little murky.
He points to selling stock as a great example. “It can often look fantastic for the farming business, in terms of a cash situation at the time of sale, but depending on what price was received and the costs incurred, the true impact might be very different when reconciling at the end of the financial year. Without a real-time accrual accounting system in place, it’s hard to know.”
Sanders stressed, “To be truly successful in seizing opportunities and mitigating risk, farmers need to have an accurate picture of where their finances are tracking in real-time and they need to know what impact decisions will have on their bottom line before they are made.”
For those who can feel overwhelmed by numbers, especially when they might be a little negative, Sanders is quick to point out that Farming can be stressful at the best of times, but it’s often the stress of not knowing exactly where the business sits financially that can really lead to things getting tense down at the farmhouse.
Sanders also recommends farmers use the tools available to put themselves and their advisors in the best possible position to make correct decisions.
“There are some great cloud-based accounting software platforms on the market now, which will enable the farmer and the advisor to work closely together using real-time financial information to manage the farm effectively,” he notes.
Sanders also points to the opportunity for greater collaboration between rural professionals that can occur with real-time financial information from cloud accounting platforms. “They can produce reports in real-time for the farmer, the accountant and the bank manager, tracking key metrics like funding headroom for example, allowing adequate overdraft facilities to be maintained well in advance. It saves some panicked conversations I can assure you!”