Building a profitable agribusiness starts with strong financial foundations

Sep 28, 2016
Posted on Sep 28, 2016

On a scale of 1 to 10, how comfortable are you that all the financial elements of your business are under control?

Many businesses think being in control of the finances includes:

  • Tax return done on time
  • An annual review of the Profit and Loss and Balance Sheet
  • Annual cash-flow budget.

And many people will say “My accountant looks after that”.

However, to develop a profitable, sustainable agribusiness – which is capable of responding to challenges around weather, market volatility, personnel changes etc. – a greater understanding and application of the fundamental financial principles is required.

What are the these financial principles?

The Northern Beef Report: 2013 Situation Analysis identified that adequate profitability remains a core problem for many in the northern beef industry. In part, this is due to challenges in applying and interpreting financial information for their businesses – along with a range of other fundamental structural beef business issues.

The authors noted the core dilemmas for many in the beef industry are around:

  • Size and scale of the business
  • Financial literacy
  • Debt management
  • Understanding key profit drivers
  • Managing expenses.

This is a common experience across many sectors in agriculture.

So … A question for you – how confident do you feel that each of these areas is “under control” in your business?

What are the Best Practice metrics that should be used?

If we assume that the average agribusiness (farm operation, service providers and others in the value chain) – is seeking to become a profitable, sustainable and competitive enterprise – what are the metrics they ought to be looking at?

Some of these metrics include:

  • Cash flow
  • Liquidity
  • Solvency
  • Profitability
  • Repayment Capacity
  • Remuneration for key personnel – in particular the business owners and shareholders.

But … what’s more important than knowing all the metrics?

To many business owners, talking and working through detailed financial metrics is basically … “double Dutch”. This is because they are good at producing a product (and are aware of all of the intricacies of inputs, genetics etc), but are less comfortable talking about financial management.

The result? Things appear complicated, we feel outside our comfort zone – and the easiest solution can be to “shut-off” when the topic is raised.

Some simple Golden Rules apply here and include:

  • Knowing that “you don’t know… what you don’t know” – and accepting that is the case
  • Then having the right people (and advisers) – to provide direction and who you can readily call on for advice
  • Being proactive, rather than reactive. Too often, business owners wait for a call from the accountant to tell them their tax is due – or worse still, wait for the phone call from the bank. However, there is much more that be done to better position your business for wealth creation
  • Committing things to paper – so they appear real.

The simplest way to combat these risks is to have regular, timely and structured meetings with your trusted advisers.

Webinar – “Sound financial management provides sound foundations for business growth”

More detail on the topic can be viewed in the recent webinar “Sound financial management provides sound foundations for business growth”. Brett Collins (Agribusiness Partner with Crowe Horwath) joins Gordon Stone (ABDI) to discuss the following:

  • The financial performance of sustainable agribusinesses – a set of key insights into the financial fundamentals.
  • The characteristics and attitudes – demonstrated by a agri-enterprise operation that is exceeding shareholder expectations compared to one that is not
  • How to put in place the steps needed – to change the financial principles that aren’t working
  • How to access and work with suitable trusted advisers – who have the knowledge, experience, and systems to help you reduce financial risk.