Three years ago, Birchip grower Tim McClelland was certain he needed a new and bigger seeder to sow the expansive winter crops on his family’s 6500-hectare Mallee property.
But for Tim, it was not simply a matter of checking the farm bank balance was healthy enough to afford the hefty $580,000 acquisition and heading off to his local machinery dealer.
With his extended family holding long-term financial interests in the farmland plains he manages with his wife Julie, father Ian and aunt Ros, Tim first had to get approval for the big-ticket purchase from his own farm management board and its independent chairman.
In turn, with the purchase close to blowing the business’s annual machinery budget in one hit, there was a further agreement needed from the overarching “family council” that oversees the future of the mixed-farming enterprise, including from his Melbourne-based brother and two female cousins.
It might sound a complicated structure to work within, but Tim has come to welcome the extra layer of financial and management discipline it imposes on himself and the farm’s operations.
Support for new directions
Central to the success of key decision-making is the requirement to prepare a business case to back new directions or farm investments.
“I’ve got a degree in agricultural commerce, worked in project management and private investment and I run professional budgets, so I was pretty sure I understood our farm business, how it operated and had a good handle on all the key metrics that underly the business,” he says.
“But it was only when I had to sit down and really justify in writing and in numbers a decision I wanted to make, identifying all the issues on the farm and the strategies to overcome them – and how that fitted in with the bigger-picture strategic direction set by the family council – that I really honed my understanding of the business.”
The formal management and family structure requires Tim to prepare a detailed business case for each major decision he proposes affecting the farm’s day-to-day operations to put to his farm board.
That may include buying new equipment, changing a crop choice, altering the balance of the mixed farm’s operations between cropping hectares and sheep numbers, or even considering making an offer for the farm or paddock next door.
In each business case, written in great detail, Tim will weigh up the pros and cons of the purchase or system change – in this situation arguing for the bigger upgraded seeder – and consider both the short-term and long-term operational implications and financial consequences of going ahead or not.
Detailed business case
It is a new way of approaching farm decision-making that was kickstarted five years ago when the Victorian State Government offered a matching grant of $10,000 for any farm business that identified an area of capital investment required in their business to meet long-term growth goals, as long as it was backed by a well-thought-out and detailed business case.
The government incentive saw the McClellands succeed in securing a matching grant to buy an automatic drafter to better handle their 3500 Merino ewe breeding flock – and turned Tim into a firm believer of the benefits of preparing business cases.
Next followed his bid in 2018 to convince his farm board of the merits of buying the new, better and bigger $580,000 seeder to set up the promising 2019 crop after good early rains.
“We spend a lot of money on machinery – we hold about $5 million worth of machinery assets – and try to keep our machinery repayments at $400,000 a year in proportion to our business size, so this was quite a sizeable purchase for us. I needed to convince the family, instead of me just saying I wanted it and had a gut feeling that it would make a big difference.
“I wrote a business case on what we could do in term of yields, timeliness of sowing and options, and analysed the potential performance of old versus new both financially and in terms of production.
“It showed we could plant the crop 17 per cent quicker with a wider seeder, gain another 20 per cent efficiency using a larger air cart and, by getting the crop in on time and with more accurate seed placement, gain a conservative yield benefit of $50,000 a year.”
He also spelled out the potential risks if the farm bought the new equipment; for example, the extra financial repayment burden, the chance the new seeder might not do much better than the existing one, or the fear that sowing the crops in a shorter timeframe exposed the business to greater frost risk.
“But in the end, it was a really easy decision for the farm board (to approve), because the business case on paper highlighted the potential benefits so clearly. It actually convinced me more than I had been before that this was absolutely the right choice to make, and the right money to spend.
“But the other benefit, besides the seeder business case being so compelling, was that having the options all written down and compared took all the potential angst and conflict (among the family and farm board) out of the decision. It wasn’t me arguing against them or me trying to waste money on a whim, because it was all laid out plainly in the business case.”
Also all business cases are sent to the McClelland farm’s bank, along with the farm budget reports that are presented to the management board every two months. It gives the bank confidence that the financials are on track and makes future loan applications easier.
Why are you farming, what are your long-term goals, and what are your strategies to achieve them?
Wagga Wagga farm business consultant John Francis wishes there were more Australian growers like the McClelland family, who are open to new farm management structures and the rigour of preparing businesses cases to back major decisions.
Mr Francis, who runs his own consultancy and has participated in several GRDC business seminars, believes every grower should be able to write business cases to back their key decisions and that more agricultural service providers – such as banks – should be demanding this.
“The first thing I ask farmers who come to me wanting to improve their businesses, is why are you farming, what are your long-term goals, and what are your strategies to achieve them?” Mr Francis says.
“It’s amazing how many either don’t have a goal or have never clearly articulated it. It could be as simple as ‘why am I growing this crop in this rotation?’, or could be a much bigger-picture vision such as ‘I want to create wealth for my family’, ‘I want to retire at 60 with $5 million in the bank’ or ‘I want to achieve a five per cent operating return on the value of my farm over the long run’.
“What I say to my clients is that it’s really hard to deliver outcomes if you don’t know what you are trying to achieve in the first place. Clearly articulate those goals – financial and family-focused – and then we can work out the best strategies, options, opportunities and ways to achieve them.
“And then back those steps or key decisions along the way with sound business cases every time.”
Improving financial literacy
Mr Francis believes there is an opportunity to improve the financial literacy of growers. Many have a “fear of financials” due, in part, to their experience with trying to understand tax compliance and tax accounts.
The problem, he says, is that tax accounts are not a great tool for assessing business performance; they are the wrong tool for the job. The better tool for assessing farm business performance is management accounts that report the farm’s financial and production performance and provide a solid basis for decision-making.
“This fear of the numbers can be overcome but requires time and discipline.”
He makes the point that a business case does not need to be a complicated, high-finance document: “Actually, it can be quite simple, but it needs consideration of all the options and weighing the financial impact of each alternative; a basic cost-benefit analysis.”
While many do not develop a business case – happy to be guided by ‘gut feel’ – Mr Francis argues that everybody should be doing this, especially if intending to use debt to achieve long-term goals.
In his role as a farm business consultant, he says his first step is often to help growers understand the financial performance of their existing business before embarking on farm expansion or investing in the next growth opportunity. That is when preparing business cases – and having a good grasp of the business’s key financials or “metrics” – comes in.
Even when a manager’s financial performance is not great, and it is clear the bank will not lend further money, the process of articulating goals, reviewing farm performance, analysing the books and preparing business case documents is never wasted.
“There is always something positive to extract from the process. And when the business case doesn’t add up and it is clear they can’t safely take on more debt at this stage of the business cycle, it also helps see what areas and financial figures they need to work on so they are successful next time.”
Use analytical tools
Fiona Best, the chief executive of the Birchip Cropping Group (BCG), says a major focus of the organisation has long been to encourage its grain growers to use the analytical tools available to support their decisions.
Ms Best agrees with Mr Francis that it is impossible to make good decisions without first defining the goals of the business, both long-term and short-term, and grasping what the constraints to these goals are, what resources are available, and what are the personal attitudes to risk.
“All that helps you understand the comparative benefits and the costs of what needs to be compared, and often determines what approach or analysis the farmer should undertake,” Ms Best says.
“BCG encourages its farmers to support all their decisions with information, whether it is the latest research and trial results or financial metrics. And we say make those decisions on big capital purchases gradually, outside of those high-pressure periods of sowing or harvesting, and make them when you are not under pressure financially or short of time.”
Ms Best says writing a business case for alternative options does not need to be complicated or overwhelming. Many excellent farm analytic tools and templates are available on the internet, on GRDC’s website, or from the major banks and farm advisers.
Some growers will even be doing them already but not calling it a formal business case, instead referring to their comparisons as a partial budget, a break-even analysis, a risk and sensitivity analysis or even a cost-benefit analysis.