The message from former rural banker Geordie McCallum is when times are tough, like this season, the bank doesn’t need anything from you that you shouldn’t already know for the good of your business.
Now a Masterton-based business consultant, McCallum says farmers must own their business information, so they can make the best decisions for their business and be in the best position to lead the conversation with the bank.
Farmers are passionate people and know the job they do – and knowing their finances used to follow that. However, McCallum says now being a good farmer is not enough – the business side will define a farmer’s success.
The bank manager is charged with managing relationships, and might have 50-100 clients, so is a busy person.
“He or she wants to be a good old-fashioned bugger, but they are there for the bank and are assessing the risk to capital in every situation. They will be dealing with 15-20 clients every month from general reviews to various requests for support. If the manager visits and the farmer has gaps in their information, the banker needs to go away and fill those gaps themselves or choose to not fill it – which is a risk to the farmer.”
An unprepared client means time spent gathering the numbers. With a prepared client, the conversation can change to using the numbers to talk about the strategy and the solutions to the problems.
“A conversation about a negative budget is not always a negative conversation. If you have good information and a good plan this could be a very positive conversation and hopefully you will walk away with the support you need. Negative conversations often happen because there is a lack of information and no plan. Both parties leave without what they came for and you don’t have confidence that you have the support your business needs – those conversations are hard on both parties.”
Farmers have the most at stake and it makes sense they should know their situation better than their banker.
Geordie says farmers learned lessons from the last credit crunch period but hikes in farm prices and higher payout had dissipated the messages.
“What has changed this year is farmers have run out of cash and they need to review their systems – but they need to understand their unique business so they are making strategic decisions for the future, not just a kneejerk reaction.
“So they may hold the line on fertiliser, regrassing and subdivision but they need to recognise there is a cost that comes on the other side.
“A small cash loss rather than no cash loss could hold you in better stead for the future, or vice versa the priority in some businesses right now could be breaking even at almost all costs.”
The benefit of knowing your business is being able to make timely decisions like a system change, to fertilise or not, or fixing the interest rate, and then being able to validate those decisions.”
Interest rates are the lowest they have been for years, McCallum says, so while low rates are a benefit, they shouldn’t be the overriding focus of a bank visit.
Cashflow, equity and people are the factors bankers look at, and everything is on a case-by-case basis.
Of course the people factor makes a big difference, McCallum says.
“If you are in the bottom 20% for performance but you are motivated to make a change you could probably be helped up to average or better, so it comes down to a judgment of the person and their support team, but they really need to know where they are financially first.
“When we look at someone’s history, it’s a lot about the physical and financial performance, but also the bank manager will take into account information flow, integrity and personal awareness – the person who is in the crap and knows it is much better than the one who is in financial strife but doesn’t even know it.”
To strengthen your case:
• Strategy for the next five years – where have you positioned yourself? What is your view of the future? Are you going for high-input or low? What’s the two-year cashflow case around that? This is your plan to start negotiations from.
• Identify specifically what you are asking from the bank (overdraft extension, term loan, lower interest rate) then think about what they might ask from you (more security, guarantees, payment of principal). How are you going to meet these?
What are the figures you need to have?
• Balance sheet with all assets and liabilities
• The most recent year’s performance – farm production, monitoring and measuring, cost of production and variable costs, drivers of production, KPIs.
• Forecast budget – at least the current year’s, plus the year beyond.
• Sensitivity around – payout, cost structures (understanding how they can be manipulated or why they need to be maintained), dropping asset values, dry year
• Benchmarking – some way of comparing with district averages
• Risks to the business – what are the three biggest and how are they to be dealt with?
