Senwes Scenario August/September 2018 | Page 52

PART I
FINANCES

PART I

Agricultural debt

Steps to improve the financial position of a farming business

According to statistics of the National Department of Agriculture , Forestry and Fisheries , agricultural debt increased by approximately R34 689 or 30 % during the period 2014 to 2017 and is expected to reach the R160 000 million level during 2018 , which would imply a debt burden of approximately 35 %.
� By Johan du Toit Manager : Senwes Agricultural Services

Measured against generally accepted norms , it is gravitating to the higher side . It should be seen against the background of a slowing down ( or even a decrease ) in land prices , stricter monetary policy and political uncertainty .

Every farming operation has a unique set of circumstances and it is therefore necessary to determine the impact thereof on the financial position as accurately as possible , rather than to generalise .
LOGICAL POINT OF DEPARTURE - TO MEASURE IS TO KNOW
� Do a thorough analysis of the financial position of the total farming business ( all entities ). Trend analyses of critical financial and efficiency ratios from comparative balance sheet and income statements over time and cash flow budgets are essential .
� The more timeous , comprehensive and reliable the management information , the faster and more acccurate the analysis , diagnosis and implementation of proactive or affirmative measures will be .
� Senwes Credit ’ s Agri-economic Services has an E-Bureau service , the objective of which is to do such analyses for your farming operations and to monitor it on an annual basis .
� Do a strategic analysis ( SWOTanalysis ) and revise short-term goals and long-term goals where necessary .
� Proactive actions by making use of scenario planning will enable you to have a sensible discussion with the financiers of your farming operations . Problems can be identified and addressed collectively in this manner .
� Determine from the above analysis whether problems are of a short- or long-term nature , since it will require different actions and solutions .
CONSIDERATIONS TO RELIEVE SHORT-TERM PRESSURE Short-term financial problems ( usually a lack of liquidity / cash flow ) which are not the result of poor management ( unforeseen setback ), can easily be rectified :
� Obtain bridging finance .
� Negotiate temporary moratorium on payment of premiums .
� Sell unproductive farming assets - streamline balance sheet . Productive assets should make up approximately 75 % of total assets .
� Additional animal / grain sales - building a stud or storing grain in the silo during times of serious cash flow pressure seldom has the desired outcome .
� Application of financial reserves - liquidation of short-term investments , surrendering of policies and borrowing against endowment policies as a last resort .
� Negotiate extended payment plans for term debt and asset finance .
� Consolidation of accumulated shortterm debt , on condition that the farming business will , under normal circumstances , still be able to service consolidation payments . Where O / R hard core is consolidated , the limit should be decreased accordingly .
� Stock management – limit obsolete stock to a minimum . Discount on early payments must exceed the additional finance obtained in order to justify it . Make sure that traditional February tax purchases bring the required cash flow benefits .
� Make sure that finance terms align with the useful life of the asset .
� Effective management and recovery of debtors . Outstanding debtors of 60 days and more should be addressed as a matter of urgency .
Irrespective of the option ( s ) being considered , it is essential to test the desirability
( practical viability and feasibility ) thereof on the basis of a comprehensive 12 – 24
month cash flow budget . Senwes Agrieconomic Services can assist you in this regard . * In Part 2 in the next edition of Senwes Scenario we will be looking at possible options to consider which will have a longer term impact on the financial position and structure of the farming business .
For any enquiries please contact : Johan du Toit Manager Senwes Agricultural Economic Services 018 464 7543
50
SENWES SCENARIO | SPRING 2018