7 minute read
Is your business in good shape?
How well does your business treat you?
BY CHRIS PUCKRIDGE RURAL FINANCIAL COUNSELLOR, RURAL WEST WA
Vegetables WA recently chaired a webinar where Rural West was invited to discuss the key issues revolving around analysing the health of your business.
The complete webinar is available on the vegetablesWA Facebook page and in this article, we focus on one part of the webinar where we looked at the key issues of investigating the health of your business.
Every business is different, often there is no one rule that fits everyone, so business operators need to make their own investigations and seek their own information, but to put it in a broad picture we suggest that there are 8 key points that can help you identify if your business is in good shape or if it might need some work.
The eight points to consider if your business is healthy! 1 How well does the business present its financial information so you can understand it?
Most businesses at some stage complete a tax return and their accountant will often produce a booklet titled Financial Statements or similar. As the business operator what do you do with that information? Do you flick through it and then put in the drawer and not look at it again? If so, what has to change for it to be useful? Do you consider your balance sheet important? Does it allow you to investigate the differences between this year and last year in the expenses? Are you able to discuss the results with your accountant and focus on areas where the business can or needs to improve? Maybe your business is involved with a family trust or some other type of trust, do you really understand it? These reports are very powerful and if used correctly they can give you a lot of traction in your business and you can understand if you are really going forwards or backwards.
2 Does the business have financial benchmarks that are reviewed regularly?
Your financial statements produced by your accountant are a financial benchmark allowing you to compare your business performance from one year to the next.
These can help you to analyse the impact of costs and income on your equity position, this can be helpful when you are thinking about the future. This can help you to think about the potential to expand your business and if you can have the capacity to increase spending on plant and equipment or if you might need to tighten up on spending. The other benchmarks that are helpful are the external benchmarks where you can compare your performance to other producers. This benchmarking has been used successfully in broadacre cropping for many years and many broadacre farmers are able to see how their farm compares to others in their local environment and across the state. Vegetable growers are now able to take part in benchmarking through the Vegetables WA Industry Benchmarking Project and this not only gives individual producers the ability to compare their own business to others but also gives you the opportunity to use this information to support your business with financiers and banks who can now look at your business objectively and confirm your professional production and financial performance compared to other producers. This can help in many ways including refinancing or gaining a better arrangement with your current bank or other lender. If your lender can see that you are performing above the average that can help them justify a better interest rate on your debt or the scope to provide you with more funding. There are many possibilities that you can take advantage of by taking part in the Vegetables WA Benchmarking Project.
3 Is the business a profit maker or a profit taker?
It is helpful to look at the trend of financial performance in your business over the past five years. All businesses can have difficult circumstances and particularly in horticulture there are some specific risks that can impact on you, but if the business is loss making 60% (three years in the past five years you have recorded a loss) of the time it’s time to have a hard look. Perhaps it is time to discuss with your accountant or another trusted advisor. It often takes more hard work to make a loss than to make a profit!
4 Does the business meet its financial commitments without stressing you?
All growers have times when they reach peak debt and low cashflow but if your business is consistently under pressure with overdue accounts and perhaps phone calls from creditors chasing payments this can be a sign that your financial structure is not right. It is also very draining on you as the operator when you are having to make excuses about overdue payments and it can be expensive in that you may be paying penalty fees and extra interest rates. This is well worth investigating and there are several strategies that can help reduce this pressure on you and the business.
5 Does the business clear its overdraft at least once a year?
Overdrafts are generally higher priced debt facilities that were designed to manage short term debt, they are not meant to carry core debt. Many growers fall into the habit of leaving debt in the overdraft and as a result they are not only paying higher interest, but they are also reducing their ability to access cashflow when they need it. If you are not clearing your overdraft at least once a year there is the opportunity to do something to adjust your structure to address this.
6 Does the business keep up with ATO requirements?
If you are constantly battling to finalise your BAS each quarter and it is causing stress this can be a red flag that your business does not have the right supports in place. If you are in debt to the ATO and not making PAYG or employee superannuation payments on time this can lead to serious action from the ATO. This is another sign that the business is not healthy, and this can be addressed.
7 Does the business keep you awake at nights?
Are you losing sleep? Worrying about debts and how you are going to pay for critical inputs? This is a red flag. Worry and anxiety are draining emotions which can really impact on your health, your relationships, and your ability to make sound decisions. Many growers love the physical aspects of their work but struggle with the “bookwork”. There are strategies to reduce this stress and to support growers who want to reduce their time spent with accounts and invoices but running a business also means that you need to take responsibility for the financials and be involved.
8 How well does the business handle alternative views in making decisions?
All family businesses have stress points but its important to have a strategy to handle that stress. If your family has long arguments and find it difficult to come to agreement on various things this will be draining a lot of energy that could be used in a positive way. If your family are arguing and fighting it might be time to look at what you can do to minimise this. Successful businesses often have a mentor or perhaps a small team of trusted advisors who they can turn to when they have a problem. If you have paid advisors, are they relevant to the business today? Are your advisors delivering value? Are they increasing your efficiency and effectiveness to operate the business or are you using them to outsource decision making yourself? It pays to make sure you are getting the best outcomes possible from outside experience, but the business needs to be controlled by the owners who are the ones who live with the consequences of their decisions. Many family businesses have found ways to manage the differences between family members and harness the value of external experience, and when they do this well the business can often make a significant leap forward!
MORE INFORMATION
Rural West is the brand name of our organisation formerly known as The Rural Financial Counselling Service of WA. We are funded by the state and federal government and we assist businesses in rural and regional WA to build their strength and to manage difficult circumstances. We work with primary producers in farming, forestry and fishing and we work with small business in regional communities. Our services are free to eligible businesses. Our services are confidential, and we can visit you at your property or in your office. Please contact us on 1800 612 004.
