Cash is King for Many Types of Rural & Agricultural Mortgages
In any business, cash is king but it is more so in a business where stock takes longer to turn into sales such as in farming. Farm and Country Finance often sees cases where banks have been willing to let an overdraft become core borrowing which should never happen. We can arrange farm finance to replace these. Farm and Country Finance are experts in arranging agricultural mortgages.
The main point is that cash is needed to pay for things that will include your new agricultural mortgage and so an additional injection of cash through an agricultural mortgage might be appropriate.
By cash, Farm and Country Finance is not talking about notes and coins but the conversion of that sale into money, which may be in cash but more likely to be a credit to the bank. We accountants refer to this as cash flow or working capital management.
Working capital is sometimes referred to as circulating capital. In simple form, STOCK is purchased from TRADE CREDITORS, then sold to DEBTORS on credit, which then pay you, so that you can pay your TRADE CREDITORS (and VAT) and the cycle begins again, with the resultant surplus or profit swelling the coffers.
Managing this process is all about keeping things moving because if it doesn’t, money will not end up in the bank at the right time to keep the machine running. Profit is not profit until it is realised.
In farming, the process is a little longer winded. Typically, stock would be purchased and retained for a period in order to ‘add value’ to it or for use in breeding, which ‘adds value’ through offspring. This lengthier process would require funds to bridge the gap between purchases, sales and eventual money in the bank. In short, there is a need for money, at the front end, but once the cash is in the bank, no facility or a limited facility is required – the typical overdraft scenario. This type of borrowing needs greater hands on management and annual reviews; greater care must be taken to avoid the creeping overdraft that becomes core borrowing. That is where part of the overdraft does not move downwards at all. Remember, these facilities can be, and often are, called in by banks. As stated earlier, Farm and Country Finance can arrange agricultural mortgages to replace this type of lend and raise extra to put that all needed cash into the bank.
Specifically then, these tips relate to any business enterprise: –
DEBTORS – a sale is not a sale till the money is in the bank. If you sell and do not get paid, you may as well have had your goods or services stolen.
These are your customers and you don’t want to upset them by asking them to pay you on time do you? Well no you don’t but then CASH IS KING and you need that money to pay your staff and your bills and maybe a little to yourself. “But if I hassle my customers they might not want to do business with me and I need the business.” Of course, we all need the business, but a contract is a contract. Your customers do not do business with you because you offer soft credit terms (and if they are, it’s for the wrong reason), they do business with you because you offer an excellent product (or service) at an acceptable price. If you have kept your side of the bargain, then your customer should expect to stick to theirs. Check out whether your customer can pay you before you open an account (there are many agencies that do this – type credit references as a search string on the internet). Ideally, take references from two other trade creditors with whom they deal and don’t be afraid to ask for payments on delivery or upfront and if so do not deliver if the money is not there. If you take a risk on the first order, do not deliver any more until the first order is paid for, whatever the sob story.
This may not be possible in all cases, but try to have written terms and conditions of sale and agree these before an account is opened but at the very least they should be on the back of your invoices and definitely on order confirmations. Remember that your terms and conditions should recite that your firm’s conditions are paramount, as this will help to avoid someone putting in a purchase order with their own terms and conditions on them.
Farm and Country Finance realises that this might be difficult for one man and his dog, where time is taken up in other ways, but in all cases you should know or get to know your customer, be prepared to hassle (in a nice way) to be paid – make sure invoices are promptly sent, get signatures for deliveries and send monthly account statements which you can annotate with such remarks as ‘THIS ACCOUNT IS OVERDUE AND YOUR PROMPT PAYMENT IS REQUIRED’. Be prepared to suspend deliveries, no matter how big a bully your customer thinks he is.
So be firm, be fair, be persistent and work on the premise that CASH IS KING and as if the very survival of your business depends on it – IT DOES.
Analyse your customers – there may be ones who nail you down on price and go over credit terms all the time, that is they want to have your excellence at a cut price and to boot let you be their bankers. Make amends, immediately. In terms of the cash coming in take care with those who start to make smaller round sum payments or pay the smaller invoices and not the bigger ones.
Think about the prospect of allowing some discount for early settlement and charging interest on late payments, though clearly stating in your terms and conditions that this is without prejudice to your rights to enforce the contract. You may have a statutory right to charge interest on late payments – see www.gov.uk/late-commercial-payments-interest-debt-recovery
If you’ve tried the nice, the lunch, the cajoling and endured all the usual nonsense and excuses and the cheque in the post has been regularly intercepted then send a seven day letter to say that if payment is not received within that time, proceedings will be issued and if ignored go for it. The key here is to ensure that if your customer has cash flow problems, your account is made one of the priorities otherwise, make no mistake, you will go to the bottom of the in tray. And when you have gone into legal process do not shy away. You will often hear the sort of excuse that if you take action you will get nothing. Do not be put off – this is YOUR money.
Remember that you are to your suppliers what your customers are to you. Stick to your agreements with them, which will strengthen your relationship with them. Pay only on proof that goods have been delivered or services provided. Take advantage of any discounts available for prompt payment. If you have a dispute try not to retain all the money because money makes your suppliers’ world go round as well. If the work is 60% okay, why hold 100% of the money? Act with integrity. Now might also a good time to negotiate price reductions but with fairness. If you are managing your debtors properly, you should be able to pay your suppliers on time and your credit rating will go up. Accordingly, your suppliers will help you when you need them most, which may be to help you supply a customer order. What goes around comes around – treat your suppliers with fairness and they will be on tap to help you. Remember that Farm and Country Finance can arrange all types of agricultural mortgages.
Stock and its timing are critical – you need to be able to supply on demand but not have the stuff in the bin too long. If it’s in the bin too long, you run the risk of it becoming obsolete and you may have paid the supplier for it before you can sell it. So, look at your stock lines carefully. Ideally, stock reorders should be made to ensure that it comes in when the last item is about to be despatched to a customer (the just in time concept). But remember that you may want to adjust this to ensure sufficient stock for emergencies and warranty claims. Look at demand – if you only sell three widgets a year then why carry them, but remember the concept of complimentary sales where you would not sell to a customer if you did not carry the widgets. E.g. if you don’t sell knives you are not likely to sell forks and if you sell knives you may sell these discounted, if you can sell forks at a higher price; it’s all about balance.
Each year, your accountant will be looking for slow moving and obsolete stock items, the value of which will be written down or even written off in full. Remember that you’ve already taken the pain for this, in a prior year, so any cash sale now might be to the bottom line. Look at these items and see if they can be offloaded, at a bargain price and turned into the KING. Again, negotiate your prices for replacement stock items in what is currently a keen market.
If you are in farming, do you need all that feed? Buying in double bulk to get discount is okay provided you use it in the right time. If the interest cost on the stock outweighs the discount, there is no point. Have you properly costed your end product to ensure it is making a profit; can you hedge against movement in commodity prices? Remember that it is sometimes better to have the cash now than to get a better price later. It may be half grown and half price but is the difference, in a potential but uncertain price, worth the wait and the marginal cost of fattening stock further. CASH IS KING.
YOUR BANK MANAGER AND YOUR OVERDRAFT
Love or hate him you may have to row in with him for the moment. He may be right out of the textbook banking school but he is ‘managing’ your account. He will be under pressure himself and so what he won’t want are nasty surprises, so try not to be the problem. FORECAST then FORECAST again. Remember that budget you prepared last year – it may need to be adjusted. It is critical to forecast your cash needs. This way you can keep your man informed, because the key is communication. Remember that if your overdraft is not on its way down, when sales start materialising, you may have core borrowing and having long term finance by this means is not the best way. Farm and Country Finance arranges agricultural mortgages.Think about your options and take advice early if you think your overdraft is creeping, because if you don’t, your bank may start making the decisions for you. Have more than one bank account and not with the same bank. Were the bank to get the jitters and call in your account, paying cheques into that will simply swallow them up against your debt without your being able to draw on them. The result will mean you cannot pay anybody when you need to. Having a slush fund elsewhere will allow critical payments to be made whilst you are making alternative arrangements. When re-negotiating facilities with banks, be wary of offering them more security.
YOUR EGGS NEED TO BE IN MORE THAN ONE BASKET
Avoid too much reliance on one supplier – he may go bust.
Avoid too much reliance on one customer – he may go bust and take you with him. Got your mortgage with the bank and your business loans and overdraft? It’s as if your bank manager can see in 3D. Think about different lenders for different parts of your requirements. It may save you interest as well.
DO YOU NEED ANYTHING?
If you’ve agreed the price with a supplier, be fair and pay them what is agreed on the nail. Remember though, that if your purchase needs to be financed this should be taken into account in your cash needs forecast. Be wary of all expenditure, in terms of its affect on your cash needs.
The market wants you to buy and we are all deluged by information about this or that opportunity, bargain, or must have essential. Have none of it but make an exception in considering cases where an investment now may make long-term and continuing cost savings such as in operational efficiency – cost control is a better term than cost cutting. Excessive cuts in staff, for example, may result in substantially higher recruitment costs later when the market turns. Remember, as a farmer, you may have a mixture of land and buildings and it may be possible to split these to attract better deals from different lenders.
YOUR BALANCE SHEET
You may have heard about the banks using the taxpayer’s money to repair their balance sheets. A basic review of your balance sheet is not a bad idea. In particular, where assets are financed, does the life of the finance basically measure up to the life of the asset? As a basic premise, cars and vehicles should be on three to four year (some more for certain vehicles like trucks and trailers) agreements, machinery and tractors, three to ten and land and buildings over anything from ten or more years. The key is that your balance sheet will look more solvent where many of your debt obligations appear in creditors due AFTER more than twelve months. We are back to the overdraft again, but if some of this had been used to pay for land, for example, the land would appear as a fixed asset in your balance sheet but, because the overdraft appears in debts due within twelve months, it might be detrimental to the apparent strength of the business. Farm and Country Finance arranges agricultural mortgages. What readers of accounts will be looking for is a hearty balance of net current assets or circulating capital because this is a better measure of a business’s ability to meet its obligations as they fall due. Interpretation by these readers may affect the way people, who you may want to do business with, look at your business. Think also about revaluation reserves. If your land and buildings are in the balance sheet at the cost when you bought them, then as time goes by you may raise extra cash on these by way of a re-mortgage. Make sure the asset values are correct by ensuring that the assets are in at fair value and by creating a revaluation reserve. This will improve net worth considerably and add strength to your balance sheet. By the way, you can’t do this arbitrarily, as the assets will need to be professionally valued. The only caveat to this is that if you recognise greater value in your balance sheet, your creditors will see there is some meat on the bone. This may be advantageous in some ways but not so in others – your accountant will be able to advise you.
And lastly, if you can see the muck about to hit the fan don’t bury the head – take advice quickly and take it early and talk to your creditors.
If you need any kind of agricultural mortgage, Farm and Country Finance are here to help.
Be careful out there but bear in mind one thought – CASH IS KING.