...with thanks to my source of this wisdom, David Bolton (www.boltonpartners.co.uk), and our sponsor Challenger Tractors UK (part of AGCO).
“What does your business model look like?,” asks farm business consultant David Bolton. “It's a question that anyone seeking funding for a new business today is likely to be asked, and one worth asking yourself from time to time.”
Just for a moment, he suggests imagining that you were starting a farming business now, and what you might say in your Dragon's Den pitch: 'We spend lots of money on things to spread on the soil, which might not grow or could get washed down the ditch; or we spend lots of money on farm animals that might die. Then we do as much as humanly possible to prevent these things from happening and to encourage germination, healthy growth and fruition.
'As well as hard work, we keep our fingers crossed for a long time – up to a year with crops, perhaps longer with many livestock – before harvesting a crop or cashing in a meat animal or producing milk, which we may well sell for a spot price that wasn't fixed or perhaps even known at the time we bought the inputs.'
Convinced? Mr Bolton hopes so, because that's what your business owner(s) needs to be when they wake up every morning. “Of course, farmers reading this who are also the business owner or a shareholder/partner have a place on either side of Dragons' Den's gladiatorial arena,” he says. “On the one hand as farm manager, you want your dragons to retain their investment for another day/week/month/year, while you continue striving to generate a healthy return for them. On the other as one of those dragons yourself, you deserve reassurance that your hard-earned wealth is invested wisely and earning a healthy return.
“If over breakfast one day you decided your shares in Acme Biotech plc weren't earning their keep, you could instruct your broker to sell that very day. Even though liquidating your holding in a farm business can't quite be done with a single phone call, the principle holds good: Every morning, the owners of your business decide – albeit subconsciously and unintentionally – either to buy into it for another day or sell out.”
Assuming they decide to buy rather than sell each morning, Mr Bolton suggests considering why. Is it out of habit, obligation, apathy, indolence, or being trapped? Or is it down to commitment, conviction, philanthropy, personal drive or agrarian enthusiasm? In other words, are your owners (and you) hostages or investors?
Now would be a good time to identify this, he says, because many farming businesses including very successful ones face significant challenges over the next two to three years, which a well thought through business model can help overcome.
In the here and now for example, crop gross margins face ongoing pressure due to below average 2012 yields, poor or non-establishment of crops last autumn, slug damage, leaked soil nutrients, rising input costs, and soil structure problems. Mr Bolton believes this latter factor in particular will take more than one crop year to overcome. So despite current grain prices, he foresees the possibility of tight cash flow situations for many arable businesses and urges action now to predict these and line up additional working capital at a competitive cost for when it's needed.
“Even with a strong balance sheet, planning ahead can make the difference in borrowing cost between 2% over base and 29% APR from The Bank of Last Minute,” he suggests. “When doing your cash flow forecast, run it to at least the end of 2014 or even to harvest 2015, then discuss the situation now with your dragons and bank manager.”
