Support your long-term vision
Guide your business to financial sustainability and resilience with early end-of-financial-year planning
Words: James Anderson
The end of financial year (EOFY) is the time to reconcile the accounts, trim your business' sails and set course for next year. But if all that takes place at the end of the year, it's too late, says Stephen Hannan, General Manager of Agribusiness, Westpac.
June may not be too late to wrestle your accounts into shape, he adds, but it's almost certainly too late for the real purpose of settling your business' EOFY financial position: to make decisions that will guide your business into the future.
"People leave their EOFY accounts until the last minute, and in the rush they tend to make decisions they later realise they could have made differently," Hannan says. "That's what we hear when we sit around the kitchen table, doing reviews with customers. It's understandable. People are selling their last crop or preparing their next, and time just gets away. A review comes around, there's little discussion among the family about priorities and, all of a sudden, it's June-we haven't made the decisions we need to and it's a mad rush." But there's growing professionalism in the farming sector. Farmers are recognising that being a 'good farmer' is not enough; they have to run a good business, too.
To a bank, the signs that a farmer is running a good business are no different to any solid business in any sector. "They have the information to hand," Hannan says. "They have the data, they include people in decision-making and they sort out their advice early in the EOFY process."
A farm business that communicates well with its bank tends to also have good communication with its other relationships. In Hannan's experience, that bodes well for the business. Having an open dialogue with your bank demonstrates a willingness and ability to communicate well on thorny subjects, such as succession planning.
"An inclusive, collaborative approach builds resilience into the business and allows other members of the family or business to have input that might otherwise be lost. They are more confident about providing information," Hannan explains.
'Resilience' and 'sustainability' have become catchwords in discussions about farming, and while the terms are usually used in the environmental sense, Hannan thinks equal attention should be paid to financial sustainability and resilience.
"Given the seasonality of our industry, and given the uncontrollable nature of the weather and global markets, to have equity and resilience in your balance sheet is fundamental to having a business that can prosper and grow and take advantage of market opportunities," he says, adding, "I think paying tax is a good thing."
This is in reference to an old farming trope: that to pay tax is to 'give money away to the government'. To avoid this, farmers will borrow against profits until their balance sheets record a loss and they are no longer interesting to the taxation office.
Hannan thinks this tactic usually delivers a doubtful short-term benefit at the expense of long-term gain. "Dealing with profit has to be about investing in the long-term viability of the business," he says. "It's about setting up a structure that takes a longer-term view of sustainability and building a balance sheet that makes provision for that.
"It comes back to the enterprise having a strategy, such as investing in off-farm assets for retirement, succession planning or investing in other sources of income. If there isn't a strategy for off-farm income, there are Farm Management Deposits, where you can put money for 12 months, with tax advantages.
"It's about developing a longer-term strategy and executing it every time you draw up EOFY balance sheets."
If the strategy is clear, it's clear where any surplus should be put. That should shape your decision-making, not whether you're going to pay tax or not."
It's not complicated to put together a solid financial strategy, Hannan adds. Once the partners in the business know where their priorities lie, "it becomes all about having disciplines and plans in place to guide you when you sit down with your accounts and your advisers".
For advisers, including the bank, the quality of their advice depends on how clearly defined the enterprise's strategy is, and how clearly it is communicated. And it all starts with those EOFY accounts.