When interest rates rise or fall there are always winners and losers. Just like grain prices or variability of seasons, nothing much stays the same and it’s being able to ride out these changes and, even take advantage of them, that provides the opportunity to prosper. Whatever happens, there are always consequences.
Ever since the late 1980’s when interest rates were in the high teens (some of us remember those horrid times), rates have gradually fallen to reach the current official cash rate of 2.5%. Our Reserve Bank Governor, Glenn Stevens, alluded last week to the possibility of reducing rates further in a bid to lower the value of our currency.
The most obvious consequences of lower interest rates are:
Savers get punished
Borrowers generally benefit
We attract less foreign capital
Exporters benefit because of lower exchange rates
Importers are less competitive because of lower exchange rates
Investors are subtly ‘forced’ to invest in higher risk assets
It’s likely that market excesses and financial bubbles are created because of cheap money
I have read a number of articles recently that all point to most countries looking at ways to make their exports more attractive by lowering their currency exchange rates. We are in global economy where we are all now so interdependent on each other. So, if a country forces their interest rates and/or currency down, this changes the game for everyone.
A good example of such consequences is Holden and Toyota who are planning to cease manufacturing here. They are struggling to compete. I read recently that an Australian made Toyota Camry is around $3,600 more expensive to manufacture than in other countries! One of my concerns is the complacency and attitude to debt – especially with those who haven’t experienced the impact of high interest rates.
Not only is this a major problem with people in general, but local, state and Federal Governments are currently seeking approval to raise debt limits. This is a sad state of affairs. Personally I feel that we have experienced at least a generation of the best of economic times and sadly our overall debt has increased because money is cheap.
As I mentioned in the first paragraph, nothing stays the same and there are always consequences. We are definitely heading into new economic and social territory. Being prepared for change and how you can benefit is the essence of what planning is all about.
We’ll be in Wudinna in the 3rd week of December 2013 and be pleased to meet you.
Those of us who run our own business tend to think we have a pretty good handle on what we do. When you think about it, besides ‘doing the job’, there are a lot of other unseen functions within the business that need to be done during the year to ensure that you’ll still be trading again next year. For example, budgeting, invoicing, paying bills, salaries and completing BAS statements, just to name a few.
One other very important thing on the list is book work and seeing the accountant. It is not uncommon for us to see most small businesses completing their business financials and tax returns long after the financial year has finished. Many people believe this is because it’s only to find out how much tax they have to pay. In other words, if they didn’t have to pay tax – they wouldn’t bother getting it done.
Although there is often a large focus placed on tax, the main purpose of preparing financial statements is to have accurate and up to date information on the business so that important decisions can be made. A profit and loss statement and balance sheet can provide vital information on the health of a business. If these statements are prepared long after the financial year has ended, what value do they have? Very little, really. It’s like trying to drive a car using only the rear-vision mirror. What has happened in the past is nice but it is merely historical and has little bearing on what will happen in the future. A classic scenario is tax planning. You can’t minimise tax if you don’t know what it might be – and you certainly can’t minimise it after 30 June has passed. Bank managers and insurers love it when their clients can quickly provide recent and accurate financials, as it assists them in assessing loans and underwriting policies. A good example I have witnessed involved a farm purchasing more land at short notice. Having up-to-date information made this process easier for everyone involved.
We find our business clients get the best results when they work closely with their accountant to ensure financials are kept up-to-date on an ongoing basis. Quite often, this means handing over all or part of the book work and lodgement of BAS statements. This can be a little daunting for some people at first – especially those who are very hands-on, but they soon realise how much time they save.
Technology is moving ahead rapidly, with clever solutions that can track bank transactions (saving manual entries) and web-based software that allows accountants and clients to view the same screen simultaneously. This means that minor queries can be sorted out over the phone as they occur. In many cases, these efficiencies actually reduce accounting costs.
You don’t necessarily need to have a finance or accounting degree to understand business financials – you just need to know that they are important!
In my 20 plus years in the financial services industry I have noted that very few small family operated businesses have a truly effective succession plan in place that provides direction and security for all concerned. This important aspect is often avoided or dismissed as not being important or something that can always be addressed when the time is right. There is never a right time. For are a host of reasons people put off transitioning their business to the next generation. For some, it’s not knowing where to start or how to go about implementing a succession plan. For others it’s about being able to let go and know that the next generation is capable of running the business successfully. Whatever the reasons, the result of inaction is a disaster and has the ability to hamper the viability of the business by creating dissent amongst family members which can often lead to a break up of the business. This is especially so if an estate has not been carefully considered. The ultimate failure is where an estate is contested.
The starting point in developing a transitioning plan for a business is to learn and develop a good understanding of the family’s situation as well as the things that are important to each person. It’s important to have this out in the open as it forms the basis of a succession plan. After all, the aim of a succession plan is to consider all peoples’ objectives and then create a structured plan so that everyone knows where they stand and what each expects of each other. The ideal outcome of this exercise is that each family member achieves their objectives.
Because the mix of family and business can breed a cocktail of emotion, having someone independent of the situation can usually produce more effective results. This is where our knowledge and experience can add value because we are able to ‘ask the hard questions’ and open the lines of communication. Family members tend to be more open (and honest) if there is someone independent involved.
Estate plans don’t need to necessarily take effect when parents die. In fact, it can be very beneficial to provide for off farm family members while parents are alive. This is called giving with ‘a warm hand’ and I have witnessed tremendous satisfaction from both the giver and receiver.
Being fair to all beneficiaries is not always an easy task especially where a farming business is involved. Land is an asset that is often intended to be passed onto the next generation and this is where problems and misunderstandings begin between family members.
As an agreement is developed, a good practise is for the outcomes to be documented. Eventually this might also mean updating Wills and investment beneficiary nominations including insurance and superannuation accounts.
Bob Budreika is a specialist financial adviser and an Authorised Representative of Gold Financial Pty Ltd ABN 50 113 653 946, AFS Licensee 291389.
Working with farmers has taught me a lot about the complexities of what goes into running a successful operation. The process needs to be carefully managed throughout the year to give the best chance of growing a good crop, only to rely on the weather and grain prices to ensure it translates to a financial success.
In the middle of August, Bob and I were given the opportunity to present at the EPIC Grain Industry Expo (View our presentation) at four different locations across the Eyre Peninsula, one of which being Wudinna. For us, our message was simply talking about the advantages of purchasing farm land within superannuation by comparing it to traditional finance methods that most people are familiar with. The other speakers were representing the various different grain marketing firms that farmers can choose to sell to. Each speaker was given 15 minutes on a particular topic of interest, with a panel style Q&A session with all presenters at the end.
Our role in providing financial advice with farming families tends not to include grain marketing. Needless to say, we were quite overwhelmed with the all of the options producers have when it comes to who and how much tonnage to sell to. We have seen first-hand the stress and anxiety it causes with each text message that comes through to notify that a certain company is now offering a different price on the same quality of grain.
“Should we sell at that price? How much should we sell? What do you think?”
By the end of the week, we had heard many presentations on cash products, index selling and everyone’s favourite – pools. It seems like most growers are becoming disillusioned by the promise of pools delivering a certain return, only to be disappointed when this doesn’t eventuate. As the pool managers said themselves – always make sure you know who the managers are (as individuals) and what their mandates say. This way, you can work out whether their strategy fits in with your overall business model. In any case it is no surprise that most growers are avoiding pools and selling to cash.
Our general advice to clients is to know your cost of production per tonne. This way you’ll know what price you need to aim for in order to break even or make a particular profit margin. This is regardless of which method you use to sell your grain. We are seeing more and more farmers becoming savvy in this area and adopting a professional approach to running their businesses.
The outlook we took away from the presentations were that grain prices may soften towards the end of this year, as the world’s supply remains strong for now. But as we all know, you need to get there first!
Written by Daneil Budeika
Published in the Wudinna Granite
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