This year, fingers crossed, the season is looking reasonably positive across many areas, particularly through the southern mixed farming belt. For many producers, however, the next month or so will be important.
With talk around El Niño and the potential for warmer and drier conditions through spring, the question is how quickly the season could turn following a relatively mild winter.
In some areas, people are saying they’re only a couple of well-timed rains away from a strong finish. If conditions allow, some producers and growers may choose to put additional weight on livestock, hold off on sales such as wool to manage the timing of income, or store grain on farm post-harvest.
Decisions like these can create higher working capital requirements, over and above what may have originally been budgeted.
Before you increase the spend, understand the return
The first question shouldn’t necessarily be how do I access more money? It should be is spending the additional money going to generate an appropriate return?
Take livestock as an example. Holding animals for longer may deliver additional weight and potentially greater sale proceeds, but there is also the cost of feed, along with the market and seasonal risk associated with carrying those animals for longer.
Before committing additional capital, work through the numbers. What is the potential upside? What will the additional funding cost? How much margin is there if commodity prices move? And what happens if the season turns?
It’s ultimately a risk and reward decision, and understanding both sides of that equation is important before increasing expenditure.
If you need more working capital, don’t leave it too late
Once you’ve established that the opportunity stacks up commercially, the next consideration is how you fund it. If your existing overdraft or working capital facility isn’t going to be enough, start the conversation early.
A few things to consider:
- Allow more time than you think you’ll need. Don’t wait until you’re approaching your existing limit before speaking with your lender or finance adviser.
- Ask for enough. Look beyond the immediate expense and forecast your cash position through harvest, livestock sales or the point at which the facility is expected to reduce. If there is uncertainty, building in some buffer may be more practical than having to return for another increase several weeks later.
- Have your numbers ready. An updated cashflow, current trading position and a clear explanation of why the additional funding is required can make the conversation much easier.
- Know how the additional debt comes back out. A short-term increase should have a clear purpose and an expected repayment pathway, whether that’s grain sales, livestock proceeds, wool income or another known cash inflow
Working capital should give your business the flexibility to take advantage of an opportunity, rather than becoming a constraint when you need it most.
If you’re looking at the remainder of the season and think your existing facilities may not comfortably carry the additional spend, now is the time to start the conversation.
