In the business of farming, risk is a constant and whether you know it or not, you are making risk calculations and employing risk management strategies all the time on your farm.

Some risks are more significant or front of mind than others, like the weather, but there are many different types of risks faced by farmers that are not often considered, like succession planning.

It’s important to remember that risk is something you can manage. In fact, formalising your on-farm risk appraisal and risk management processes can be very beneficial. 

What is risk?

The simplest way to define risk is uncertainty of outcome. The risks in your business are any areas where the outcome is unknown. People get caught up thinking that risk is negative but in fact it is a neutral factor that can have either negative or positive outcomes for your business.

Just as every farm is unique, the risks and possible effects on business will vary from one farm to another. There are some risk areas that are common across most farming businesses:

• Production/yield risk –the risk that yield might be lower than expected due to extreme weather events/change (including drought, frost, too much rain), weeds, pests or disease, or machinery and equipment failure.
• Personal and operational risk – injury, sickness and changed family relationships (think death, divorce and disability), as well as disruptions to operations caused by human error when handling machinery or working on the farm.
• Price/market risk – the possibility that you may lose the market for your product, or the price you expect to receive is not met and sales are impeded. Lower sales and prices due to increased competition or changing consumer preferences are common sources of this risk.  
• Financial/legal risk – financial risks include not having enough cash to meet obligations and legal risks include failure to fulfil agreements or contracts. This may be brought about by production and market risks or by increased input costs, higher interest rates, changing exchange rates, excessive borrowing, or higher cash demands to meet family needs.
• Succession planning – the risk associated with succession. It may be that you don’t have a succession plan, you haven’t planned ahead and are trying to rush one through before you retire, the plan is disputed by family members, or that it is simply insufficient in terms of securing the future of the farming business.

What is the risk in having unchecked risk?

Obviously, when we’re facing the unknown, the ideal outcome is a favourable one for your business. It follows that a significant part of good business management should be devoted to maximising your chances for positive outcomes while minimising the chances (and the effects of) negative outcomes.

When it comes to dealing with risks in farming, the absolute worst thing you can do is nothing. When risks are left unchecked or unmanaged, in addition to the inherent outcome, it can also cause a lot of stress and additional work and expense dealing with the fallout.

However, effectively managing risks is an excellent way to bring structure and discipline to your business and help to reduce the pressure you’re under. Facing the risk head-on by trying to understand what’s ahead and planning for the outcome you want is the smartest way to manage risk. In short, better risk managers make better farm managers.

How do you manage risk in farming?

Good risk managers make decisions quickly and decisively. Ask questions, seek information and look at the whole picture. As far as possible emotion is set aside.

Farm managers accustomed to managing risk make calculations and clear decisions. You need to identify areas of uncertainty of outcomes, then you need to calculate the chance of incidence by the degree of consequence. Next you need to ask yourself, ‘which way do I want to be wrong?’ and you’ll soon know what you should do.

For those new to risk management thinking, it is helpful to break it down even further into these five key steps to develop a Risk Management Plan:

1. Identify your sources of risk

This involves an honest assessment of your farm and business processes, challenging your default or traditional thinking (i.e. looking beyond doing things simply because that’s the way it’s always been done), neutralising risk (stop thinking of risk as negative, or avoiding it altogether), and arming yourself with information. Ask questions, seek expert advice and be ready to pay for it – it’s an investment that will pay dividends in the long run.

2. Measure the likelihood of that risk occurring

How likely is it that this thing will happen? Thinking of a scale from very unlikely to very likely can help.

3. Estimate the effect on your business 

In the event of that risk occurring This may be in terms of profit and/or asset value over time.

4. Create a risk score and rate the risks

Risk score = Likelihood of occurring (chance of incidence) x Effect on your business (degree of consequence).

5. Determine the strategies you can adopt to manage your risks.

This is where you formalise your thinking in writing. Best written when you’re not facing any major decisions or under stress, your plan documents the various risks you’re likely to encounter and maps out the actions you will take at what point in time for the type of consequence you’re willing to accept.

Strategies may include income diversification; crop, livestock, or credit insurance; marketing plans; negotiating or developing new production or sales contracts.

Start today

While you won’t be able to eliminate all the risks in your business, it is important that you spend the time assessing them and developing some realistic strategies. The aim is to manage those risks with the potential for greatest impact on your business and on your ability to reach your business goals.

You have to get on the front foot with risk management and you have to think objectively. Don’t rely on instinct, feelings or traditions; scrutinise your farm decisions and justify your actions according to considered business objectives and goals. Don’t wait until crisis hits. Do it now.

If you’re looking for specific advice in managing risks on your farm, it’s always a good idea to talk to your own team of experts, including your accountant, financial planner and agronomist/agribusiness advisor.

If you need help developing your risk management plan, call 1800 319 458 to book a free, confidential appointment with one of our qualified Rural Financial Counsellors.

Why do a cash flow budget?

Understanding what your best, worst and average cash outcome might be can place you in a powerful position. Creating one or several cash flow scenarios does not have to be a difficult task. With the right tools and assistance this can be a quick and easy process, giving you real insight into your financial future.

Cash flow budgeting helps you to understand the financial impact of your on-farm decisions. This improves decision making day-to-day, season-to-season and increases the likelihood of each decision being a profitable one.

Being uncertain about your financial future and how you are going to meet your financial obligations can be stressful and seriously impact your emotional, mental and physical health if left unchecked. A cash flow budget is a great way to better understand how far your money might take you in the short, medium and long term.

These days, having an up-to-date cash flow budget is necessary if you want to access new finance or tick off your annual bank review. There is a good reason for this; a cash flow budget helps you and your bank manager to work out how much money you might need in the future, how you are going to service your debt and meet your financial obligations going forward.

What is cash flow budgeting?

A cash flow budget is a way of monitoring all cash coming into (+) and leaving (-) your business. It consists of the following:

+ Cash coming into the business from operations (e.g. sales, income)

+ Cash from capital assets sales  (e.g. machinery sales)

+ Non-farm cash received if used to pay farm expenses (e.g. off-farm wages)

+ Cash in from financing activities (eg. new loan proceeds)

- Cash outflow from operations (e.g. cropping, livestock and overhead costs)

- Cash used to purchase capital assets (e.g. machinery & livestock)

- Cash out from financing activities (e.g. farm loan interest and principal repayments)

- Non-farm cash expenses including personal/family expenses

The result is your net cash flow. Your net cash flow needs to break even or show a surplus to ensure you can meet your financial obligations.

How is a cash flow budget different to your profit and loss budget?

It is common to be confused between a cash flow statement or budget and a profit and loss statement because they can be quite similar.

The two key differences are:

1. A cash flow statement or budget does not include movements in non-cash items such as depreciation and inventory, but a profit and loss will.
2. The cash flow statement or budget will record the cash leaving the business to purchase new capital assets, and cash coming into the business from new loan proceeds. The profit and loss will not.

What tools and assistance can help me get started?

When setting up a cash flow budget, creating something quick and easy that suits your circumstances often depends on the tools you use and assistance you get.

Microsoft Excel can be cheap to install and easy to use (with the right training). This is a great tool if you want a flexible template and you have the time to invest in training and setting up a template with your farm data. However, it is easy to make formula errors if you don’t have the right skills and training.

If you are not confident with Excel, farm management software often has a wide range of options and reports available, and it can be easy to use with less training and no formula errors. The downside is it may be more expensive to install and maintain.

If you are not confident with either of these options and you are time poor, another option is getting external assistance. Rural Financial Counsellors are skilled in cash flow budgeting and can assist with regular budget updates.

It’s all too easy to put cash flow budgeting in the ‘too hard basket,’ but setting up and regularly updating a cash flow budget is a great way to make your life easier. As a farming business owner, your risk of being unable to pay your bills when they fall due and ending up in financial hardship will be reduced.

Contact your local Rural Financial Counsellor or call RFCS NSW on 1800 319 458 to find out how we can help your business take advantage of the benefits of cashflow budgeting.

Scott comes from a background in farming wheat and sheep in the central wheatbelt of Western Australia near Kellerberrin. After completing an Agriculture Business degree, he spent twelve years as a project manager with the Kondinin Group with extensive agriculture research. During this time Scott moved to Wagga Wagga NSW to gain a different perspective on rural life. It was in Wagga where Scott met and married a local and they now have two adult daughters. 

Scott has a diverse range of experience in agriculture, including ag training, machinery, sales and support and industry superannuation with qualifications in teaching and financial planning.  

Most recently Scott was a general financial counsellor for Anglicare in Wagga and the Northern Territory, where he also studied a Diploma of Financial Counselling.

Scott looks forward to bringing his skills and knowledge to farmers to strengthen their farming businesses.

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As Christmas and the summer holidays approach, many farming families get together, making it the perfect time to start discussions about succession planning. We’ve all heard the stories of farm businesses falling apart due to poor planning, communication between family members can be tense, putting a strain on relationships  but it doesn’t have to be this way.

Succession planning is the process of transitioning the farm business and assets from one generation to the next, aiming to meet the needs of all family members. It involves balancing the older generation's desire for security and purpose with the younger generation's aspirations and the future viability of the business.

Why Start Now? The holidays provide a chance to bring the family together and initiate open conversations about the farm's future. However, many families struggle with these discussions due to communication breakdowns or emotional conflicts. By starting early and seeking professional help, families can prevent future disputes and ensure that the plan works for everyone.

The Role of Professionals in Succession Planning: While it may seem overwhelming, there is support available. Rural Financial Counsellors can facilitate discussions and help families understand the process. They can also guide families in selecting other experts, such as legal, tax, and financial professionals, to assist with more specialised aspects of succession planning.

An experienced facilitator can help navigate the emotional and practical challenges of the process, ensuring that everyone’s voice is heard. Their role is to create a safe space for dialogue, helping family members tackle difficult topics and find common ground.

Key Steps in Succession Planning:

1. Start early: Begin the discussion sooner rather than later, particularly before any tension builds.
2. Define your vision: Consider your retirement plans, the future of the farm business and other assets.
3. Document your ideas: Documenting your ideas helps clarify your thoughts and provides a foundation for discussion.
4. Encourage open communication: Encourage an environment of open and respectful communication within the family.
5. Review and update regularly: Succession planning is an ongoing process. Review and update your plan as circumstances change.
6. Seek expert advice: A professional facilitator can manage complex family dynamics and ensure the conversation remains respectful. Legal, financial, tax, and estate planning professionals will help structure the plan and ensure it’s legally sound.
7. Implement the plan: Begin to implement it gradually, starting with delegating responsibilities and transferring ownership.

Challenges to Consider: The increasing value of agricultural land can complicate succession planning, especially when family members wish to take different paths. This can make it difficult for one sibling to "buy out" another. By discussing these issues early and realistically, families can identify solutions before conflicts arise.

As you gather with family this holiday season, take the first step towards creating a succession plan. It may not be an easy conversation, but with the right support, it can lead to a smoother transition and a harmonious future for everyone involved.

RFCS NSW is here to help with free, confidential financial counselling and support in the NSW Southern and Central regions. To speak to your local Rural Financial Counsellor and access the services of RFCS NSW  call 1800 319 458.