Just as the routine clinical herd testing performed by vets to address preventive or reproductive issues, the farmer’s financial planning should be reviewed on a regular basis by an expert who will adopt a holistic approach, taking into account every aspect. The current status of financial planning is to be reviewed and measured against the objectives of the owner, making adjustments where necessary.
Questions to be addressed
The plethora of financial planning related information that is available in the media and on the internet tends to confuse the consumer, making it difficult to understand and identify the most valuable and appropriate solutions for specific circumstances.
Therefore, a logical framework is a useful tool to determine the financial planning needs covering the various aspects of your life and business. These can be categorised as:
- Factors that impact your business.
- Factors that determine your lifestyle.
- How assets can be built outside of the farm operation in order to protect you lifestyle.
- Factors that determine your legacy.
- Farming or business assets
Questions to be asked here in terms of protection against business risks are, for example:
- What type of business entity is used for the farm operation and what are the planning implications?
- Has provision been made for loss or damage of assets, crops and potential liability?
- Do you have business assurance for key employees and to fund a buyback of shares or a stake in the business?
- What employee benefits are offered?
- Are the current arrangements still the most effective and appropriate solutions?
Consider the options to protect your and your family’s lifestyle. First determine current lifestyle costs and the costs of housing, vehicles, education, holidays and sundries, and whether these are sustainable.
- What kind of risk protection is in place to protect property against damage and theft?
- Have you set up a plan that makes provision for essential lifestyle adjustments following severe illness or injury suffered by a member of the family?
Or when the farmer or his wife is unable to continue farming or performing the day-to-day tasks due to disability?
- Investment assets (protecting your lifestyle)
Building assets outside of the farm operation is not only a sound diversification strategy, but also essential to protect your lifestyle.
- What are the asset requirements (independent of the farm business) to be able to maintain your lifestyle?
- Which asset classes are the most appropriate to invest in and what investment strategies should be followed, considering your risk profile?
- What if the owner dies without having accumulated enough assets? Will the family be able to maintain their lifestyle?
- Do you have sufficient diversification beyond the local economy?
The survival of the family business is at stake and various aspects require thorough consideration.
- Are the core values on which all decisions are based well established in the successor/s? These values should serve as the benchmark for the decision-making process, as they constitute one of the main reasons for the continued existence and prosperity of businesses through successive generations.
- Does succession planning form part of the long-term business plan and are the family members aware of the plan?
- Has/Have the successor/s been identified early? Is a contingency plan in place should something happen to the successor/s or if the original plan cannot be realised?
- Are successors being acquainted with banks, clients, suppliers, etc?
- Is there a timeline for the current owner to step down and the successor/s to take over?
- Does the financial planning documentation give effect to the plan? (Review the will, trust deed/s and agreements to ensure alignment with the objectives.)
A simple test
Call everyone together, breaking the news that (hypothetically) you were in a fatal car accident. Ask them to describe what will happen next. See how long you can refrain from starting to direct or nudge someone in the right direction. How the discussion evolves is a good indication of the thoroughness of your planning. Using this framework and asking the right questions will assist you in identifying potential gaps and appropriate corrective actions to address these. An accredited financial adviser can play a very valuable role in this process.
Barbeque or boardroom?
Time is always an important factor in the farm operation, but set time aside to review the financial plan, giving it the priority attention it deserves. Neglect may have a severe impact and has led to the demise of many farming businesses in the past.
Unfortunately, well-meant advice at the braai is not a substitute for professional financial advice. An accredited financial adviser is authorised to provide financial advice based on a thorough analysis of the farmer’s unique circumstances, ideally performed in close cooperation with the farmer’s accountant or auditor.
At best, farming is a risky business involving a lot of variables the farmer cannot control. However, a well-designed financial plan is within everyone’s reach, to assist in ensuring security for the business, the farmer and his family, as well as their future. – Koos Nel, Old Mutual