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Article:

Managing Farm Business Expenses in 2020

10 August 2020

With COVID-19 continuing to impact the global economy, New Zealand farmers face unprecedented challenges in both production and distribution. Below, the agribusiness team at BDO Kerikeri looks at the challenges faced by New Zealand farmers in 2020 and how to manage expenses to survive a challenging year.

 

2020 has been a difficult year for New Zealand farmers

Many farmers had already faced daunting challenges in 2020 before COVID-19 reached New Zealand shores. Dry conditions, which have endured since late 2019, resulted in significant declines of over 11% in beef and sheep cattle prices in the first quarter of 2020. These declining prices were felt by other meat manufacturers and dairy farmers as well.

Then, of course, COVID-19 piled on the pressure, stalling global supply chains, and shifting market demand away from exports and towards local supermarkets, who were inheriting heightened demand following the nationwide closure of food service businesses. Adding to these formidable challenges are ongoing struggles with kiwifruit bacterial disease and Mycoplasma Bovis.

 

Managing farm business expenses during recovery

Financial forecasting is uncommonly difficult for agribusiness, as the volume and quality of their product are heavily influenced by external factors that are difficult to predict. However, forecasting predictable factors and developing cash flow models based on historical data can both have a profound impact on a farm’s capacity to manage revenue. Managing expenses will be easier with an experienced agribusiness accountant, but the process typically works as follows:

 

1. Record and track farm business debts

Farms often rely on finance plans to invest in equipment that will improve yields. This means that farms typically operate with some level of debt.

A crucial element of accurate cash flow forecasting is minimising the element of surprise. An accurate accounting of all business debt will set a clear bar for revenue.

 

2. Leverage historically similar farming conditions

You may not have a crystal ball, but you can consult almanack data to inform your revenue forecasting estimates. Past years with comparable temperature and rainfall conditions can offer important insight. Your agribusiness consultant can often help you read these tea leaves.

 

3. Factor depreciation

Agribusiness equipment and machinery depreciate rapidly, as the industry continues to modernise rapidly, rendering obsolete equipment even a few years old. It’s important to regularly review the percentage of business assets wrapped up in machinery and equipment, conducting market research to determine depreciation, and the impact it will have had on your total asset value.

 

4. Account for reduced farmhouse deductibility

Since 2018, The New Zealand government updated tax law reducing the number of farmhouse expenses that can be deducted from your agribusiness taxes. Depending on whether you live in a Type 1 or Type 2, farmhouse, you will be allowed to write off less of your overall farmhouse costs, such as insurance and power.

Additionally, you can now deduct only half of your telephone rental charges, down from 100%, meaning that these expenses will now account for a larger portion of your overall farm expenses.

 

5. Prepare for unforeseen loss

Every farm business needs a rainy-day jar. With informed cash-flow forecasting, you can designate a specified percentage of projected revenue to account for unforeseen disasters. Speak with your agribusiness consultant to determine how much you can afford to set aside for this purpose.

 

Accounting experience your farm can rely on

Maximising profits and minimising loss are the cornerstone challenges of any business, but in the touch-and-go world of agriculture, these pursuits can feel less precise. BDO’s agribusiness advisors can help. Our business advisors have helped thousands of New Zealand farmers develop more successful strategies to improve and stabilise margins, respond productively to crises, and prepare effectively for future challenges. Contact BDO today to learn more.