Profits can be thin on the ground in many family farms and businesses, particularly when times are tough. At any one time they depend on a number of factors.
The first aspect of profit is mental determination to make a profit. If you do not make a profit what is the point of running a family farm or business? Not only that. The alternative is making losses and they may well lose the farm or business in the long-run.
That involves spending less than what is received in income. Never think of it as earning more than you spend because you can control what you spend but you cannot control what you receive in revenue.
When money is borrowed, there is often insufficient attention paid to the cost of interest and charges. Bankers are brilliant at glossing over the cost of the loans they constantly promote as the solutions to all our problems. I am very conservative so I prefer a fixed interest loan, but that costs more initially than a variable interest rate loan. Trouble with a variable rate loan is that the rate can rise. I have had to sort out problems with loans on which the interest rate went to 24% and higher even.
Sometimes people think that they will make more money by borrowing. This has rarely been my experience, except where the loan is to buy a productive asset. Running a business on overdraft or borrowing money from a stock agent to trade cattle can be a very attractive path to bankruptcy or at least a serious battle with the bank. The bank will treat the borrower taking out a loan like a prince, but if that borrower becomes a defaulter they can be mercilessly pursued like a pauper for recovery of the debt.
Paying the family
Far too often a family will run a business or farm and not draw out any money as their profit or “wages”. The owners need to draw a reasonable salary, but that should never create a loss. If the children are working, they need to be paid properly too but the same applies to losses. Profits are the source of money to live on, expansion, improvements and loan repayments. Losses are dangerous, a road to ruin, as the enterprise may be lost to foreclosure.
If the family is not properly paid for the work done, it can cause serious disagreement when retirement or sale is contemplated. That is the “crunch” time for many families. Sometimes the disputes end up in court absorbing much of an inheritance in legal fees, along with family friendships. GBAC promotes Profit as a Priority, for sustainability, security and family.
Succession Planning Pays
Preparing for succession to the business or farm pays off and not only in terms of the assets and income stream, but also in terms of family relationships. At GBAC
we have seen brothers and sisters who will not speak to each other because of some perceived or real slight delivered by their parents in the division of family property. If you ever feel that this has been neglected in your case, call us and let us fix it. It is dynamite. The earlier a Succession Plan is developed the better. This can be modified as circumstances change over the years.
Succession also involves different values placed on assets, income and heritage. I had no problems selling the family cattle property that I had slaved 6 days a week on and off farm for 20 years, to pay it off. Others feel terrible to have broken with tradition. Whatever your views, it is wise to plan in a way that will not be undone when you die. If there is one thing I have learned about Succession Planning, it is that you cannot determine what will happen after you die. My grandfather decided that he would exclude my mother and me from control of the family company he and my late father had run together. He left his controlling shares to outsiders. I had different ideas after his death and so applied my time, money and effort for many years to take total control for my mother, sisters and self. Boy did I learn fast! Lucky I had topped Australia in my corporate law subject.
Fencing and machinery can be key farm profit-destroyers, as can fit-out and IT in a small business. I had three tractors on my 3,300 beef cattle property at the time I went to one of the “Grazing for Profit” courses Terry McCosker ran. He commented that on a purely grazing property “If you are crazy about machinery it is ok to have a wheelbarrow”. I sold the tractors when I returned from the course, which eliminated fuel and repairs. Then I stopped buying bulk fuel and bought it as needed from the pub or servo. Expenses plummeted and profits rose. I bought fencing when I needed it as opposed to buying in June to get tax deduction, used branches to prop up fallen fences and ran solar wires or tape in some places instead of new ring-lock, barb and plain. I did not lose any more stock than I had before.
When laying 2” poly pipe to pump water from a valley with a flowing creek to one where the creek ran dry I was given a very expensive option for burying about a kilometre of pipe, on the basis that the sun and weather would damage it otherwise. My wife and I opted to run it above ground ourselves and it lasted without trouble, protected by the feed that covered it in all but the driest times.
We all have different skills
Many neighbours knew more about raising cattle than I were kind enough to share their knowledge with me. My Chartered Accountancy with financial consulting to farms from Canberra to the Kimberleys in WA, stood me in good stead. This helped ensure, the farm pumped profits out, instead of absorbing cash like a sponge. The more we learn from others with different skills the better our annual profits will look. Just be happy to earn profits and pay taxes to help with roads, schools, hospitals and aged care. I had a senior partner in my young accounting days who promoted profits. He said, “No matter how much tax there is on each extra dollar, there will be some left for you.” Make Profits your Priority. Use a good accountant to ensure you only pay what is required under the Tax Act.