What is a Recession? Why are they inevitable?
Common thought is that recessions are usually caused by an unbalanced market. While we can’t always know when the next recession will come, or the long-term/short-term effect it may have, it’s a sure thing that another recession will eventuate in the economic cycle at some stage. It’s a case of not being ‘if’, but ‘when’ a recession may take hold.
Recessions are usually triggered by either:
- External issues: e.g. war, weather events, foreign economic events
- Internal issues: e.g. economic expansion and contraction in our economy
As business cycles have highs and lows of expansion and contraction, a recession will usually start at the top of the high as the market starts to slow down and contract. When two consecutive quarters of economic contraction are experienced, it is said to be a recession.
Our top three tips to recession proof your business include:
- Cashflow planning
- Business planning/Planning in advance
- Diversification
Managing your cashflow in recessionary times
When recession proofing your business, you need a clear picture of where you are and where you’re heading, this is where cashflow planning comes in. A cashflow forecast can help you to identify challenges that may occur in the future, opportunities for growth in your farm and is a must for at least the next 12 months. You should ask yourself questions like:
- Do I have any major repayments coming up such as repairs and maintenance?
- Do I have sufficient cashflow to meet my commitments?
- What’s your burn rate? (The amount you are spending each month to pay for overheads)
- Can I pay down any of my debt quicker?
- Should I diversify my income streams?
Some farmers believe that seasonal conditions are too variable to rely on cashflow planning, but this is exactly why they are important. Understanding what your best, worst and average cash outcome might be can put you in a powerful position, and creating one or several cash flow scenarios does not have to be a difficult task.
Utilise support from your accountant, a local Rural Financial Counsellor or other professional services to develop your cashflow plan. With the right tools and assistance this can be a quick and easy process giving you real insight into your finances.
Business planning/Planning in advance
Thinking beyond today, or the current season, allows you to stand back, look in at your business and make assessments of how and what your business looks like. This is where a business plan comes in.
Your business plan can help you prepare for ‘what if’s’ and support your business to be more resilient in tougher conditions or during natural disasters. You should create your business plan to meet the needs of your farm and what you are trying to achieve. It doesn’t have to be a large document, but it should be a living document that is monitored and fine-tuned regularly to ensure you are still meeting your business’s goals and objectives.
Typically, when developing a business plan your Rural Financial Counsellor will focus on the following key elements:
- Goals: SMART (Specific, measurable, achievable, relevant and time-based)
- Short to long term (five years out)
- SWOT analysis: Strengths, weaknesses, opportunities and threats
- How do we manage our weaknesses and threats?
- How do we maximise our opportunities and strengths?
- Critical success factors:
- What are the non-negotiables? For example:
a. Increase yields or productivity
b. Reduce debt
c. Lower input costs per tonne
d. Increase access to irrigation water
A good business plan will outline how achievements will be measured, and what success will mean for the business. Good business planning will then use that plan as the baseline to measure against. Are your products, and services right? How is the market response? How are the operations running? How are finances tracking?
Good business planning should also highlight what you need to work on and expose any outside forces you didn’t perceive when developing the business plan.
Diversification – Why do it and how it can help your business?
As the world’s population continues to grow and environmental challenges loom, it has become increasingly important for farmers to adapt and innovate. Diversification in farming refers to the practice of growing multiple crops, raising different livestock, or incorporating various agricultural activities on a single farm.
Diversification can bring many benefits to your farm business including:
- Reduced risk: Diversification in farming is risk mitigation. By spreading the production across various crops or livestock, farmers reduce their vulnerability to market fluctuations, pests, diseases and adverse weather conditions.
- Enhanced soil health: By diversifying crops, farmers can improve soil health and fertility by reducing the depletion of specific nutrients. Crop rotation, for instance, helps break pest cycles and replenish the soil.
- Increased resilience: Having a variety of crops and farming activities can help you cope with temperature fluctuations, droughts, and increased rain variability.
- multiple income streams. You may sell a variety of products, participate in farmer’s markets, or offer ecotourism experiences.
While diversification offers numerous benefits, it is not a one-size-fits all solution and success depends on factors like location, climate and the farmer’s knowledge and resources. Utilise support from your agronomist, accountant, or your Rural Financial Counsellor.
Start today
The most important aspect of recession proofing your business is not to wait until crisis hits, start planning now. If you need help with the process, call 1800 319 458 to talk to one of our qualified Rural Financial Counsellors today.
