Berrys’ Partner and Business Consultant, William Tongue, gives his view on how to prepare for the end of the Basic Payment Scheme
A client emailed recently, explained he was worrying about the future and asked, ‘Can I survive without BPS?’
Formulating an answer covers a lot of considerations. In this case, the business was a mixed enterprise with diversified income streams, a detailed forward budget of profit, capital movements and cashflow was available to analyse as a basis for the discussion.
Firstly, it is important to understand current viability. If the budget shows a positive normalised cashflow balance (profit plus depreciation minus regular loan repayments, capex and drawings), it is a good start. Understanding what drives the positive cashflow, the different income streams, the level of risk associated with each income stream and the stability of the cost structure comes next. For the business in question, a mixture of arable cropping, contracting, commercial and residential rents made a good balance. The cost structure had been stable for several years and benchmarked well, rented land was on a long-term arrangement, the overdraft was purely working capital and the debts were on long term arrangements with good serviceability ratios and a proportion of fixed interest rates – lots of ticks. However, it is common for businesses to fail at this stage – fundamentally negative cashflow, unrealistic expectations of the number of families a business can support, high machinery costs, overly optimistic debt repayment profiles and unreliable land occupation arrangements being all too common.
Having passed the first hurdle thoughts turned to the future. The reduction in BPS income is easy to apply to the budget, the extent to which Environmental Land Management (ELM) will provide any kind of net income replacement remains pure guesswork. For larger scale land managers or collaboratively minded smaller farmers new income streams from private environmental contracts for carbon sequestration or biodiversity net gain may well come before ELM, but will come to the more proactive and market orientated businesses first. UK Agriculture has some challenges here – whilst some individuals do an excellent PR job on social media the general issue is all sorts of ingrained inertia in the system – high capital barriers to entry, older generations hanging on for tax advantages, low returns on capital, thin profitability giving rise to risk aversion etc etc.
Alongside the economic opportunities and threats it is also vital to understand the proprietors. From a purely economic viewpoint, many farmers could be financially better off by selling the bulk of their owned land, putting the capital into other asset classes and continuing to make what they can from diversified income sources. However, this might be the wrong outcome for so many individuals who would lose their identity as farmers and struggle with the prospect of retirement.
However, there has be a happy medium – farmers in their 50’s and 60’s with no successors need to think hard about whether they want to hang on and work towards being a tired 70/80 year old or step back while they have health to enjoy their capital. Consciously making the decision to postpone a decision is acceptable as a strategy, provided it is a process of active and regular review rather than firmly planting one’s head in the sand. Such a review must also consider the wishes and ambitions of all involved – spouses, successors and partners are all vital components to a successful business. Sadly, death can be outside an individual’s control, but the other D’s that devastate businesses, namely debt and divorce, can often be traced to a cause. Not acting to restructure a loss-making business or ignoring family pressures are prime examples.
Having finished this process of contemplating the navel with my client, we decided the business had every prospect of survival, and carrying on for the time being met with all of his personal and business objectives within acceptable boundaries of risk. It is likely we will repeat the conversation on a regular basis, but structured around a good understanding of the business’s finances, the proprietors wishes and the assets on the farm, the discussion can be meaningful and valuable – so much so the client was even happy for me to send him an invoice for the consultancy, he realised just how valuable it could be to have an independent sounding board to lean on!
Berrys is a practice of forward-thinking chartered surveyors, town planners and business consultants, offering all property-related services under one roof.
With six offices across the UK and a strong reputation both locally and regionally of providing high quality professional advice, the team at Berrys has a clear understanding of the challenges that clients face and finds solutions that maximise the potential of your land, property and business.
To discuss, please contact William Tongue, Partner and Business Consultant at Berrys on 07866 693899 email william.tongue@berrys.uk.com.
