Why I left a fulfilling job in a major rural bank as a Senior Relationship Manager to start a rural accountancy firm with Xero and Figured:
The business environment started getting harder and I noticed farmers began asking for help:
“I need someone independent from the bank who can:”
“help me do some planning”
“help to sort my business out”
“help me with my succession”
“help me automate this compliance, give me my life back!”
“help me deal with the bank, they ‘own’ 60% of my business”
It became clear there was a need out there for someone to help. The common theme of these requests for help was for “proactive” and “future focussed” services i.e. Business Development.
Helping farmers succeed is why I get out of bed in the morning.
My vision is that all the different components of a farmers business systems are integrated and automated as much as they can be - to reduce the number of hours completing mundane low value tasks like data entry and working out payroll so farmers can spend more time on high value activities like - business planning, spending time with family and getting on their mountain bike -> get your life back to do what you want to do. The industry is not there yet, but is heading there fast.
I teamed up with Xero accountants James Swaney and Dave Jessep from Sidekick Timaru mid-2018, and Sidekick Rural was born. Since then we’ve been quite been busy growing, and I’d like to thank all of our new clients. We’ve had Richie McCaw and Terry Murdoch from Christchurch Helicopters come and talk to our business community about high performance teams. We’ve hired two more accountants, Chloe Lea and Manish Rawat. One of Canterbury’s most experienced and respected rural accountants, Trevor Croy has joined Sidekick Rural as a consultant. We’ve teamed up with Xero www.xero.com , Figured www.figured.com and Smartpayroll www.smartpayroll.co.nz to bring cloud financial software to South and Mid Canterbury farmers. We’ve engaged with Banks and other specialist rural professionals to bring a collaborative team approach to our clients. We are now looking for another specialist rural Client Service Administrator to help us with onboarding clients onto these products.
Increasing compliance is a major challenge facing the rural sector. This includes, Financial, Tax Environmental, Employment, Animal Welfare, Bio-security to name a few.
Let's take a closer look at financial compliance for your Bank.
We’ve seen overseas investment cut off, increasing banking regulation, Mycoplasma Bovis, public scrutiny over environmental issues affect the rural property market impacting on Bank’s security margins. Banks are now looking across the Tasman to see if the Royal Commission in Australia is coming our way. The Reserve Bank of NZ has also announced this week that they will be looking to increase the amount of capital Banks have to hold against loans in NZ. Historically, this means an increase in interest rate margin.
Two things affect the level of financial compliance required by your bank.
The Level debt you have
Typically as a minimum, if you have over $500,000 of debt you will be required to provide your financial accounts to the Bank within 6mths of your balance date… check your loan agreement.
The more debt you have, typically the more frequent and detailed reporting is required.
The Strength/Weakness of your credit rating.
The amount of capital the bank has to hold against your rural loan increases exponentially, the weaker your credit rating becomes. If Banks are being forced to hold more capital by the reserve Bank, these higher risk loans become of particular interest to as underperforming loans with a low Return on Equity i.e. expect an increase in interest rate margin.
What makes up my Credit Rating?
The Credit Rating algorithm is made up of two main components:
Credit Score - “The Risk of Default by the Farmer,” made up of:
Account conduct: - Trading within agreed facility limits. Breaching your overdraft limit unannounced gets picked up automatically by the algorithm can change your credit score very quickly. This means its important to be aware of your cash position and I’ve found banks are very accommodating when you give them some notice with a plan.
Viability: Historical and forecast. Industry norms expect a farming business to have the ability on ‘hypothetically repay their debt over 20yrs,’ sensitised at long term interest rates and product prices.
Equity: What you own less what you owe including family debt. As a rule of thumb, equity of >50% is considered robust in NZ agriculture to withstand fluctuations in land and product prices. Of course there is variation between industries and operators. A strong balance sheet also means the Bank can be more patient if viability needs improving.
2. Loan to Value Ratio LVR - “the Risk of Loss of Bank Capital”
a. Amount of Bank Debt / Value of secured Assets x 100.
b. Typical Bank LVR maximums are 60-65% for rural debt and rural assets.
c. A reduction in land values can put farmer with no change in debt levels outside this Bank parameter. This is why some conversations with your banker can change when you might think your business hasn’t.
d. The bank apportions value on e.g. Land and buildings, Livestock & Plant, dairy company shares, cash etc. Some industries like pigs, goats and chickens may ‘restricted’ and nominal values placed on assets or LVR maximums reduced to say 50%.
e. Farming Businesses typically have multiple legal entities. The trading might be in partnership and the land held in a Trust. Individually, these can rate quite poorly as the partnership makes all the money but has no equity and the Trust has lots of equity/security, but makes no money. Banks like to consolidate related farming entities to assess a ‘single risk.’ This improves the credit rating, reduces the cost of capital. This is done by cross collatorised guarantees. If this is the case, it is important to report to the Bank in the form that they are assessing your business… so you are talking the same language.
Come and talk to us at Sidekick Rural to help you understand your credit rating and what you can do to improve it. This will help determine not only your access to capital, but the cost of it.
Disruption in the Accountancy Industry
A recent Westpac paper provided bold insights into the accountancy industry:*
They note: Technology will be the key driver of change.
It will also eliminate the role of accountants in all aspects of traditional accounting work.
Advances in machine learning / artificial intelligence and process robotics automation will mean that even the reduced level of tasks that accounting services providers currently undertake because of the adoption of cloud based accounting software, will disappear.
Software, easily accessible, cost effective and payable on a subscription basis, will effectively replace accountants that deliver traditional accounting services. Furthermore, this situation could happen sooner rather than later...
“The accountant, for so long simply a numbers person, is now becoming a people person...”
...with a broader range of softer relationship skills to complement already well developed technical and ethical competencies and problem solving abilities. Being entrepreneurial, having a strong business acumen and being able to think strategically are additional sought after competencies. As a result, accounting services firms are increasingly hiring people from disciplines other than accounting.
*Source - Westpac Industry Insight - Accounting Services - September 2018