All too often agreements are being set up or budgets drawn up, that are not being tested in a realistic manner. The optimistic view is generally the one taken and stress testing is not being carried out adequately.

When banks look at a proposal they often ask for it to be run at up to 6% interest charges to see how well the proposition can withstand change. This does not mean that the actual banking deals will be struck at this rate, rather it is stress testing the business. If a new proposition cannot be repaid within ten to fifteen years, then maybe we should be asking, ought we to be doing this at all?! This effectively implies an interest rate of 6.7% up to 10%.

Realism must be the mantra for the future when planning and it is essential that a sensitivity analysis is carried out to show the impacts of upward or downward movement of various aspects of a budget (which a business is probably more vulnerable to than interest rates). This will highlight two things in particular:

a) What the impact of, say, a 1 ppl movement in milk price will mean or, say, a 7.5% rise in feed costs.

b) It will clearly highlight which aspects of your business carry the greatest risks.

This in turn allows you to concentrate on and plan to mitigate the priority risks that affect you most. As a generalisation, simple businesses with clear guidelines on how the system operates will be the most robust and least risky.

For help and guidance with assessing and managing risk in your business please contact Ian at ianbrowne@fcgagric.com or your local FCG office.