Practical Cost Control Series – Finance Costs

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Sophie Cahill (FCG Midwest)

This is part of a series of articles featuring cost focus and control on our clients’ farms. At times of low commodities prices, cost control is, of course, a really important area and should be seen as a cultural way to approach farming, rather than reacting to low prices by trying to slash costs.

The cost of financing can often be forgotten about when looking at controlling costs on farm, despite the potential for this to have a significant effect on cashflow. Controlling finance costs can be essential in terms of maintaining cashflow, protecting working capital and supporting long-term investment.

Finance costs should be reviewed regularly, as you would any other expense. During periods of higher interest rates, even modest debt levels can place significant strain on profitability.

The main areas to consider:

  • Working Capital and Overdraft Management – Prepare monthly cash flow forecasts to enable you to pre-empt any future issues with working capital. The more notice and information you give your bank manager that you may need an extension to your overdraft limit, the better.
  • Overdraft Limits – Overdrafts are a valuable tool but can also be an expensive way to borrow money. If significant capital purchases and investments have been made using the overdraft, consider moving this debt to a term loan.
  • Interest Rates – Consider the interest rates you are paying on your loans, and whether these might be improved upon.
  • Loan Term – Are you trying to pay off your borrowing too quickly? This can place significant pressure on cash flow, sometimes unnecessarily.
  • Consolidating Borrowing – The more borrowing you have with one lender, the lower the interest rate is likely to be. If you have several historic loans with different lenders, consider whether you might obtain a better ‘deal’ if you were to move this all to one bank.
  • Loan Redemption Figures – It can be worth asking your lender for a loan redemption statement. Depending on the terms of the agreement, and who your lender is, there may even be a fixed rate break gain to be had. It never hurts to ask!

Don’t exclude finance costs when considering your potential to make business savings, they can be as negotiable as any other!

If you would like to review your finance costs, please contact Sophie Cahill at sophiecahill@fcgagric.com or your local FCG Office.

Midwest Consulting Limited is regulated by the Financial Conduct Authority and is a registered credit broker FRN793780. We are members of the NACFB.

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