Best practice process ensures fairness across workforce

IN RECENT months I have written about the connection between debt, interest rates and good management.

Often the line between the three gets blurred, especially when official interest rate cuts don't get passed on fully to borrowers and the media focus on bank profits.

The events of the past couple of weeks and the ongoing interest from politicians in relation to rural debt suggests it is a good time to think about the role of debt, capital management and profits in the management of any business.

Even the best plans can come unstuck and this can be particularly traumatic if debt restructuring is required.

Business growth is usually funded from retained earnings (residual cash flow or prior profits) or debt (a claim against future earnings).

Depending on the business structure, shareholders might also be asked to fund future business opportunities through capital raising, or approve the sale of an asset to "free up" capital.

Something well known to farmers and central to the financial health of any business is assets are used to generate income and create wealth, while debt (liabilities) remains within the bounds of the business's capacity to pay.

Since 1996 QFF has been a principle player with the Queensland Farm Finance Strategy (QFFS), a voluntary instrument that promotes best practice in debt management, underpinned with good business plans and open two-way communication between the parties.

However, even the best plans can come unstuck and this can be particularly traumatic if debt restructuring is required, and all the more reason why Queensland needs the discipline of this best practice process to ensure a fair playing field for bankers and farmers alike.

This is a message QFF shared with Treasurer Wayne Swan who has scheduled a banking roundtable in Brisbane last week.

Rural businesses operate in a somewhat unique environment and Australian banks generally manage the cash flow and capital requirements of that quite well.

There are times when there may even be "market failure" in the sense the bank's requirements seem to leave the farmer with too little flexibility.

This underscores the important role of third party advisors.

In previous cycles of rural property downturns governments have recognised their limited capacity to intervene because partial intervention tends to create unwanted distortions.

Topics:  business farm finance interest rates joanne grainger

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