Financial planning for successful diversification

As changes in farming policy and increased costs continue to impact dramatically on the agricultural industry, many farmers are considering how they can diversify their income streams to support their businesses in the future.

At Virgin Money, we work closely with our farming customers to understand and support their plans, and it helps to engage with your bank manager as early as possible. As a lender, the bank is ideally placed to support you in developing your proposals to secure the funding you need, but your own preparation and planning is imperative. 

Diversification options 

There are so many options for farm diversification, but what works for one farm may not be suitable for yours. Research is critical, and so is professional advice, but the best starting point is to capture what you want to achieve. Desired outcomes may vary from:

• Cashflow to support the existing business
• Employment or a business interest for family or staff members
• Capital growth
• Better asset utilisation.

I always find it beneficial to consider more than one investment opportunity. This allows some relative strengths and weaknesses to be considered, but also how they measure up against the original objectives. 

Return on investment

This is often used to assess the relevant benefits and from a financial perspective can be a good measure, but something often forgotten when pursuing new enterprises is that other non-financial matters can be just as important:

• Can the existing business still run with your focus diverted elsewhere?
• What is the impact on staff, who often bear the burden of change?
• Do you have or can you access the necessary skills?
• How resilient do you consider yourself and do you have plans for unforeseen issues?

Professional advice

This should be taken as early as possible and from whatever source is available, such as accountants, solicitors, or land agents – and never forget to discuss with family.

Typically, lenders will be looking to satisfy themselves on the following key factors:  

• Have planning approval and permissions been secured? Lenders will require sight of these depending on the project size
• If you are looking at re-purposing or erecting a new building, has this been costed and competitively quoted?
• Is the project realistically funded to deliver a completed project within timescales, with adequate contingencies?
• Does the venture require licensing and if so, is it in place?
• What corporate structure will the venture take, e.g. a new limited company?

Business plan

A bank will also typically require a business plan but prepare this for yourself primarily.

A good business plan should provide confidence to you, family and lenders, identify areas to focus on and ensure risks are accounted for.

Assume the reader of your plan is not an expert. Create a clear summary page covering what you are planning, how much funding you require, and how you are going to pay it back.

Your plan should also cover issues such as:

• What makes the venture unique or different?
• What is the local competitive environment?
• Have you done any customer research – e.g. test trading, direct research, evidence of demand?
• How are you going to market your offering – e.g. social media and what platform, what content and why? 
• Do the numbers look too good to be true? If so, that’s how the lender may view them
• Spell out assumptions and research that underpins your numbers
• Have you budgeted for different scenarios – e.g. best, worst, most likely etc?
• Remember cash pays back loans, not profits. Does your plan spell out the cash cycle of your new venture?
• It is easy to under-estimate repair costs. Your venture has to be like new for every customer.

What the lender wants

Expect to be challenged on the numbers. You need to fully understand them, but lenders challenging your numbers is the best way to ensure they are robust.

The lender needs to have confidence that every aspect of your proposed investment stands up to scrutiny, so they’re looking for a business plan that shows them:

• A proposition that is well considered and well researched
• A balanced funding proposal, clearly defining your stake in the new venture
• Contingency plans B and C if the proposed business levels are not achieved
• The route to the repayment of their funding, and when.

Virgin Money has a long heritage of working with and supporting the farming industry and working closely with customers on any requirements, both short term and long term. 

We understand how important it is for any farming business to invest in the future, and we are fully committed to helping our farming customers turn their plans into success.

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