The concept of equity in a farming context is well understood, and most agribusiness owners could knock up an approximate calculation of their equity on the back of an envelope pretty quickly.

Equity is one thing, having a business that is performing on a profit basis is another thing entirely.

Erosion of equity is pervasive and can slowly rear its head over a period of years, if not measured regularly.

During times of rapid growth in property prices such as we’ve experienced in rural areas in more recent years, can mask a more insidious issue; that being inadequate profitability.

Sustained losses will invariably overtime start to erode the equity of an agricultural business.

As we know, there are many uncontrollables in farming and there will be years where losses are incurred.

The trick is to have a business model that reduces the risk of this event happening.

Benchmarking is one way to track the crucial key performance indicators within any business, and this is certainly true for a farming business.

Sometimes enterprise benchmarking can reveal some uncomfortable truths, and knowledge is power, so and the sooner a potential issue is identified the better.

Banks also take a keen interest in equity within an agricultural business, but an even bigger interest in the businesses ability to service its loans.

Legislatively they are required to have this focus, particularly, post the Banking Royal Commission.

For those agribusiness owners that lament the days of balance sheet lending will be waiting for quite some time – if ever – for those days to return.

Second tier banks have more flexibility, but the vast majority of debt in agriculture is held with the big banks, as they commonly offer the cheapest money.

Growing equity is a positive and allows flexibility for any agribusiness in this situation. It’s important to have a plan of how best to utilise this increase in net worth effectively.

Some farming businesses are quite content to just let their equity slowly build over time. There is absolutely nothing wrong with this approach and shows there is a long-term plan in place.

Other agribusinesses may choose to leverage their balance sheet with further debt when the opportunity presents itself.

Invariably, these operations will be profitable and are on top of their numbers and have a sustainable business model; banks love dealing with these types of customers.

My non-farming connections sometimes say – why don’t farmers just sell up and take the millions and run?

While it does happen sometimes, it’s certainly not the norm and most farming business are multi-generational and in it for the long haul.

Having an increasing equity position is ultimately positive, but it’s only one piece of the puzzle and it’s crucial that this number is put in context along with other key performance metrics.

Knowing ‘all’ your numbers is paramount.