Testing the downside and taking it to the bank

A budget shows what happens if things go to plan. A downside test shows what happens if they don't. Do it before you commit, not after.

How to test the downside

Change one thing at a time, then a few together:

• Price. Drop the sale price. A fall of 10% to 20% is a fair test for livestock.
• Costs. Lift the biggest cost, often feed. In a dry year, feed can cost far more than the budget.
• Production. Cut the lambing, calving or weaning rate, or the number of pigs sold.
• Time. Slow the build-up. Approvals run late, and stock take time to settle.

Look at what each change does to the gross margin, the peak funding and the payback year. Then ask one honest question. If it only works when everything goes right, it doesn't work yet.

A bad result doesn't always mean no. It might mean a smaller start, a different mix or more cash in reserve before you begin.

Taking it to the bank

Talk to the bank early, with your numbers in hand. business.gov.au says lenders usually want to see your business plan before they approve a loan. You may also need to provide financial reports and forecasts.

For a new enterprise, a good pack has:

1. A short plan: what you'll do, why, and who will do the work.
2. The enterprise budget, with every assumption written down.
3. The build-up cashflow, showing peak funding and the payback year.
4. The whole-farm cashflow, with and without the new enterprise.
5. The downside test, and what you'd do if it happened.
6. Approvals: what you have, what you've applied for and what's still to come.
7. What you are asking for: how much, what for and which kind of facility.

Showing the downside test can feel risky. In our experience it does the opposite. It shows the bank you have thought it through, and it starts a better talk about how to set up the loan.

Your go or no-go

Work through the go or no-go checklist. Each box you can't tick is a risk to sort out first. Our bank ratios page shows the numbers a credit team works out from your plan.

This course is general information, not credit advice, and the bank makes its own decision. If you'd like help building the budget and cashflow from your own figures, that's our Adding an enterprise service.