Finance with Don Fraser Fraser Farm Finance

I want to talk about the difference between capital and disposable income – in other words, looking after your money (capital) and spending the cash.

An aging client recently called me to say she wished to sell her commercial buildings, which had been netting her about $40,000 for many years. That, on top of her pension, would make a single 70-plus woman quite well off.

On further discussion it became apparent her accountant is suggesting she should sell and spend the money, the capital that is.

With an eight per cent capitalisation rate, the building is probably worth say $500,000. That $500,000 divided by $40,000 spending per annum equals 12-and-a-bit years. Based on this calculation, at age 82-and-a-bit, she's out of money.

Would she not be better to hold the buildings, even if she had to pay a property manager, because the $40,000 per annum would continue on?

The same applies to the sale of land – all land – whether it goes to offshore purchasers or other New Zealand farmers. You sell the property and the income flow ceases.

You have a sum of capital or cash in the bank, but you have no cashflow – and, because you don't understand money, you start spending the cash.

Nest egg
A house in town, a world trip, a bit for each child and a new car you have always wanted, and suddenly the fat nest egg is looking like a few straws in the bottom of the nesting box.

The thrust of this argument or story is we must identify the difference between capital and cashflow. Capital is what you invest to create cashflow. Cashflow should really only be spent to try and protect your capital for future cashflow.

I then pondered on who is, and who should be, advising people on how to manage their assets and capital versus cashflow.

We have all these new regulations in place, but the fact remains many advisors – some accountants and solicitors included – aren't working towards protecting capital assets for cashflow for their clients.

The Institute of Directors is lifting its game, trying to get higher standards and registration in place for its members to give the public more qualified support.

It therefore seems to me there needs to be a profession who act as trustees and professional advisors to assist the public to hold and manage assets to provide cashflow for their clients – and don't take the soft option of cashing up and putting the money in the bank, where it will depreciate and allow clients to spend capital too.

Confused
My concern is many people, including farmers, are great at managing their businesses but as soon as the asset is sold they become confused with all the cash in the bank and how to manage it.

It seems to me there is a lack of understanding and professional support around the necessity to protect as much capital as possible, for production of disposable income for their future.

These are the opinions of Don Fraser of Fraser Farm Finance.

Any decisions made should not be based on this article alone and appropriate professional assistance should be sought. Don Fraser is the principal of Fraser Farm Finance, and a consultant to the farming industry.

Contact him on 0800 777 675 or 021 777 675.