Budgeting and cashflow forecasting puts farm businesses on the front foot

A properly constructed budget which is monitored throughout the year puts a farm business on the front foot when assessing opportunities and threats.

Andrew Fundell, partner and agricultural business consultant at Brown&Co, says a budget is a tool for demonstrating expenditure and income over a period of time, usually 12 months.

It gives farmers greater control over decision-making and helps to inform potential system changes or improvements.

Put simply, a budget is a plan, normally for the next financial year.

To be of value, it must be detailed, to include cropping areas and detailed livestock numbers.  That information will feed into gross margins.

Other income streams should be included - money generated by diversification enterprises, environmental stewardship or contracting work for instance.

The budget will take account of capital and private expenditure and loan repayments, including hire purchase commitments and lease liabilities, and include detailed analysis of fixed costs to help farmers identify where money is being spent.

This data is then referenced to the cashflow with the net farm income calculation / profit and loss and, importantly, the source and application of funds - where the money is coming from and where it is going to.

Banks may insist on a budget when they are approached for a new loan or extension in overdraft facility, often one verified by an independent professional.

“If you are looking to increase your facility or take on some additional core borrowing, a budget is essential not just for the bank but for you,’’ Andrew advises in the latest in a series of Brown&Co podcasts.

“Banks have a responsibility as lenders to lend to a business that can afford to repay that debt, a budget should be able to demonstrate that.’’

Cashflow forecasting is also an important business tool, one that anticipates a business’s peak cash needs.

“If you are operating in an overdraft facility, cashflow is something you will need to agree with your lender, it will also help you with your buying and selling strategy in order that you can operate within that agreed facility,’’ says Andrew.

“It will help you deal with problems before they arise, but importantly a cashflow enables well informed, real-time decision making.’’

Brown&Co has a robust track record on helping clients prepare budgets.

Andrew says its consultants are sometimes challenged on the value of the process when it is tricky to accurately predict the next 12 months - the performance of the world economy or grain and livestock prices for example.

Admittedly, there will be some unforeseen circumstances, such as the extreme weather conditions and changes in the world economy that have characterised the last three years, but, as Andrew points out: “Reviewing historic financial data, setting realistic targets on yields and prices, and constantly reviewing the budget will put a business in a strong position to counter any changes.

“It may be that you do need to adapt your plan but without a budget you don’t know where you are.’’

Key take-home points on budgeting

• A budget should act as a guide to help a farm business make strategic decisions throughout the year
• Take time to go into the details required in a budget
• Review the budget throughout the year and monitor actual figures against it
• Seek professional help to draw up a detailed budget, especially so if it is your first time producing one

For more information on budgeting and cashflow, please contact your local Brown&Co office.

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