Mark Smeaton, Partner and Head of EQ Agriculture at EQ Accountants, talks about the importance of preparing a budget to sustain a profitable business for farmers.
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With the 2022 harvest nearing completion, farmers can finally catch a breath after a demanding and eventful summer. Now is the time to get back into the farm office and focus on the money end of the business as no doubt field operations have taken priority for the last few months.
One area which is critical to the farming cash flow cycle is the farm budget. In simple terms it is a list of all anticipated income and expenses for the year ahead, broken down into monthly payments. You should also take into account cash items which do not necessarily affect the bottom line such as machinery purchases, bank loan payments and hire purchase commitments as well as partners’ drawings. This will also give you the opportunity to decide if the business can support any future capital purchases.
The thought of preparing a farm budget can be a daunting prospect with questions regularly asked surrounding their usefulness. The volatile nature of crop prices and energy costs can severely impact on how the figures look. However, without undertaking this initial exercise there is no real way of knowing if you will stay on the right side of the overdraft limit.
A profitable business is not always a cash rich business and the need for future bank assistance should be flagged up at the earliest opportunity. Your bank manager will not take kindly to a last minute phone call.
Like all businesses, farmers should take the opportunity to review current debt facilities with their bank, consider existing debt structures and any potential benefits of locking into fixed rates. This will also give some certainty for future budgeting purposes.
Planning your budget and reviewing your financial position is a vital part in all businesses. Within the agricultural industry this is even more critical when it may take over 12 months to generate cash from the initial outlay. A little time in the farm office will go a long way.
