As a business owner, I am committed to the principle that focusing on doing ordinary tasks exceptionally well can have a profound financial impact on our business. Despite my tendency towards a more relaxed approach to management, I recognise the critical importance of maintaining a disciplined approach to this aspect of financial management.
In our experience, the single most crucial part of successful financial management is the development and continuous monitoring of a comprehensive cash flow forecast.
By collaborating with members of our financial team every month, we can achieve the clarity, certainty, and confidence necessary to make informed decisions that drive the success of our business.
While financial management may not be the most exciting aspect of running a business, it is the key to enabling us to pursue what truly inspires us. By dedicating just 60 minutes each month to this critical task, we can ensure the continued growth and prosperity of our farm businesses.
If you are feeling a little lost now, stay with me - I can make this very easy for you and can guarantee it will give you the peace of mind you are seeking to run your business well. You’ll finally get that good night’s sleep that’s eluded you for so long.
Step 1: Create a cash flow budget
Building a cashflow budget model is just like baking a cake; you need to know all the ingredients and how to assemble them. The recipe for business success is very simple: spend less than you make. The recipe looks something like this:
- Grain and livestock income
- Less grain and livestock inputs cost
- = Gross margin
- Less overhead costs
- Less financing costs
- = Net profit
- Less tax
- = Surplus (after-tax profit)
So why do you need to do a cashflow budget?
The reality of your business is that there are many small calculations and assumptions behind each of these numbers. Plus, all the income and expenses enter and leave your bank account at different times of the year. The expenses usually leave your bank account many months before you receive income—a lot like using your rainwater all Summer and replenishing it in the Winter.
Managing your farm business cash is like managing your water over the Summer.
- You need to know how much water you need to last the Summer. Is your tank big enough to last the Summer before the next rain? (Income In).
- If you have not collected and stored enough water over the wet months (cash surplus). Do you need to borrow some water to see you through? (Debt).
- What time of the year are your water reserves predicted to be at their lowest? (Peak debt). How would you check the status of your predicted water surplus as the Summer went on?
The role of a cashflow budget model is to calculate all these numbers for you (based on your assumptions) and then allow you to add timing to these numbers so you know when the income is planned to enter and leave your bank account.
There is usually a big gap between when you purchase, use, and pay for something or deliver a commodity and get paid for a commodity. For example:
- You may order your fertiliser in January, take delivery for it in April and pay for it in May.
- You may contract your grain in August, deliver it in December and get paid for it in January.
A good cash flow forecast/budget can help answer
- When will money enter and leave my bank account?
- When will I run out of cash and need to borrow money to see me through?
- When will my peak cash debt be?
- How much will I need to borrow?
What do you need to know to build an accurate, reliable model of your future cash flow?
- Total hectares to be cropped, e.g. 2000 ha
- Planned hectares to be planted to each breed and variety, e.g. wheat (mace) or barley (bass) 1000 ha
- Inputs for each variety
- Seed variety kg/ha, $/kg, quantity on hand
- Fertiliser(s) rate/ha, $/tonne (or/litre)
- Herbicide, fungicide, insecticide(s) rate/ha, $/litre/gram
- Operational costs ($/tonne or $/ha)
- Seeding
- Spraying
- Spreading
- Cartage
- Harvesting
Budgeting for operational cost
Using a contractor is a direct operational cash flow cost (same as other inputs). If you use your labour and machinery, you can add it as a non-cash-flow cost. The reason for doing this is to accurately calculate a gross margin for the Enterprise and ensure your plan is profitable.
How much does your machinery cost/ha?
- Add up all the costs you incur on a piece of machinery
- Principal and interest repayments
- Insurance
- Repairs and maintenance
- Fuel and oil
- Divide that annual cost by the typical number of hours this machine works/per year
- = Machine $/hr
- Add labour to operate the machine per hour
- = Total cost/hr
Information required for forecasting/budgeting for income
- Target yield (grain/ha, wool/hd, lambs %, weight gain/hd,
- Target price
- Retained tonnes
- Seed
- Feed
- Sales plan
- How (cash, contract, pool)
- How many tonnes in what months?
- Timing
The result
1. Enterprise cash flow projections to add to your whole farm budget.
2. Gross margin analysis of your Enterprise.
3. A model that you can use to change your key assumptions to run multiple scenarios before you commit to a production plan, e.g. yield, price, and input costs.
This allows you to optimise the cash flow in and out of your business and lower the capital required and the cost of capital to optimise cash surpluses.
You now have a 24-month rolling budget. Done!
Step 2: Review and adjust the budget within 60 minutes each month
Monthly compare your budget to actuals. What’s red (off forecast) and green (on or above forecast)?
- Green means keep going.
- Red means STOP, LOOK and FIX.
- What actions must you take to turn your red numbers into green ones?
- What can you do to leverage the greens?
- Tighten up the ‘cone of uncertainty’ (represents the difference between the predicted and actual outcomes for a project).
- Quickly review the next 13 months and fix any apparent changes.
- Review the next three months ahead in detail and tighten up your forecast based on new information.
- Forecast for the 13th and 25th months (this is the month you have just ended next year), as this is when you will have the most clarity on these future months.
Hope is NOT a strategy
Don’t kid yourself: hope is not a strategy; it’s a delusion that will send you broke.
Conducting regular monthly reviews, even in the face of unfavourable results, is imperative in ensuring informed decision-making. This is because the farm business environment and climate are always in a state of flux, making the review process a vital aspect of successful farm business management.
Spending more time on the review process can lead to a deeper understanding of the current state of the business. However, it is essential to note that the goal is not to create an exact prediction but to develop a well-informed plan that can be used to improve decision-making.
Having a farm business advisor or mentor to assist in the review process can be invaluable in keeping the business on track. They can provide a fresh perspective, ask tough questions, and offer advice when necessary. While an accountant can fulfil this role, it is essential to note that a compliance-focused approach may not be enough, as the focus should be on the future of the business and not solely on past results.
We recommended investing 18 hours each year, which equates to only 0.2% of the year, in conducting these reviews to ensure the stability and longevity of the business. This investment will result in peace of mind and the ability to focus on what you truly love in running your farm business.
