I wish I had a dollar for every farming client who told me they do not do a budget because it all changes anyway! The error in this thinking is that a plan/budget is a once-off static document (something you do at the beginning of the year for the bank).
The key to farm business success in the new world of volatile, low-margin, and high-capital-risk farming is making lots of financial plans (options) and reviewing your business's forecasted position weekly or monthly. Look for the brutal truth then adjust to the new reality (truth).
Helmuth Karl Bernhard von Moltke (October 1800 – April 1891) would have made a great farmer.
Moltke was a German Field Marshall and the chief of staff for the Prussian army for more than 30 years and is regarded as one of the great strategists of the 19th century.
Moltke's central thesis was that any strategy must be seen as a system of options since only the start of a military campaign was plannable. His strategic thinking can best be summed up by his two main statements:
"no plan of operations extends with certainty beyond the first encounter with the enemy's main strength" (or "no plan survives contact with the enemy").
and
"strategy is a system of expedients".
It is a mistake to think that Moltke did not plan because his plans would have to change. In contrast to this common assumption, Moltke made detailed plans considering thousands of variables.
So why would he make a good farmer? Farm business management is just like preparing for battle. You need to:
- Have clear knowledge of your current position.
- Have a clear objective.
- Know what available resources you have (land, stock, machinery, labour, working capital, etc.).
- Know your controllable risks and your uncontrollable risks (or unknowns).
Based on this information, you make detailed production plans and equally detailed financial plans (budgets) to "ground truth" your production plans, as all your wins and losses will be measured not in production but in dollars!
Like Moltke, your plans will not survive first contact with your enemy (weather, markets, breakdowns, health, etc.). So, when planning for the battle at the beginning of this season, I strongly encourage you to think through and make several alternate plans based on possible alternatives.
E.g., do a minimum of five budgets (make one and copy it).
- Baseline budget – this is the most probable (the one you take to the bank).
- Bad year budget – e.g., late or low growing season rainfall, low prices.
- Good year budget – e.g., early rain, high prices (most big business mistakes are made in good years!).
- Half budget/ half actual – a combination of your baseline budget with your monthly actuals imported into each month as they are reconciled (see how your cash flow is going).
- Sand box budget – this is where you play with scenarios (so you don't stuff up your other plans).
The importance of this extra planning before the season (battle) starts is that your mind is clear, and you will make better decisions. In the heat of action (e.g., seeding), your cortisol levels will be elevated, making your thinking slower and less effective. As a result, big mistakes can be made.
The other key to successful strategy execution is to make sure you review and make necessary adjustments to your plan, as business (battle) conditions change. E.g., PLAN (budget), DO (management accounting records), CHECK (budget to actual comparison report), ACT (adjust the plan (financial and production) based on the budget to actual).
Understand that "no plan survives first contact with the enemy," so make lots of them and change your plan as the conditions of the battle change!
Agrimaster has been designed specifically to help you plan and manage risk, just like Moltke. Using a combination of a good setup and up-to-date cashbook and use of full budgets for planning, you can approach each season with the confidence that you have done everything you could to plan for success and have a system to manage change actively.
