Farm Budget Benefits
Sophisticated budgeting tools are now more readily available to farmers, enabling them to more accurately record and predict their finances. Agribusiness Senior Manager, Jarrod Godfrey, encourages all farmers to take advantage of these tools so that everyone in the primary sector can collaboratively benefit from better farm financial performance.
A new era of budgeting
Increasing numbers of farmers are using more sophisticated tools to budget financially, and then compare actual results to the budget. Part of this is due to a younger generation of farmers coming through who actively embrace “precision farming”, which includes accuracy around farm numbers. Part of it is also due to bank pressure and financial covenants which require regular reporting on how actual results compare to the budget or prior year outcomes.
This is not to say that farmers were not budgeting previously. Many farmers who are confident around farm finances have always taken care of PAYE, GST and farm budgeting using what tools existed at the time. This may have taken the form of Cashmanager or an Excel program, and sometimes the budget might have even been found on a notepad in the bottom draw. But either way, there was a budget somewhere.
But for newer farmers, or those farmers late to the budgeting party, there is now a wider selection of tools available. The farm financial environment has improved greatly in recent years, with financial tools such as Xero and Figured coming to the market and providing all farmers a wide range of options when monitoring farm financial performance.
This really is a case of a rising tide lifting all boats, when it comes to farm financial tools.
The benefits of improved farm budgeting are numerous:
Setting a financial plan at the start of the season enables farmers to forecast where they might be at the end of season (or in subsequent seasons). Knowing this at the start allows farmers to make changes to their farming system earlier if the initial prognosis is not good.
A financial plan will also help identify what options are available to the farmer – is there room to make capital improvements and will this add to the bottom line? Do I have enough headroom in the budget to make additional loan repayments?
A budget at the start of the season will also indicate earlier what the operating profit might be, allowing the farmer to sense check and adjust provisional tax payments for instance.
Sensible budgets are also a good way of illustrating financial common sense to the bank – it will provide comfort knowing the farmer has a plan.
Budgets allow farmers and their accountant an opportunity to review actual results during the season against the budget – why are milk revenues lower, and feed expenses higher? What changes can be made during the season to get back on track?
Most farm financial software tools have an ability to model financially the impact of certain scenarios – whether this be the purchase of a farm, sale of a farm or structural changes to the existing farming system. The ability to quickly model what the financial impact is of a big purchase or sale is a huge benefit to the farmer concerned. Too often these decisions are made quickly and without the same level of due diligence you might expect from a commercial property owner. We encourage all farmers to consult their accountant on opportunities such as these so that we can use these tools to understand whether it’s feasible or not.
And the benefits of better farm budgeting are not only limited to farm owners – all farmers, whether a farm manager or share farmer, can benefit from making financial plans. As an example, take a Farm Manager who wants to understand the financial impact of taking on a contract milker role. Doing year one and year two budgets will quickly confirm whether the contract rate is too low and allow the prospective contract milker an opportunity to negotiate higher.
Having a farm budget in years of considerable change is crucial. For Contract Milkers stepping up to Variable Order Share Milking, then onto becoming a Herd Owning Sharemilker where you might change in terms of scale and system and of course financial responsibilities, it is very important to understand what cash reserves you might need for that first year on that new farm. Setting a budget at the start of that season will provide that clarity.
The key messages of better farm budgeting
Farmers have a wide range of financial tools available to them, all aimed at improving farm financial performance. Whatever stage you might be at in your farming career, a budget will add value to your business, especially in those years of big change. Above all, however, budgeting can be fun – setting a budget ultimately requires a farmer to have a conversation with someone, which is an opportunity to learn about new ways of operating. New Zealand agriculture has been at the forefront globally – because of its pioneering and innovative spirit. Big gains can be made by being on the financial frontier.
If you would like to discuss your on-farm budgeting options, contact your Findex adviser.