28 September 2020
There is no doubt the 2020 drought will have a serious financial impact for businesses with many farms reducing capital stock numbers during the drought to assist with their cashflow. But while many farming businesses will be starting the year with reduced stock numbers, this may not materialise as reduced profits until FY21/22.
It’s important to start planning for the year ahead by including both a profit and a cashflow forecast as drought impacts may have a differing effect on both, particularly depending upon how you choose to rebuild your capital stock.
Traditionally, many farming budgets are not formalised on paper. Whilst this was once acceptable practice, most banks or finance institutions now require a robust budget including cash forecasts before they will extend lending facilities or provide new ones.
For those who don’t usually prepare a budget, now is a great time to start. The outcome of the drought may take a while to show its true impact, so taking the time to prepare now will provide you with some clarity around future cashflow and potential profitability. Having an accurate budget can also take the guesswork out of financially related decision making when times get tough or you are uncertain about the way forward, particularly as the season changes.
The hardest part of preparing a budget can be getting started! Using the prior year as a base to work from and adapting and changing the timing and volume of activities is often a good way to begin. Once you have your base, modern software makes it easy to alter and amend to show various scenarios. This provides you with a good understanding of the potential impacts that decisions on cashflow and profit may have.
As the season changes you can alter your budget to see the change in outcomes for both profit and cash which will enable you to make further timely decisions. When cash is tight it is useful to know where every dollar is planned to be spent and whether it will add value.
Once you have set your budget it is useful to compare it to actual results and hold yourself accountable for the decisions made that may have differed from your original plan.
For many businesses, FY21/22, rather than FY20/21 will be the year impacted by reduced profit. You may therefore be paying provisional tax on FY20/21 income for FY21/22, meaning you may be paying out cash when you don’t need too. Completing a budget will help plan for these tax payments and enable your adviser to assist with amending them where needed. You may also be able to utilise the adverse events income equalisation deposit scheme, which helps spread the burden of tax from one year to the next or future years.
If you would like help with budgeting or require further information, please contact the Findex Accounting & Business Advisory team.
Findex NZ Limited, trading as Findex
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