Financial planning will help combat price volatility

NO matter what kind of farming you are in, price volatility is a reality that we need to work around.

There is no point in moaning when the price drops if we fail to make provision for the rainy day when the price is strong.

Take the case of a 500,000-litre milk supplier. A 1 cent price drop will knock €5,000 off his bottom line. On the other hand, a 1 cent price increase will leave him €5,000 better off.

Farmers in general would like to think they are in the top half of the class when it comes to animal husbandry and welfare, and grassland management, and by and large they are. However, one area that farmers score not so well on is budgeting and financial planning.

It is said that what you don’t monitor, you can’t manage. Completing a cashflow budget for your farm is not rocket science, and if you cannot do it yourself, get help from your farm advisor.

The basic principles of financial management are planning and control by budgeting and monitoring. A medium-term plan should cover the next five years.

Equally, annual planning and budgeting are essential to ensure the success or viability of any business.

Most top dairy farmers insist on preparing an annual budget projection as part of the planning process for the year ahead.

An annual budget forecast will enable you to predict:

• The likely cash surplus, if any, for the year ahead

• The likely tax bill

• The amount of working capital required, if any.

• The scope for capital investment and how best to finance it

• The scope for contributing to the rainy-day fund

• The likely impact of price fluctuations. Cashflow budgets are easy to complete and can be done very quickly.

If you have even a basic working knowledge of Microsoft Excel the task will be very simple. If you have no knowledge of spreadsheets, the simple pen, jotter and calculator will do just as well.

Firstly, you estimate the income your business is likely to generate for the year ahead, ie, milk sales, stock or grain sales and BPS.

You then project your likely input costs such as feed, fertiliser, contractor, veterinary etc.

Finally, you input your anticipated overhead costs and personal drawings along with loan repayments and essential capital expenditure.

The previous two to three years’ financial statements from your accountant will provide a very good guide in this regard. Budgets prepared without using historical accounts generally overestimate cash surpluses.

Be conservative in the way you budget. The main purpose of a budget is to establish if the farm business will operate at a surplus or deficit after paying all bills, including your own personal drawings and taxation.

The primary function of the budget should be seen as an aid to decision making and the formulation of sound management plans for the business.

If your budget indicates a cash surplus, you need to ask yourself how will you use this surplus.

A surplus allows choices to be made between reducing debt, investing in your farm business or putting aside cash in the rainy-day fund. These decisions should be made in line with your personal and business goals.

If, on the other hand, your budget indicates a deficit, you need to ask yourself some hard questions.

What is the major issue here? Is it lack of production and therefore income? Are your costs too high and can they be reduced?

Is the financial structure and funding of the business too highly geared - in other words, too much debt or badly structured debt? Are drawings too high?

What changes are needed to make this budget work?