Farm consultants addressing an online GRDC Farm Business Update find they still need to reiterate the importance of careful planning and the risks of inadequate planning when it comes to crop production and cashflow budgeting.
Consultants have reiterated the value of:
- Planning crop production and cashflow
- Reviewing the plan regularly through the year
- Using long-term median yields and prices when forecasting
- Developing a harvest plan to minimise losses
The online discussion, titled ‘Management under the microscope’, was part of a series of events delivered over five days to growers in New South Wales with the aim of building knowledge to support effective decision-making in the farm office.
Wagga Wagga-based farm business consultant Chris Minehan said he works with clients to develop “realistic and sensible” plans for crop production and cashflow.
For his clients, planning starts in October, with the initial draft revised in January or February when harvest actuals are added to the cashflow budget to forecast cash position at peak debt, plus cash surplus for the next 12 months.
After sowing, the production plan and cashflow budget are reviewed to accommodate changes, such as alterations to crop areas or improved lamb marking percentages.
“At various points through the year, we revise the plan against actuals,” Mr Minehan, who is a director of Rural Management Strategies, said. “It’s a constant feedback loop that involves planning, implementing the plan, reviewing the results and then replanning.”
October, he said, was also when grain tonnages were estimated and discussions were held about how a “skinny harvest”, for example, might influence future cashflow. Alternatively, a plan for logistics and selling would be discussed for dealing with an above-average harvest.
When developing a budget, Mr Minehan suggested using 10-year median grain yields. While using actual grain yields from the farm was his preference, he said district averages could be substituted if genuine figures were not available. “The key is using realistic, not aspirational, yield targets for budgets,” he said.
On the price side of the equation, Mr Minehan uses figures from decile-five seasons over the past 10 years, sourced from grain marketing organisations.
When budgeting for expenses, he encouraged the use of realistic figures. “You can calculate the requirement for fertiliser, for example, based on your area and the tonnage of grain you are targeting.”
An essential part of the process, he said, was analysing the budget and thinking about where the production plans could be changed to produce a more favourable result.
Tamworth-based Agripath director Simon Fritsch said he felt it was important to think about the purpose of the business and what individuals wanted to achieve.
“All farms should have a plan that answers the question of ‘where are we now and where do we want to go?’” he said. “The decisions made today influence where you want to be in 10 to 20 years’ time.”
Accordingly, the cashflow budget is an important tool because it allows owners to monitor what is planned for the business today and will allow it to achieve plans for the future.
“By checking that the margin generated from the cropping enterprises is sufficient to cover the aspirational financial needs of the business, managers are assured that they have a business that will meet their long-term goals,” Mr Fritsch said.
“If the margin generated from crops is insufficient to cover the financial need, then this is valuable strategic information for business owners to apply technology and strategies to meet it.”
Another benefit of the cashflow budget, Mr Minehan said, is that it serves as an early warning system.
“Generally, banks are understanding … but they don’t like surprises,” he said. “The more time you can give them, the better your options, particularly when it might take three months to approve a finance application.”
Mr Fritsch said financiers were increasingly asking growers to support their requests for capital with cashflow budgets and farm business plans. In his experience, banks had shifted away from equity-leveraged funding arrangements and were now focused on looking more closely for evidence of how the applicant could service a loan.
For those who had not harvested any grain for three years, Mr Fritsch said it was critical to create a harvest plan for this year that documented how the crop would be reaped with minimal losses.
“Some growers have had three years of no income and need to make sure they get this season’s crop nailed,” he said. “That might mean a need for additional equipment.”
With machinery manufacturers now offering low-interest loans and rent-to-buy arrangements, Mr Fritsch said it was critical for finance applicants to demonstrate they had the capacity to service debt with realistic projections.
When it comes to expansion decisions, Mr Minehan said he develops a partial budget to provide a baseline picture of the business’s performance. The next step is to run a range of scenarios to look at the implications of the additional purchase on cashflow, profit and risk.
If the partial budget shows an expansion decision will increase the cash surplus, he said, the expansion decision is more straightforward. If the additional purchase decreases cash surplus in the short term, it may need to be subsidised by the existing business.
The next question to ask, he said, is whether the expansion fits strategically within the business; for example, because another generation is seeking greater involvement in the farm business.
Mr Fritsch agreed and added that a key question he would encourage business owners to ask themselves is whether they can afford to expand the farm.
“If you are making a five to six per cent return on asset, it’s likely a bank will lend you money at a three per cent interest rate,” he says.
“If you are only making a two to three per cent return on asset, I would encourage you to focus on your current landholding and re-engineer that for a higher return.”
In terms of machinery purchasing decisions, Mr Fritsch said key questions to ask were:
- Is it essential?
- Could a contractor be employed?
- Can the asset be shared with somebody else?
“If you have a smaller farm and a reliable pool of contractors to ensure jobs are done in a timely manner, there may be a case to use contractors,” he said.
“But if contractors aren’t available and that influences the timeliness of operations, there might be a case for ownership.”
Mr Minehan agreed and added that while, for smaller operations, using contractors might be more cost-effective and economically rational, the deciding issue for his clients often came down to the surety of having their own machinery to ensure tasks are completed on time.
GRDC Research Code ORM1906-002SAX
Watch the recording of ‘Management under the microscope’ delivered online as part of the 2020 GRDC Farm Business Updates by clicking here. All the topics delivered as part of the series are listed below.