Darren Sutton: Don't blow the budget

This season we have the opportunity to make financial progress on farm. The Fonterra milk price is currently forecast at $7.05/KgMS and has the potential to provide discretionary cash. Right now, monitoring the budget and cash flow needs to be a key focus.

Plan for a profit. Don't wait until the end of the season to see what's left, it may not be the result you had hoped for.

Cash is King

To be in business, cash flow needs to be strong enough in the good years to generate discretionary cash in order to build a stronger business for the lower milk price years. Cash equals choices — no cash, no choices. One thing that doesn't change with the cycle of milk price is the fact that the strength of your cost control is critical to your business.

Key points about your budget:

• A realistic budget aids good management. Too optimistic and you may lose sight of costs to achieve production, too pessimistic and you may miss opportunities.
• Know what is achievable. Benchmark your costs against industry information for your area. Check out DairyNZ budget case studies on their website.
• The average Farm Working Expenses (FWE) for the 2017-18 season was $4.20/KgMS. FWE for the top 25 per cent of farms was $3.80/KgMS. What are your FWE/kgMS? Remember the majority of costs are variable and can be controlled.
• Calculate your break even milk price (BEMP). If this is not where you want it to be, make changes now. If you have a high BEMP it would be worthwhile reviewing your current farm system.

You should have discretionary cash available for debt repayment or capital expenditure would be $1.18/KgMS. The key is to allocate this cash wisely. Debt repayment is always a good option, but if debt is low then there may be an opportunity to invest or put the money towards required environmental upgrades.

Spring Review

Spring is a busy time of year and a time when the budget can quickly blow out. It is when many big-ticket items combine, such as fertiliser, animal health, cropping/re-grassing and mating costs. Keep an eye on expenditure and make sure it fits in the budget. Pasture management skills and discipline are key to holding feed costs at or below budgeted levels. Constantly review the average pasture cover, is this on target? Are grazing residuals on target to provide quality feed to hold production next round? It's very easy to trickle in additional feed over the coming months, especially if an in-shed feeder is in place. For example, milking 500 cows and feeding each cow 1kg of grain a day for 'cow flow' or to 'top up' the cows can cost $6000/month, for little or no production gain.

The greater the pasture production and feed eaten, the greater the operating profit.
For example: On a 100ha farm growing 16tDM/ha and eating 12tDM/ha, 75 per cent of pasture is utilised.

Based on a return of $350/tDM/ha, an increase of 5 per cent generates an additional $21,000 minimum. An increase of 10 per cent generates an extra $42,000 minimum. This is a significant financial gain.

Marginal returns

Don't be tempted to chase marginal return unless it fits in with your business plan. Always ask the question — is the added cost is generating a direct return?

All decisions need to be based on the long term goal. Do not spend funds on additional resources unless you are making the most of what you currently have. This includes land, stock, staff, water, feed, machinery, etc.

Review the Budget

Once through the early part of the season (November/December), take the time to review the forecast budget and cash flow to ensure all is on track.

• Most budgeting tools will provide a variance report. What has been spent to date compared to your budget? If over in one area, can this area be mitigated elsewhere in the budget/costs?
• A strong cash flow is a living document monitored monthly at a minimum and revised quarterly.
• Know your BEMP.
• Are you on track with KPI's for inputs and outputs? For example, targets for pasture management, production, operating profit, etc.

Profit and a strong cash flow provide time and choices. Financial planning and monitoring makes decision making easier.

For some the changes will be small, if at all, while for others this may be a big mind-set shift. There are professionals available to help if you don't have the skills, or know where to start.

A strong cash flow takes time, planning and asking the hard questions of your current operation. Look outside the farm for benchmarking and ideas for improvement. Plan for a profit and free cash, creating choices at season end.

With the forecast pay out strong, take the opportunity this season to drive the business, keep a close watch on expenses and generate free cash to build a stronger business for next season.