Budgeting essential for farmers

Budgeting is an important cornerstone for all farmers.

Budgeting is a cornerstone for any successful business and allows farmers to gain control over all spending decisions.

Specifically budgeting allows you to take financial control of your business, assess the viability of new opportunities or ventures and plan cash income and expenditure.

Without a budget it is difficult for farming businesses to be proactive and it may end up that actions are reactive, which is often too late.

An annual cash budget indicates if the business is sustainable and viable, and will provide the season's surplus or deficit (loss) at the end of the financial year. Creating a budget requires accurate forecasts for the coming season including production, stock reconciliations and financial information.

The more resources you have the better. Having the most recent set of annual accounts on hand is also essential to ensure that all relevant costs and income streams are included.

Taking advantage of the rural professionals who support your business such as bankers, veterinarians, farm consultants, and accountants can also be beneficial.

They will be able to provide a range of valuable information on market trends, input costs and advice on how to tune your business to be productive and profitable.

Most rural accounting software packages have the ability to synchronise the financial and farm management information which is easy and provides increased control to help with planning.

Farm expenses in the budget preparation will include the annual interest charge. If you are planning on paying back any principal debt this should be included as well. Tax should be calculated last (after all income and expenses have been forecast). This allows the cash surplus or deficit to be calculated - total income less total expenses.

Once the budget is complete it is time to digest the implications. If you have a surplus, how are you going to use this surplus? Debt reduction or off-farm investments could be some options.

If the result shows a deficit then it will need to be communicated with those key business stakeholders, and some hard questions may have to be asked. What are the major issues, is there a lack of production, are expenses too high? Do some major or minor changes need to be made?

Budgets are management tools and ideally should be reviewed and updated at least every two months to monitor actual income and expenses against what was forecast. This allows variances to be identified and relevant actions taken.

For example is spending getting out of control in any areas and is income higher than anticipated? Monitoring performance will allow your business to be more proactive in decision making and tax planning.

For more information, please contact your local Crowe Horwath advisor.

*This information is general in nature and readers should seek specialist advice before making financial decisions.