By Brian Eccles, Managing Director CRS Software Ltd
It’s pleasing to see a significant number of clients having a crack at drafting next year’s budget. It’s my impression this is a bit later than normal which is hardly surprising given the harshness of the drought, and the extra work this creates, plus uncertainty around COVID-19.
I’ve often heard it said making a plan is a great way to relieve stress. Getting ideas out of your head and into a plan provides an excellent process for turning ideas into a feasible plan. Regardless of whether the result is good or bad, making a fair assessment of the situation creates comfort.
Droughts have a cost – this year or next?
Some farmers accept there is a big cost to the drought and take the hit to the bottom line this year. If there is no hit this year, then there will be one next year. Rather than worrying how bad it might be, getting your ideas organised and the effects calculated will help to clarify decisions you need to make.
Remember today’s plan is unlikely to be the one you eventually run with – that’s the nature of having a strong planning culture. A better plan should always supersede the current plan as planning is an incremental process and along the way you get to measure your bright ideas against your original plan.
I know lots of farmers who regularly fire up their Cash Manager, make a copy of their plan and use this copy to explore new ideas. If it works, it has been worth the effort. If the bright idea is not so good, it was still worth the effort.
Getting a good handle on livestock numbers is key to making a robust plan.
Livestock numbers will be down after the drought which will affect numbers available for sale next year, especially if you want to retain animals to rebuild stocking rates. Without doing the maths this is incredibly hard to estimate. You cannot beat doing a proper livestock reconciliation such as the one in Cash Manager. If you’re unsure how to do ask for help.
At this early stage estimating pricing, that will drive revenue, will require an educated guess. Ask around and then back yourself. You may find it valuable to run with an optimistic and pessimistic scenario to cover all bases and get a clear idea how things look. It’s always better to make an educated guess and establish a position you can live with.
As new information becomes available it will be easy to update your plan and see how much the bottom-line changes.
Working with nature
Planning in the agricultural sector always has challenges because we are working with a biological model where, if you pull one lever something else will change to balance it out. A good planning system puts you firmly in the driver’s seat.
Keep your Bank Manager Informed
Never has it been more important to work on your relationship with the bank. While wholesale interest rates are dropping, banks are increasing their risk margin. Keep your manager fully informed and on your side. Consider the manager as your ally who must convince the banks credit team you are a good bet. Currently that is not easy. A robust plan is an excellent starting point. Seeking assistance from your accountant on how to communicate with the bank is time well spent.
Merging actual into your plan
The Cash Manager system merges actual transactions into your plan ensuring that, as the year progresses, your plan includes as many months of real information as possible. We call this process revision and it’s a key strength of the Cash Manager system – many farmers love to do a revision each month, so they have a reliable view for the next month and a clear vision for the remainder of the year.
By contrast budgets completed separately to where actual data is recorded are a nightmare to keep up to date.
Tactical and strategic management
Managing farm finances is a mix of what I refer to as tactical and strategic management.
Tactical management is where decisions must be made now to refine the current plan and make the most of opportunities as these arise. Successful farmers make tactical decisions almost every day. It’s all about being responsive, having an eye on opportunity and making it happen as soon as possible.
Strategic decisions have a longer horizon and, because these involve significant change to the farming model, they need time to evolve.
Droughts have a nasty habit of shrinking the horizons of even the best decision makers. Lifting the fog by completing a high-level plan for next year is a great way to provide certainty and relieve stress. Remember the plan does not need to be detailed at this stage.
Validating your guesses
It’s a useful practice to validate your estimates against an earlier year which can be done on a code by code basis. Using Cash Manager my favourite method is to display last year on what we call line two of the cashflow. This provides a month by month view to use as your reference point for validation. By using this tool, you can readily see what should be in the plan which is yet another strength of using an integrated system specifically designed for the job.
Plan for next year
Good luck drafting up your first plan for next year and remember this will change over time, but that’s ok. Committing your ideas to a plan will have a positive impact on stress levels, and ultimately on your bank balance.
Brian Eccles, MD CRS Software Ltd (a former farmer who knows what droughts do to your head)